15th Nov 2006 07:01
Turbo Power Systems Inc15 November 2006 Wednesday 15 November 2006 TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2006 Highlights •Revenue and development income up 96% to £4.2m (2005: £2.1m) •Operating loss before stock compensation charges (£0.37m)(2005: £0.04m) reduced by 13% to £4.1m (2005: £4.7m) •Operating cash outflow reduced by 3% to £3.7m (2005: £3.8m) •US$3.5m follow on contract from PRC lasers announced in September £€6m equity placing, redemption of £8.8m loan notes and proposed move to AIM announced in October •New rail contracts with Bombardier and NREC announced today Commenting on the results, Michael Hunt, Chief Executive said, "We have seen continued order book and revenue growth in the third quarter. Therecently announced placing and loan note conversions will transform our balancesheet while today's contract announcements further underpin our growth prospectsfor 2007." For further information, please contact: Turbo Power Systems Tel: +44 (0)20 8564 4460 Michael Hunt, Chief Executive OfficerStephen Sadler, Chief Financial Officer Company Website: www.turbopowersystems.com Gavin Anderson (PR) Ken Cronin Tel: +44 (0)20 7554 1400Michael Turner KBC Peel Hunt Oliver Scott Tel: +44 (0)20 7418 8905 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 The third quarter saw the further development of the business as we recordedcontinued revenue growth and announced a placing and loan note conversion inOctober. The announcement of a £6.0m equity placement, the conversion of £8.8m of the£11.2m outstanding 2003 and 2005 convertible loan notes and the proposal totransfer the Company listing to the AIM market resolves some key issues for theCompany. The raising of funds to support the working capital needed for our rapidlyexpanding order book, and the transformation of the Company's balance sheet,enables us to look forward with increased confidence towards continuing thegrowth we have experienced over the last 18 months. The proposed transfer to AIMwill provide us with a regulatory framework more appropriate to a company of oursize and should provide the potential to generate additional cost savings. Our recent commitment to lease a new, larger power electronics factory inGateshead is a reflection of the rapid increase in demand for our technology.The move is being supported by a £550k capital grant from One North East, andproduction is planned to commence at the end of the first quarter 2007. In November, the Company saw a further consolidation of its rail business withthe agreement from Bombardier Germany for a new range of standard batterychargers to be deployed on European and International rolling stock, and anadditional order for NREC traction electronics. Production revenue for the nine months to 30 September increased 106% to £3.6mas production increased on our rail and industrial power electronics programmes. While the power electronics division at Gateshead continues to be the maincontributor to the revenues generated for the period the development contractscurrently underway at Heathrow are progressing to plan and are expected to makea positive contribution to group revenues from the second half of next year. The power electronics division experienced a shortage in component supply inAugust which, although quickly resolved, led to a significant proportion of thequarter's revenue being billed in September. As a result debtor collections inthe quarter were reduced and this is reflected in an operating cash outflow of£1.5m forthe third quarter. These debtors will now be collected in the fourth quarter. Direct Drive High-Speed Motors and Drives Industrial Motor and Drive Design and Supply Test rigs for the initial prototype 500 kW motor and drive systems are currentlybeing commissioned in conjunction with the end customer, and initial testing isexpected to commence soon. The production systems are still planned to be launched during the latter partof 2007 following extensive field testing during the summer. SKF Initial deliveries of motors and drives for SKF have now been made. Productionwill now be held until the completion of an extended field testing programme bythe end customer. Volume production is expected to re-commence during the earlypart of 2007. Specialist Drives and Motor applications (Aerospace, Oil and Gas) Hamilton Sundstrand The TPS engineering team for the Boeing 787 Ram Fan Motor Controller is workingclosely with Hamilton Sundstrand and Boeing and has recently successfullycompleted its Critical Design Review milestone. The qualification hardware is scheduled for completion during early 2007 and, aswith the Eaton contract, flight certification hardware deliveries will continuethrough 2007 with production runs commencing in early 2008. Eaton Aerospace The Boeing 787 Override Jettison Pump motor controller for Eaton Aerospacecontinues to proceed well through the pre-qualification and qualificationphases. Initial hardware was delivered to the Boeing Aircraft Electrical Modellaboratory where the equipment will undergo system integration and coordinationwith other equipment on the aircraft. ALC - Oil and Gas Electrical tests have been carried out on the prototype motor assembly atHeathrow, and the demonstrated performance closely matched the challengingtarget specification for the equipment. Following further trials in the TPS testcells the system including the submersible pump will be transferred to the testwell in East Anglia for initial down hole operations. Final field trials arescheduled in North America in 2007. Although this remains a very technically challenging "leading edge" design,commercial interest from the sponsoring oil company remains very high, withcurrent oil prices favouring an easily deployable technology which has thepotential to make a significant improvement in the barrels per day output ofexisting wells. Lotus Engineering Hybrid Vehicle Drive Testing of the units in the demonstrator cars continues at Lotus and it isexpected that this first phase of evaluation will conclude shortly. Once that stage is completed, then the vehicles will be delivered to thesponsoring car manufacturer for extensive testing prior to any decisionregarding production release. High Voltage Power Supplies and Auxiliary Power Systems New Rail Contracts Bombardier Transport - Germany The Company has been selected by Bombardier Berlin to supply a range of standardbattery chargers for passenger trains in European and International markets. Theagreement is for an initial period of three years and Bombardier's intention isto maximize economies of scale by proposing these standard products in as manyof their proposals as possible. TPS will produce four different products, and annual quantities are expected togenerate up to €1m annually. National Rail Equipment Company NREC have recently placed a US$700,000 order for further traction controlhardware for delivery in early 2007. Production of the innovative shunting locomotives has now begun at NREC'sfacilities in Illinois, and demand for their low emissions engine, which alsoreduce fuel consumption by in excess of 20%, is increasing rapidly in the US andin International markets including Australia, Eastern Europe and Turkey. Existing long-term Rail Contracts Toronto Transit Commission - H6 subway car Auxiliary Power Unit (APU) Production continues to proceed well with deliveries scheduled until 2008. Bombardier - Beijing Design of the auxiliary power units for the Beijing Light Rapid Transit Systemis continuing to plan with initial units expected to be available by February2007. Trans Elektro Production of the air-conditioning system power supplies are on schedule withdeliveries continuing into the early part of 2007. NREC Production deliveries against the initial customer contract commenced early inQ3 2006 and have increased during the quarter. A further US$700,000 order hasbeen announced today. Production of these systems, each comprising nine separatelarge electronic units, is expected to continue at least until late 2007. London Underground Production deliveries of the air-conditioning power supplies used in theDistrict Line refurbishment project increased during the quarter to meetcustomer demand. Bombardier - First Great Western Production of 'At Seat' Power supplies and Catering Car power converters for therefurbishment programme for First Great Western, announced in Q2 2006, commencedduring Q3 2006 with deliveries scheduled to continue into Q4 2007. Other Products/Activities PRC During Q3 2006 the Company received a follow-on contract worth US$3.5 millionfor additional laser power supplies. The existing contract provides forproduction until the end of 2006, with deliveries under the new contractcommencing in the first quarter of 2007 and continuing until early 2008. After Market Spares and After Market revenues have continued to grow during Q3 2006 and areexpected to continue to do so as the volume of products in service increases. Direct Drive High-Speed Generators and Inverters for the Distributed Generationand Renewable Energy markets Discussions are continuing with potential turbine partners for projectsincluding: €100 kW Generator and Inverter €600 kW Generator and Inverter €5000 kW Generator and Inverter Compact Power, with whom TPS have a product development agreement for the supplyof a generator and inverter for use with the 600kW gas turbine designed intotheir Biomass Generation project, are well advanced in planning their pilotinstallation which is scheduled to commence in March 2007. Renewable and Energy Saving Projects TPS is continuing it's 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 particular directed towards expanding thepotential for our grid connected inverter technology. Consequently at present we have preliminary participation in the followingareas: •A demonstration Low-Head Hydro energy recovery scheme in the UK Midlands. TPS is providing generator and inverter hardware. •An EU funded programme for a externally fired micro-turbine (< 10kW) system for domestic CHP. TPS will provide a high-speed generator and inverter. •An EU funded programme examining inter-connection issues with the grid, in anticipation of an increasing proportion of the overall electrical demand being met from embedded renewable generation sources. TPS will be providing an inverter for this programme. •A DTI funded programme investigating the potential for a grid connected battery storage scheme to offset peak and off peak demand, utilizing an innovative 3rd party patented battery design. TPS will be providing an inverter. RESULTS OF OPERATIONSREVIEW OF NINE MONTHS TO 30 SEPTEMBER 2006 Revenue Revenue in the nine months ended 30 September 2006 was £3.63 million comparedwith £1.76 million in 2005 and comprised; 2006 2005 £'000 £'000 Power electronics 3,459 1,667Electrical machines 172 95 ------- ------ 3,631 1,762 ======= ====== 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 Toronto Transit Commission H6, PRC laser powersupplies, London Underground and Lotus. In addition the contract with TransElektro for air conditioning power supplies, which entered production in Q1, hasmade a significant contribution to revenue for the year to date. Production onthe NREC programme began in the third quarter and is scheduled to continueproduction throughout 2006 and 2007. Spares and service revenues were £0.84m for the nine months (2005:£0.37m). In the Electrical Machines division revenue has increased over the prior periodas the SKF contract has moved into production and revenue has been received fromALC. Increased volumes were shipped on the SKF programme in the third quarterbut volumes will reduce in the fourth quarter while the end customer conductsfield surveys. Development income Development income in the nine months was £0.58 million compared with £0.39million in 2005 and included receipts from Eaton Aerospace and HamiltonSundstrand on the Boeing 787 Dreamliner programme. 2006 2005 £'000 £'000 Development income 577 386 ======= ======= Production costs The cost of product revenues in the nine month period amounted to £2.80 million(2005 : £1.55 million), resulting in a gross profit on sales of £0.83 million(2005 : gross profit of £0.26 million) as follows; 2006 2005 £'000 £'000 Power electronics 1,272 591Electrical machines (443) (329) ------- ------- 829 262 ======= ======= Certain fixed facilities costs attributable to the manufacturing operation meanthat the electrical machines division recorded an overall loss on product sales. Overall, gross margin has improved to 23% (2005: 16%) as production programmeshave become more established. Research and product development Research and product development expenditure in the nine months was £2.61million compared with £2.20 million in 2005, and comprised; 2006 2005 £'000 £'000 Research and product development expenditure 2,660 2,256Accrued R&D tax credits (50) (60) -------- --------Total expenditure 2,610 2,196 ======== ======== Product development costs have increased in 2006 as work has started on both theEaton contract and the Hamilton Sundstrand contract for the Boeing 787Dreamliner. Included in research and product development costs for the nine months are stockcompensation charges on options awarded of £188,000 (2005: nil). General and administrative General and administrative costs of £2.38 million (2005: £2.18 million) consistmainly of staff costs, facilities costs and the costs associated with theCompany's public listings. Included in general and administrative costs for thenine months are stock compensation charges on options awarded of £151,000 (2005:£43,000), and increased costs for additional sales and marketing personnel andactivities. Amortisation Amortisation was £0.89 million compared with £1.00 million in 2005. Interest income Interest income for the nine months was £0.21 million compared with£0.24 million in 2005. Interest expense and finance charges Interest expense and finance charges arise from the issue of convertible bondsin July 2003 and March 2005 and comprise; 2006 2005 £'000 £'000 Interest payable 420 398Amortisation of deferred finance charges 121 140Debt accretion 291 267 -------- ------- 832 805 ======== ======= The cost in 2006 has increased due to the inclusion of a full nine month chargeon the convertible bonds issued in March 2005. 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 nine months this charge amounted to £0.29 million (2005:£0.27 million). Financial instruments During the third quarter the company purchased U.S. dollar denominated currencycontracts covering receipts from programmes scheduled for 2006 and 2007. Thepremium cost for these options was £81,000 and has been charged to profit andloss in the quarter. This charge is offset by the value of the option as at 30September 2006. CASH FLOWS FOR THE NINE MONTHS Cash outflow from operating activities Cash outflow from operating activities for the nine months was £3.70 million,compared with £3.79 million in 2005. In the first nine months of 2005 theCompany recorded an operating loss of £4.78 million and had an increase inworking capital outflow of £0.40 million. The 2006 operating loss was £4.48million and working capital outflow increased by £0.46 million during theperiod. Although revenue growth was strong in the third quarter, compared to the prioryear, much of this amount was shipped and invoiced in September. Followingcomponent shortages in August debtor collections were reduced in the thirdquarter. The debtor collections associated with the September invoicing will bemade in the fourth quarter. Stocks, work in progress and creditors increased by £1.37 million during thefirst nine months reflecting the increase in manufacturing volume. Restructuring payments of £0.25 million paid during 2005 relate to redundancyand property disposal payments charged to the profit and loss account in priorperiods. Interest paid of £0.50 million during the nine months represents payments madeon the convertible bonds issued in 2003 and 2005 (2005: £0.38 million payment). Capital investment activities Cash outflows from capital investments in the nine months were £0.12 millioncompared with £0.04 million in 2005. Cash flow from financing activities No cash movements resulting from financing activities occurred in the ninemonths. Cash inflow from financing in 2005 of £8.09 million during the nine monthsrelates to the release of restricted cash funds of £0.38 million and £7.71million net funds received from the issue of convertible notes in March 2005when the Company completed an £8,000,000 (gross) financing agreement withinstitutional investors. The financing comprised unsecured Convertible Notes andWarrants. The Convertible Notes have a term of five years plus one day and bearinterest at a rate of 6.5% per annum. They are convertible into an aggregate of66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of£0.12 per share. The Warrants have a term of five years and are convertible intoan aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at anexercise price of £0.15 per share. Overall cash outflow for the first nine months Overall the cash outflow for the nine month period was £4.07 million. Thiscompares with a cash inflow of £4.10 million in 2005, including proceeds fromthe debt issue of £7.72 million, and movements in restricted cash of £0.38million. REVIEW OF THREE MONTHS ENDED 30 SEPTEMBER 2006 Revenue Revenue in the three months ended 30 September 2006 was £1.47 million comparedwith £0.81 million in 2005 and comprised; 2006 2005 £'000 £'000 Power electronics 1,380 750Electrical machines 90 59 -------- ------ 1,470 809 ======== ====== Revenues from the Power electronics division increased as a result of productionrevenues from contracts with Toronto Transit Commission, Bombardier, NREC andTrans Elektro, which had not commenced in 2005, and a significant increase inspares business in line with the increasing sales volumes. Revenue in the Electrical machines division relates primarily to the SKFcontract. Development income Development income in the three months was higher in 2006 at £0.29 millioncompared with £0.07 million in 2005 and included receipts from Eaton Aerospaceand Hamilton Sundstrand on the Boeing Dreamliner programme. 2006 2005 £'000 £'000 Development income 285 71 ======= ======= Production costs The cost of product revenues in the three months amounted to £1.13 million (2005: £0.66 million), resulting in a gross profit on sales of £0.34 million (2005 :gross profit of £0.15 million) as follows; 2006 2005 £'000 £'000 Power electronics 538 284Electrical machines (198) (137) -------- -------- 340 145 ======== ======== Certain facilities costs attributable to the manufacturing operation mean thanthe electrical machines division recorded an overall loss on product sales. Overall, gross margin has improved to 23% (2005: 18%) due to the increasedcontribution from the power electronics division. Research and product development Research and product development expenditure in the three months was£0.92 million compared with £0.76 million in 2005, and comprised; 2006 2005 £'000 £'000 Research and product development expenditure 927 781Accrued R&D tax credits (10) (25) -------- --------Total expenditure 917 756 ======== ======== Included in research and product development costs for the three months arestock compensation charges on options awarded of £67,000 (2005: nil). General and administrative General and administrative costs in the three months of £0.81 million (2005:£0.69 million) consist mainly of staff costs, facilities costs and the costsassociated with the Company's public listings. Included in general andadministrative costs for the quarter are stock compensation charges on optionsawarded of £55,000 (2005: £2,000) and costs for additional sales, marketing andmanagement personnel and activities. Amortisation Amortisation was £0.23 million compared with £0.31 million in 2005. Interest income Interest income in the three months was £0.06 million compared with£0.11 million in 2005. Interest expense and finance charges Interest expense and finance charges arise from the issue of convertible bondsin July 2003 and March 2005 and comprise; 2006 2005 £'000 £'000 Interest payable 132 154Amortisation of deferred finance charges 40 53Debt accretion 97 101 --------- ------- 269 308 ========= ======= 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 period this charge amounted to £0.10 million (2005:£0.10 million). Financial instruments During the third quarter the company purchased U.S. dollar denominated currencycontracts covering receipts from programmes scheduled for 2006 and 2007. Thepremium cost for these options was £81,000 and has been charged to profit andloss in the quarter. This charge is offset by the value of the option as at 30September 2006. CASH FLOWS FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2006 Cash outflow from operating activities Cash outflow from operating activities for the three months was £1.50 million,compared with £0.96 million in 2005. In the third quarter of 2005 the Companyrecorded an operating loss of £1.54 million and had a decrease in workingcapital outflow of £0.09 million. The third quarter 2006 operating loss was£1.34 million and working capital outflow increased by £0.52 million during theperiod. A significant proportion of the invoiced revenue for the three months was billedin September and so does not impact on operational cash flow in the thirdquarter but will be collected in the fourth quarter. Interest paid of £0.19 million (2005: £0.29 million) during the three monthsrepresents payments made on the convertible bonds issued in 2003 and 2005. Capital investment activities Cash outflows from capital investments in the three months were £0.07 millioncompared with £0.01 million in 2005. This spend was primarily on plant andsoftware associated with the Hamilton Sundstrand programme. Overall cash outflow for the period Overall the cash outflow during the three months was £1.66 million. Thiscompares with an overall cash outflow of £0.78 million for the third quarter of2005, and reflects the increased working capital requirement as productionvolumes increase. BALANCE SHEET AS AT 30 SEPTEMBER 2006 The Company ended the period with a cash balance of £2.46 million compared with£6.53 million at 31 December 2005. Substantially all of the Company's cashbalances are denominated in Sterling. In addition the Company had restricted cash amounts of £1.50 million relating toperformance bonds entered into as part of contracts with the Toronto TransitCommission and Eaton ( 2005: £1.50 million ). Long-term assets have decreased from £4.54 million at 31 December 2005 to£3.64 million at 30 September 2006, after depreciation charges of £0.89 millionand deferred financing charges of £0.12 million. Deferred finance charges relate to the fair value of warrants issued in 2003,and expenses in connection with the March 2005 convertible bond issue. Thesecosts are amortised over the term of the convertible bonds and the warrants. Therelated amortisation charges are included in interest expense and financecharges. Long term liabilities have increased to £10.45 million at 30 September 2006compared to £10.21 million at 31 December 2005, reflecting the accretion of debtattributable to the convertible bond issue partially offset by a reduction indebt following the conversion of £65,000 of convertible bonds into 541,665shares during the first half year. Net working capital at 30 September 2006, excluding cash balances, was £0.27million, compared with (£0.30) million as at 31 December 2005. As at 1 November 2006, the Company had 191,494,592 common shares issued andoutstanding. As at that date there were 27,771,083 outstanding share options and10,500,000 outstanding warrants. On 20 October the company announced its intention to transfer to AIM, in addition to an institutional placing of Common shares and 'A' shares raising £6.0 million before expenses. In addition it announced the redemption of £8.8 million of convertible loan notes. Shareholder approval will be sought for this transaction at a special meeting of the company on 27 November 2006. TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF LOSS AND DEFICITUNAUDITED Notes Nine months ended 30 September 2006 2005 £'000 £'000 Revenue 4,5 3,631 1,762Development income 4 577 386 -------- -------- 4,208 2,148 ExpensesProduction costs 2,802 1,547Research and product development 6 2,610 2,196General and administrative 2,384 2,175Amortisation 892 1,006 -------- -------- 8,688 6,924 -------- -------- Operating loss (4,480) (4,776) Other income and expensesOther income - 168Interest income 206 239Interest expense and finance charges 7 (832) (805)Financial currency instruments 8 (58) -Loss on disposal of assets (8) -Foreign exchange losses (22) (30) -------- -------- (714) (428) -------- -------- Loss for the period (5,194) (5,204) Deficit, beginning of period (44,718) (38,265) -------- --------Deficit, end of period (49,912) (43,469) ========= ========= Loss per share (2.7) p (2.8) p TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF INCOME (LOSS)UNAUDITED Notes Three months ended 30 September 2006 2005 £'000 £'000 Revenue 4 1,470 809Development income 4 285 71 -------- -------- 1,755 880 ExpensesProduction costs 1,130 664Research and product development 6 917 756General and administrative 814 687Amortisation 230 312 -------- -------- 3,091 2,419 -------- -------- Operating loss (1,336) (1,539) Other income and expensesOther income - 168Interest income 59 109Interest expense and finance 7 (269) (308)chargesFinancial currency instruments 8 (58) -Loss on disposal of assets (8) -Foreign exchange losses (11) (14) -------- -------- (287) (45) -------- --------Loss for the period (1,623) (1,584) Loss per share (0.8) p (0.9) p TURBO POWER SYSTEMS INC.CONSOLIDATED BALANCE SHEETSUNAUDITED Notes As at 30 September As at 31 December £'000 £'000Assets Current assetsCash and cash equivalents 2,459 6,525Debtors 12 2,224 1,346Stock and work in progress 1,065 541 -------- -------- 5,748 8,412 -------- -------- Restricted cash 10 1,496 1,496 -------- -------- Long-term assetsInvestments 11 57 59Intangible assets 11 1,136 1,471Tangible assets 11 2,443 3,007 -------- -------- 3,636 4,537 -------- -------- 10,880 14,445 ======== ======== Liabilities and shareholders' equity Creditors: amounts fallingdue within one year 13 3,024 2,183 -------- -------- Creditors: amounts fallingdue after more than one year 14 10,452 10,211 -------- -------- Capital and reservesShare capital and otherequity instruments 2,15 47,385 46,897 Currency exchange adjustments 2 (69) (128)Loss deficit 2 (49,912) (44,718) ---------- ----------Shareholders' funds (2,596) 2,051 --------- --------- 10,880 14,445 ========== =========== TURBO POWER SYSTEMS INC.CONSOLIDATED CASH FLOW STATEMENTSUNAUDITED Nine months ended 30 September Notes 2006 2005 £'000 £'000 Cash outflow from operating activities 3 (3,700) (3,788) Interest received 206 239Interest paid (495) (380) --------- ---------Net cash outflow from (3,989) (3,929)operating activities Non operating activitiesPurchase of long-term assets (117) (39) Financial instruments 8 (81) - --------- ---------Cash outflow from non operating activities (198) (39) --------- ---------Net cash outflow beforefinancing activities (4,187) (3,968) Tax 121 (18) Financing activitiesProceeds from debt issue - 7,707Movements in restricted cash - 380 --------- ---------Cash inflow from financing activities - 8,087 --------- ---------Increase/(decrease) incash in the period (4,066) 4,101 ========== ========= Cash and cash equivalents:Beginning of period 6,525 2,067 ---------- ----------End of period 2,459 6,168 ========== ========== TURBO POWER SYSTEMS INC.CONSOLIDATED CASH FLOW STATEMENTSUNAUDITED Three months ended 30 September Notes 2006 2005 £'000 £'000 Cash outflow from operating activities 3 (1,497) (963) Interest received 59 117Interest paid (192) (293) --------- ---------Net cash outflow from (1,630) (1,139)operating activities Non operating activitiesPurchase of long-term assets (69) (14) Financial instruments 8 (81) - --------- ---------Cash outflow from nonoperating activities (150) (14) --------- ---------Net cash outflow beforefinancing activities (1,780) (1,153) Tax 121 (1) Financing activitiesProceeds from debt issue - -Movements in restricted cash - 370 --------- ---------Cash inflow from financing - 370activities --------- ---------Increase/(decrease) incash in the period (1,659) (784) ========= ========= Cash and cash equivalents:Beginning of period 4,118 6,952 ---------- ----------End of period 2,459 6,168 ========== ========== TURBO POWER SYSTEMS INC.NINE MONTHS ENDED 30 SEPTEMBER 2006NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 1 Basis of preparation The unaudited financial statements of the Company have been prepared bymanagement in accordance with International Accounting Standards and GenerallyAccepted Accounting Principles in Canada for interim financial statements. Theseunaudited financial statements do not include all the note disclosures required for annual financial statements and therefore they should beread in conjunction with the Company's audited consolidated financial statements for the year ended 31 December 2005. The significant accounting policies are consistent with prior years.Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2006. 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, tomanage foreign exchange rate fluctuation exposure on receipts from customers billed in U.S. Dollars. These derivative contracts, not accounted foras hedges, are marked to market, and any changes in the market value are recorded in income or 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 Kingdomsubsidiaries in Sterling. All numbers reported in these financial statements arestated in Sterling unless otherwise noted. 2 Movements in shareholders' funds Share Other Exchange Profit and Total capital equity adjustments loss £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2005 42,932 1,027 (78) (38,265) 5,616 Loss for the period (6,453) (6,453) Exchange (loss) (50) (50) Stock compensation 133 133 Equity component of financial instrument 1,331 1,331 Conversion to shares 1,786 (298) 1,488 Equity adjustment 35 (49) (14) --------- --------- --------- --------- --------- Balance at 31 December 2005 44,753 2,144 (128) (44,718) 2,051 Loss for the period (5,194) (5,194) Exchange gain 59 59 Stock compensation 373 373 Conversion to shares 65 (11) 54 Issue of shares 61 61 --------- --------- --------- --------- --------- Balance at 30 September 2006 44,879 2,506 (69) (49,912) (2,596) ========= ========= ========== ========= ========== 3 Reconciliation of operating loss to cash outflow from operating activities Nine months ended Three months ended 30 September 30 September 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Operating loss for the period (4,480) (4,776) (1,336) (1,539) Movements in working capital balances Decrease / (increase) in debtors (878) (330) (749) (158) Decrease / (increase) in stocks and work in progress (524) (45) (110) 3 (Decrease) / increase in creditors 939 335 341 240 Restructuring payments - (249) - - Amortisation 892 1,006 230 312 Provision for impairment - 90 - - Stock compensation expense 373 43 138 2 Other income - 168 - 168 Foreign exchange(losses)/gains (22) (30) (11) 9 --------- --------- --------- --------- Cash outflow from operating activities (3,700) (3,788) (1,497) (963) ========== ========== ========== ========== 4 Segmental analysisThe Group's three reportable segments are the power electronics segment,which is involved in the development and manufacture of electrical power supplyand control systems, the electrical machines segment, which is involved in thedevelopment and commercialization of generators and motors, and the corporatesegment which is responsible for the financing of the group and other related corporate activities. The power electronics and electrical machines segments operate in the UnitedKingdom. Thecorporate segment operates in Canada and the United Kingdom. All amounts in £'000 Power electronics Electrical machines Corporate Total 2006 2005 2006 2005 2006 2005 2006 2005Nine months ended 30 SeptemberRevenue 3,459 1,667 172 95 - - 3,631 1,762Development income 577 386 - - - - 577 386Net interest income/ - - (832) (300) 206 (248) (626) (548)(expense)Amortisation 104 159 788 847 - - 892 1,006Operating Loss (372) (475) (3,037) (3,221) (1,071) (1,080) (4,480) (4,776)Net Loss (348) (478) (3,894) (3,798) (952) (928) (5,194) (5,204)Capitalexpenditure 87 16 30 23 - - 117 39 Three months ended 30 SeptemberRevenue 1,380 750 90 59 - - 1,470 809Development income 285 71 - - - - 285 71Net interest income/ - - (326) 147 116 (345) (210) (198)(expense)Amortisation 34 63 196 249 - - 230 312Operating Profit/(Loss) 110 (21) (982) (1,064) (464) (454) (1,336) (1,539)Net Profit/(Loss) 110 (17) (1,318) (1,251) (415) (316) (1,623) (1,584)Capital expenditure 48 2 6 12 - - 54 14 4 Segmental analysis (continued) All amounts in £'000 Power Electrical Corporate Total electronics machines As at Sep Dec Sep Dec Sep Dec Sep Dec 2006 2005 2006 2005 2006 2005 2006 2005Total Assets 4,935 4,468 1,858 5,604 4,087 4,373 10,880 14,445Total Liabilities 1,602 787 11,642 11,494 232 113 13,476 12,394 5 Significant Customers During the nine month period ended 30 September 2006, 41% of the Company's revenue was from three customers ( 2005: 61% from four customers). 6 Research and product development Research and product development expenditure incurred during the period comprised: Nine months ended Three months ended 30 September 30 September 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Research and product 2,660 2,256 927 781 development cost Accrued tax credits (50) (60) (10) (25) --------- --------- --------- --------- Total expenditure 2,610 2,196 917 756 ========= ========= ========= ========= Deferred research and product development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 30 September 2006 amounted to £nil (31 December 2005 - £198,000). Deferred research and product development expenditure comprised materials, labour and allocated overheads. Total accrued tax credits receivable at 30 September 2006, including those credited against deferred research and product development expenditure, amounted to £119,000 (31 December 2005- £190,000). 7 Interest expense and finance charges Nine months ended Three months ended 30 September 30 September 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Interest payable 420 398 132 154 Amortisation of deferred 121 140 40 53 finance charges Debt accretion 291 267 97 101 --------- --------- --------- --------- 832 805 269 308 ========= ========= ========= ========= 8 Financial Instruments Foreign currency risk Certain of the Company's business transactions occur in currencies other than Sterling. The Company has entered into foreign exchange average rate option contracts during the nine months ended 30 September 2006 ( 2005: nil ) to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars The Company has purchased an average rate option over $1.965million U.S. Dollars at a strike rate of 1.90 U.S. Dollars which expires on 27 December 2006, and 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. As at 30 September 2006 the unrealised gain from these contracts was £23k (2005- £nil). 9 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 outstanding for each period. The weighted average number of shares outstanding in the period was 191,165,301 (2005 - 184,009,119). No diluted earnings per share have been reported as the Company has losses in both years and the effect would be anti-dilutive. The loss for the nine months ended 30 September 2006 was £5,194k (2005 - £5,204k). 10 Restricted cash The Company has committed cash bonds in support of contracts placed by certain of its customers. The associated contracts require the bonds to remain in place until up to two years after all equipment is delivered. According to the current contract schedules that would result in cash being under the performance bond restrictions until 2012. At 30 September 2006 cash subject to restrictions totalled £1,496k (December 2005 - 1,496k). 11 Long - term assets Cost Impairment Amortisation Net book value £'000 £'000 £'000 £'000 At 30 September 2006: Investments 102 45 - 57 Intangible assets 5,528 1,706 2,686 1,136 Tangible assets 8,246 - 5,803 2,443 -------- -------- -------- -------- Total long term assets 13,876 1,751 8,489 3,636 ========= ======== ======== ======== At 31 December 2005: Investments 104 45 - 59 Intangible assets 5,527 1,706 2,350 1,471 Tangible assets 8,133 - 5,126 3,007 -------- -------- -------- -------- Total long term assets 13,764 1,751 7,476 4,537 ======== ======== ======== ======== 12 Debtors Sep 2006 Dec 2005 £'000 £'000 Trade debtors 1,249 631Prepayments 740 507Other debtors - 18Tax recoverable 235 190 -------- --------- 2,224 1,346 ======== ========= 13 Creditors: amounts falling due within one year Sep 2006 Dec 2005 £'000 £'000 Trade creditors 1,219 547Other creditors 357 234Tax and social security creditor 132 126Accruals and deferred income 1,261 1,221Provision for restructuring 55 55 -------- --------- 3,024 2,183 ========= ========= 14 Creditors: due after more than one year Convertible bond Sep 2006 Dec 2005 £'000 £'000 At 1 January 2006 9,913 4,364 Issued during the period - 8,000 Conversion of Convertible Notes during the (54) (1,331) period Less equity component - (1,488) ------- ------- 9,859 9,545 Add: accretion of debt component during the 291 368 period -------- ------- At 30 September 2006 10,150 9,913 ======== ======= Provisions for warranty claims 302 298 ------- ------- 10,452 10,211 ========= ======== 15 Share capital - issued common shares Number of shares At 1 January 2006 190,510,259 Conversion of convertible notes 541,665 Issue of common shares 442,668 --------------- At 30 September 2006 191,494,592 =============== No options were exercised during the nine months ended 30 September 2006. 16 Financing On 11 March 2005 the Company completed an £8,000,000 (gross) financing agreement with 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 an aggregate 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 and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. 17 Stock options, warrants and compensation expense The number of options and warrants outstanding as at 30 September 2006, and the movement during the nine months then ended, are as follows: Options Warrants Number Number Outstanding at 1 January 2006 34,995,134 10,500,000 Cancelled (13,286,051) - Issued 6,062,000 - ------------- ------------ Outstanding at 30 September 2006 27,771,083 10,500,000 ============= ============ The stock based compensation expense for the nine month period ended 30 September 2006, included in Production costs was £34,000 (2005: £nil), in Research and product development was £188,000 (2005:£nil), and in General and administrative costs was £151,000 (2005: £43,000). 18 Selected quarterly information The following table sets forth selected consolidated financial information of the Company for the eight most recent quarters. (Loss) per Revenue Net loss hare UK £'000 £'000 pence December 2004 507 (2,280) (1.3)March 2005 360 (1,939) (1.1)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 (1,623) (0.8) 19 Subsequent event On 20 October the company announced its intention to transfer to AIM, in addition to an institutional placing of Common shares and 'A' shares raising £6.0 million before expenses. In addition it announced the redemption of £8.8 million of convertible loan notes. Shareholder approval will be sought for this transaction at a special meeting of the company on 27 November 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
TPS.L