31st Mar 2008 07:01
Turbo Power Systems Inc31 March 2008 31 March 2008 TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR THE YEAR AND QUARTER ENDED 31 DECEMBER 2007 Highlights • Full year production and development income increased by 75 percent to £11.0 million (2006: £6.3 million) • Full year loss before tax of £6.4 million (2006: £6.3 million) • Year end unrestricted cash of £4.2 million and further restricted funds of £1.4 million • Investment in aerospace capability now substantially complete • Rail electronics contracts for Chicago Transit Authority (US$14 million) and Toronto Transit Commision (US$8 million) announced in the year • Motor and drive contract for initial 75 systems announced in December • Successful move to new Gateshead premises Commenting on the results Graham Thornton, Chairman, said: "During 2007 our core rail electronics business continued to grow strongly andwe also announced significant production orders in our electrical machinesdivision. In our aerospace business the investment in building the capability tocomplete development and move towards production on our Boeing 787 programmeshas adversely impacted our bottom line performance for the year, however, thisinvestment is now substantially complete and we look forward to moving intoaerospace production in 2008. "On becoming Chairman of the company I instigated an operational review which isnow largely complete and we intend to update the market with the outcome of thisreview in due course. I have been encouraged by the opportunities that exist andpleased by the response from our major customers. I look forward with optimismto a year of significant progress." 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 ScottNicholas Marren NOTES TO EDITORS About Turbo Power Systems Turbo Power Systems Inc (AIM:TPS.L). is a leading UK based designer andmanufacturer of innovative power solutions. The Group's products are all basedon its core technologies of power electronics and high speed motors andgenerators and are sold into a number of market sectors including aerospace,rail, and various industrial sectors. The Company's products provide improvedefficiency and reduced energy consumption compared to existing technologies. Turbo Power System's existing customers include bluechip companies such asHamilton Sundstrand, Bombardier, The National Rail Equipment Company, EatonAerospace and Lotus. 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.New or updated CICA Handbook sections that have been issued but are not yeteffective, and have a potential implication for the Company, are as follows: (a) Section 3862 "Financial Instruments - Disclosure" and Section 3863"Financial Instruments -Presentation" Section 3862, Financial Instruments - Disclosure, increases the disclosurescurrently required to enable users to evaluate the significance of financialinstruments for an entity's financial position and performance, includingdisclosures about fair value. Section 3863, Financial Instruments -Presentation, replaces the existing requirements on the presentation offinancial instruments, which have been carried forward unchanged. Thesestandards are effective for interim and annual financial statements relating tofiscal years beginning on or after October 1, 2007. The Company is currentlyevaluating the impact of the adoption of these changes on the disclosure andpresentation within its financial statements. (b) Section 1535 "Capital Disclosures" Section 1535, Capital Disclosures, requires disclosure of an entity'sobjectives, policies and processes for managing capital, quantitative data aboutwhat the entity regards as capital and whether the entity has complied with anycapital requirements and, if it has not complied, the consequences of suchnon-compliance. This standard is effective for interim and annual financialstatements relating to fiscal years beginning on or after October 1, 2007. TheCompany is currently assessing the impact of the new standard. (c) Section 3031 "Inventory" In June 2007, the CICA released new Handbook Section 3031, Inventories,effective for annual and interim periods beginning on or after January 1, 2008.This new section requires inventory to be measured at the lower of cost or netrealizable value and provides guidance on the methodology used to assign coststo inventory, it disallows the use of the last-in first-out inventory costingmethodology and requires that, when circumstances which previously causedinventories to be written down below cost no longer exist, the amount of thewrite-down is to be reversed. The Company is currently assessing the impact ofthe new recommendations on its financial statements. Harmonizing Of Canadian and International Standards In March 2006, the Accounting Standards Board of the CICA released its newstrategic plan which will abandon Canadian generally accepted accountingprinciples ("GAAP") and affect a complete convergence to the InternationalFinancial Reporting Standards. At the end of a transitional period ofapproximately five years, Canadian GAAP will cease to exist as a separate,distinct basis of financial reporting for public companies. The Company willclosely monitor changes arising from this proposed convergence. Definition of non-GAAP financial measures EBITDA is calculated as the net loss for the period less financial interestincome and charges, foreign exchange gains and losses, tax charges and receipts,depreciation, amortization, and stock compensation charges. The Company believesthat EBITDA is useful supplemental information as it provides an indication ofthe operational results generated by its business activities prior to takinginto account how those activities are financed and taxed and also prior totaking into consideration asset amortization. EBITDA is not a recognised measureunder GAAP and, accordingly, should not be construed as an alternative tooperating income or net loss determined in accordance with GAAP as an indicatorof financial performance or of liquidity and cash flows. EBITDA does not takeinto account the impact of working capital changes, capital expenditures andother sources and uses of cash which are disclosed in the consolidated statementof cash flows. The Company's method of calculating EBITDA may differ from otherissuers and may not be comparable to similar measures provided by othercompanies. CHAIRMAN'S STATEMENT During 2007 the Company continued to win significant orders and againdemonstrated strong turnover growth with combined production and developmentrevenues up 75% to £11.0 million. Whilst we were pleased with the level of turnover in 2007, delayed aerospacemilestone receipts coupled with increased technical resource deployment on theaerospace programmes, has meant that the planned reduction in losses was notachieved. The Group's loss before interest, tax, depreciation, amortization andstock compensation was £4.9 million. The majority of production revenue, and a significant proportion of ourdevelopment income, came from our existing core business of rail powerelectronics. In this area the year began well with the announcement of a US$14million contract for the Chicago Transit Authority in January and a US$8 millioncontract for the Toronto Transit Commission in March. Both of these contractswere placed through Bombardier and demonstrate the continued benefits of ourstrategic relationship. I am pleased to report that the prototypes for bothcontracts have now been built and are currently undergoing qualification testingat our Gateshead facility. The rail business grew strongly in the year and the company delivered productionunits to Bombardier on the Beijing and London Underground programmes, as well asto the Toronto Transit Commission on the H6 programme and various smallerproduction and spares contracts. Our largest rail production customer in theyear was NREC and we were pleased to receive follow-on production orders fromthem in May and August 2007 and January 2008. In the area of Electrical Machines, the company spent considerable effortrefining its product offerings during the year, and exhibited at a number of keyindustry events. This effort has led to a significantly increased number ofenquiries and requests for quotation for motor and generator systems. Our keyprogramme in this area with a major international capital equipment manufacturerproceeded well in 2007. Our successful development efforts were rewarded inDecember with an initial production contract for 75 systems. The Company is nowfinalising production arrangements, and the majority of these systems areexpected to be delivered in 2008. On the ALC down-hole pump programme, UKtesting is proceeding ahead of operational testing in North America later in2008. In the aerospace sector, 2007 has been a necessary period of investing to gainexperience for the future. Our Boeing 787 programmes with Hamilton Sundstrandand Eaton Aerospace have made good technical progress, but non-recurringengineering costs have exceeded planned levels, particularly on the HamiltonSundstrand contract. Project milestones were not met, and so development incomewill be received later than originally planned. Positive progress has been madeso far in 2008, and the expected qualification of the units in 2008 shouldgenerate further development income and see the start of long-term productionrevenues. During 2007 we continued to build a new aerospace design andproduction capability at Gateshead with enhanced quality systems to meetaerospace requirements. While our investment in this capability and the resourcerequired on our development programmes has been greater than originallyanticipated, this investment positions the Company well to win further orders inthis long-term, international growth market. Following my appointment as Chairman the Company instigated a review of costsand operations with the objective of identifying ways to significantly improveour earnings performance over the next 18 months. This continuous operationalimprovement process will become a key part of our strategy to increasecompetitiveness and therefore position the Company for growth. Significantprogress has already been made and opportunities for substantial improvementhave been identified. We will update the market with the outcome of this reviewin due course. I would like to take this opportunity to thank Stephen Sadler who will leave hisposition as Chief Financial Officer in early May, for his valuable contributionto the Company over the past three years. We are actively looking for areplacement for Stephen and will update the market when appropriate. Outlook In 2008 I expect to see continued progress in our core market of rail powerelectronics with the Chicago Transit and Toronto programmes moving towardsproduction. In the Electrical Machines area we look forward to the transitioninto production with our major capital equipment customer and will continue toseek new customers for this key part of our technology portfolio. In theaerospace sector we will look to achieve qualification of the two units with asubsequent move into production. Looking forward, the Company will pursue a two-pronged strategy of buildingsignificant business value with a number of key customers in the transport,energy and aerospace markets while at the same time working on marginimprovement across all product lines. As our installed base grows, we shouldstart to benefit from higher-margin, aftermarket services business without theinvestment levels associated with new design. With our successful move to new Gateshead premises in June 2007, and ourinvestment in developing an aerospace design and build capability, the Companynow has in place a strong platform for growth across all three of our sectorsand I anticipate further progress in 2008. OPERATIONAL REVIEW Business of the Company Turbo Power Systems • Designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology. • Designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications. Strategy Since the Company's products are sub-systems rather than end-products inthemselves, the TPS marketing strategy is targeted towards major OriginalEquipment Manufacturers ("OEMs") and system integrators, with the objective ofdeveloping long term agreements covering both technology development and volumemanufacturing. During the year, the Company continued the process of transforming its Heathrowfacility and the Electrical Machines operation from a development andprototyping facility into a growing production centre, by expanding the numberof funded customer demonstrator programmes using the existing design and IPRbase. TPS policy is to undertake demonstrator programmes only where OEM customers havean established business case for ongoing production volumes, or where theapplication extends the Company's installed base of equipment into sectors andapplications considered to offer considerable future growth potential. TPS maintains the capacity and capability to develop, manufacture and fully testall of its products, however where appropriate it does review the potential foroutsourcing those elements of the process where volumes and technical complexityare appropriate. The Company is currently in discussion with a potential partner in India inorder to access the rapidly growing rail and transport markets in India, Chinaand SE Asia, combining the design, application and technical expertise of theCompany with the necessary low cost base manufacturing resource required to sellinto those markets. In addition, in recognition of the increasing importance of the North Americanmarket to our future revenue stream, the Company intends to open a sales andservice centre in Chicago, to support our expanding product field population,and our increasing number of OEM customers. 2007 summary During 2007 there were many positives in the Company's performance. The numberof opportunities for the Heathrow electrical machines business increasedsignificantly with important contracts being won and very positive feedbackbeing received from our new customers. Revenues in the year grew strongly onceagain, and the rail and industrial product sales from Gateshead showed stronggrowth in order intake. The new power electronics facility has provided much needed additional capacityand a high quality environment for staff and customers. In the aerospace sector, the Eaton project although incurring some additionalcost overruns is now proceeding through to final qualification. The exception to this strong underlying performance has been the HamiltonSundstrand project, which has seen significant increases in TPS design costsover budget for both the hardware and software phases, and incurred projectdelays which meant that key income milestones were not met. Considerableprogress has recently been made in resolving both the software and hardwareissues in conjunction with both Boeing and Hamilton Sundstrand, and updatedhardware is expected to be available to the customer in time for the initialpower-up and flight test programme. High speed electrical machines The optimal size range for electrical machines based on the Company's permanentmagnet technology is between 15kW and 2MW. Markets The key markets for the motor derivatives are: • HVAC and refrigeration • Air and gas compression • Turbo-machinery • Aerospace - actuators, pumps, fans • Ship propulsion • Rail traction motors The key markets for generator derivatives are: • Distributed generation (gas turbines) • Micro-generation • Vehicle based auxiliary power generation • Flywheel systems Customers and contracts During the last year, the Company has announced a number of contract awards,which confirmed the commercial viability of our high speed electrical machineproducts. Industrial motor and drive agreement In December 2007 TPS received the launch production order for 75 sets of motorand drive systems valued at some US$2 million. The order for these systems,which is subject to commercial confidentiality, follows earlier announcementsdetailing the framework memorandum and the alpha unit testing programme. Theseunits are expected to be delivered during the latter part of 2008 to provide theinitial stock in support of the formal product launch in early 2009. Oncelaunched, the drive system will replace an existing mechanically drivenarrangement used on the existing capital equipment products in this size range,and can also be supplied for retro-fit to reduce electrical consumption onexisting installations world-wide. Initial alpha testing has gone well, andextensive field testing will continue throughout 2008. The framework agreement anticipates sales of 500 systems over the first twoyears of production, and incorporates a manufacturing agreement with an initialterm of 5 years. TPS is continuing discussions with the customer regarding thescaling of these systems to cover a wider range of product sizes. US process gas customer In January 2008 TPS received an order from an industrial and process gas companyto supply a high speed electrical machine and variable frequency drive for adevelopment project. The products to be supplied by TPS utilise the Company'spermanent magnet and inverter technologies, giving a high performance and highefficiency solution. Once the development phase has been completed it isintended that these systems will be deployed in the customers' sites. European programme Turbo Power Systems recently received an order from a European researchorganisation, acting on behalf of a major international manufacturing company,for the supply of a high speed electrical machine and variable frequency drivewhich will be used in a process system development programme. SKF Production requirements for the 35kW, 70,000 rpm high speed motor and drivesystem (motor elements being manufactured in Heathrow and the drive and magneticbearing control systems being integrated at Gateshead) are being discussedfollowing the extended customer reliability testing programme. ALC UK testing of the complete down hole pump system incorporating the TPS motors isstill underway, with the final, high temperature, trials to be concluded priorto shipment to North America for full operational evaluation. The North American tests will consist of two, three month periods of continuousoperation, with a removal and assessment review between them, and are notexpected to be completed before the end of 2008. End customer interest and demand remains very high, particularly given thecurrent oil pricing. High performance power electronics TPS designs and manufactures rugged power electronics products for rail,industrial and transport applications, all of which require high reliability andavailability in operation. Markets The key markets for the electronics products are: • Auxiliary power conversion for rail and light transit • Variable frequency drives to complement HSEMs • Motor drives for aerospace application • Industrial pulsed power supplies • Grid connected inverters Customers and contracts Bombardier Transportation-Canada Bombardier Transportation - Beijing Deliveries of the auxiliary power systems for the unmanned rail transit cars forthe Beijing airport subway extension are on programme and the contract should becompleted on schedule. Bombardier and its Chinese partners have delivered thefirst car sets to the customer for testing in advance of revenue service and theOlympics. TPS is continuing to provide periodic commissioning and engineeringsupport in China. Bombardier Transportation - Chicago Transit Authority The initial prototype units have now been built and are undergoing functionaltesting at TPS, to be followed by formal qualification tests which will beobserved by both Bombardier and the Chicago Transit Authority. Once the initialauxiliary power units have been supplied to Canada, Bombardier will build thevehicles and then commence extended vehicle trials on a number of evaluationcars, which will continue throughout 2008 and into 2009. The Chicago (and Toronto) designs incorporate a new generation of hardware andsoftware microprocessor control system which the Company is investing in as acommon modular platform for all future rail products. The base Chicago Transit Authority contract is valued at US$14 million includingproduction, spares and engineering services, which with possible options foradditional cars, could increase the value to in excess of US$20 million. Bombardier Transportation - Toronto As with the Chicago Transit Authority hardware, the Toronto prototypes, whichconsist of three unit types (a main Power Supply and two variants of HVACInverter), have also been built and are undergoing functional tests to befollowed by the formal qualification programme. Unlike the Chicago Transit Authority work, the Toronto programme does notinclude an extended vehicle testing phase and TPS production deliveries arescheduled to commence in 2008 and then ramp up. The contract for the initial quantity of 234 cars is expected to exceed US$8million, with the potential for further option quantities to extend that to someUS$14 million. National Rail Equipment Co ("NREC") Sales of the traction power electronics system to NREC in support of their lowemissions switcher locomotives accounted for a significant proportion of theincreased sales turnover in 2007. In order to support the expanding field population of NREC locomotives,additional TPS field service resources have been provided in North America, andthe planned Sales and Service centre in Chicago will be well located to supportboth the NREC locomotive build yards and their customers. Toronto Transit Commission ("TTC") - H6 Subway Programme Manufacture of the final quantities of the auxiliary power supply supplied toTTC for the H6 vehicle upgrade programme will be made in Q1 2008 in accordancewith the programme schedule. Following the success of this programme, TPS isintending to use the Chicago service centre as a base to offer refurbishment ofauxiliary power hardware, repairs and upgrades to rail and subway operatorsthroughout the US. Other Rail Products Bombardier -UK London Underground Production of the drivers air-conditioning power supply for London Underground'sDistrict Line, which has been a very successful programme, will complete inearly 2008. PT3000 Regular small orders for the PT3000 At-Seat power supply, currently in operationwith many UK operators including Virgin and National Express, continue to bereceived, however there are a number of UK rolling stock refurbishmentprogrammes currently under review where the potential quantities of PT3000s areconsiderably larger. TPS has now produced over a thousand of these units whichallows the commuter to safely charge up mobile phones and laptops. PRC Industrial Lasers TPS continues to see strong ongoing demand from PRC Lasers who have nowstandardised on the TPS high voltage power supply for their complete range ofindustrial lasers. Recently TPS has developed a new "higher power" derivativewhich is now undergoing testing. Aerospace Boeing 787 Our first steps in the commercial aerospace sector have represented a very steeplearning curve, and undertaking two major programmes effectively in parallelgave us little opportunity to apply the lessons learned on the Eaton programmeto the Hamilton Sundstrand programme. As a consequence, the level and depth ofengineering required on the Hamilton Sundstrand work was underestimated and theresulting costs exceeded both our expectations and the customer's contractualfunding. Additionally, programme delays have deferred contracted stage paymentsfrom 2007 to 2008. TPS has now absorbed the lessons of these two contracts and is now much betterplaced to bid on future aerospace programmes from a basis of experience.Dedicated production and test facilities, including temperature cycling andvibration testing have been put in place, and aerospace product assembly staffhave been trained. We still believe that the core TPS technology of highperformance electrical machines and matched power electronics is well suited tothe growing demands of the All-electric aircraft, and are continuing to identifyopportunities on other programmes and platforms. Eaton Aerospace Override Jettison Pump Control Unit The hardware has successfully met the first major qualification requirement bycompleting the Safety of Flight Test programme. The initial batch of units hasbeen delivered to Boeing to support the Aircraft Flight Test Programme. The formal qualification programme is underway with encouraging initial results.The programme has been subject to a delay as a result of a change in technicalrequirement. The Company has now ensured that production facilities and trained staff are inplace at our facilities and materials are on hand to support the aggressiveBoeing production ramp up this year. Hamilton Sundstrand Ram Fan Motor Controller The motor controller, which was a late addition to the 787 programme followingweight reduction reviews by Boeing, has suffered a number of delays due totechnical problems incurred by TPS in developing both the hardware and thesoftware, which is largely outsourced to an aerospace approved software house inIndia. With support from both Boeing and Hamilton Sundstrand, the software is nowperforming well, and a series of interim modifications have been identified toresolve the outstanding hardware issues in time for updated hardware to beavailable to the customer for the initial power -up and flight test programme. Work is continuing in procurement and discussions are ongoing with HamiltonSundstrand to ensure that profitability is achieved in the production phase oncea final design has been approved. TPS North America In order to support our growing customer base in North America and to take theopportunity to expand both direct sales and aftermarket revenues, TPS is settingup TPS North America in a facility in Greater Chicago. Initial activities will be focused on sales and service functions, however it isanticipated that some elements of hardware upgrades/modification and partialfinal assembly may follow in due course. Financial Performance During 2007, TPS's existing core business sectors of rail and industrial powerelectronics showed continued development on the back of increased production.However, work on our new aerospace programmes has consumed more resource thanwas expected which has had a detrimental impact on EBITDA and cash flow. As aresult the company has shown strong revenue growth in 2007 but increased EBITDAlosses and cash outflows compared to 2006. Significant technical progress hasbeen made on the Hamilton Sundstrand programme in the first quarter of 2008 andthe company expects to receive the remaining development income and move intothe production phase during 2008. As a result the extra front end investment inthis programme during 2007 is expected to be recovered from 2008 onwards. In terms of orders won 2007 began well with the award of two major railcontracts from Bombardier in the first quarter. The base CTA contract isexpected to be worth US$14m over 6 years with options which could increase thecontract value to US$20 million. Similarly, the Toronto Transit Commission orderhas a base value of US$8 million over 5 years with options to increase to US$14million. Orders worth US$5.5 million were received from NREC during the year forour traction control electronics with a further order for US$1 million announcedin January 2008. In the Electrical machines division we announced a production order from a majorindustrial motor and drive customer for 75 systems which is worth US$2 millionto be delivered in 2008. A number of bid enquiries requiring similar technologyhave been received in early 2008. Production revenue grew strongly in the year as new power electronics programmesmoved into production and in particular volumes shipped to NREC grew steadily.Total production revenue of £9.8 million for the year is a 79% increase over2006. Development income increased 48% to £1.2 million and includes receipts from theHamilton Sundstrand, Eaton Aerospace and Bombardier Rail programmes. Development costs of £5.5 million reflect the increased development activity onthe two new Bombardier contracts and on the Eaton and Hamilton SundstrandAerospace programmes. Development expenditure on the Hamilton Sundstrandprogramme was £1.7 million. Administrative costs including amortization increased by 12% to £4.7 million in2007. The group's loss before interest, tax, depreciation, amortization and stockcompensation increased by 15% to £4.9 million. Financing costs for 2007 reduced significantly as the benefits of therestructuring of convertible notes, which was completed in December 2006, wereseen. Interest expense for 2007 was £0.2 million compared with £1.0 million for2006. Staff numbers increased steadily in the areas of development and production toreflect the increased activity but remained steady in administrativedepartments. Overall permanent headcount at the year end was 165 (2006: 139). Operating cash outflows before tax increased to £6.0 million (2006: £5.1million) reflecting the increased losses and increased stock. Purchases of long term assets of £0.7 million (2006: £0.2 million) relateprimarily to the new premises in Gateshead and are partially offset by grantfunding from One North East of £0.1m. In June 2007 the Company raised £3.8 million net from the placing of 44,500,000Common shares. The Company finished the year with an unrestricted cash balance of £4.2 millionand held further cash of £1.4 million associated with performance bonds. These consolidated financial statements have been prepared on a going concernbasis, which presumes that the Company will be able to realise its assets anddischarge its liabilities in the normal course of operations for the foreseeablefuture. The Company has incurred cumulative losses including a loss of £6.42million in 2007 and has a cumulative deficit of £62.67 million as at 31 December2007. The Company's ability to continue as a going concern depends on itsability to generate positive cash flow from operations or secure additional debtor equity financing. Further detail of the Company's financial performance is shown below: Production revenue Production revenue in the year ended 31 December 2007 was £9.80 million comparedwith £5.48 million in 2006 and comprised 2007 2006 £'000 £'000 Power electronics 9,581 5,257Electrical machines 244 225 _____ _____ 9,825 5,482 The Power electronics division has seen continued strong turnover growth,primarily as a result of increased volumes on established programmes but alsothrough initial production runs on new contracts such as the Beijing Airportproject. Output volumes have grown significantly on the existing productioncontracts for NREC, Toronto Transit Commission H6 and Bombardier LondonUnderground. Spares and service revenues within the Power electronics division were £0.42million for the year (2006: £0.98 million). In the Electrical machines division revenue increased marginally over 2006 asthe first units were delivered as part of the Industrial Motor and Driveagreement. Development income Development income in the year was £1.18 million compared with £0.79 million in2006 and included further milestone receipts from Eaton Aerospace and HamiltonSundstrand on the Boeing 787 Dreamliner programmes. 2007 2006 £'000 £'000 Development income 1,176 794 Production costs The cost of product revenues in the year amounted to £7.28 million (2006: £4.23million). 2007 2006 £'000 £'000 Power electronics 6,280 3,423Electrical machines 999 804 _____ _____ 7,279 4,227 Production costs include certain fixed facilities costs attributable to themanufacturing operation. Overall gross margin for the year was 26% compared to23% in 2006. The improvement reflects production efficiency gains from the moveto new premises which were partially offset by New Product Introduction costs onNREC and other new production programmes. Included in production costs for the year are stock compensation charges onoptions awarded of £91,000 (2006: £51,000). Research and product development Research and product development expenditure in the year was £5.48 millioncompared with £3.32 million in 2006, and comprised 2007 2006 £'000 £'000 Research and product development expenditure 5,509 3,734Accrued R&D tax credits (27) (410) _____ _____Total expenditure 5,482 3,324 Product development costs increased in 2007 as work commenced on both theBombardier Chicago and Toronto rail programmes and activity increased on theEaton and Hamilton Sundstrand contracts for the Boeing 787 Dreamliner.Development expenditure on the Hamilton Sundstrand programme was £1.7 million. Included in research and product development expenditure for the year are stockcompensation charges on options awarded of £405,000 (2006: £255,000). The level of R&D tax credits accrued in the year reduced as more of theCompany's development resource moved on to commercial programmes. General and administrative General and administrative costs of £3.86 million (2006: £3.12 million) consistmainly of staff costs and facilities costs, which have increased following therelocation of the Gateshead operation to larger facilities. Also included arestock compensation charges on options awarded of £203,000 (2006: £205,000), andincreased costs for additional sales and promotional activities. Amortisation Amortisation was £0.86 million compared with £1.09 million in 2006. Thereduction reflects a number of assets becoming fully written down during theyear. Interest income Interest income for the twelve months was £0.37 million compared with£0.23 million in 2006 reflecting a higher average cash balance held in the year. Interest expense and finance charges Interest expenses arise from the issue of convertible notes in July 2003 andMarch 2005 and comprise 2007 2006 £'000 £'000Interest 188 662Accretion of debt 60 387 _____ _____ 248 1,049 Convertible notes 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 thenotes issued and the fair value of the liability is assigned to the equitycomponent. The equity element ofthe March 2005 note issue was estimated at £1.11 million. The equity element ofthe 2003 note issue was estimated at £0.91 million. The carrying value of thedebt element is increased over the term of the debt and this accretion expenseis charged to the profit and loss account. During the twelve months this chargeamounted to £0.06 million (2006: £0.39 million). Finance charges for 2007 were £66,000 (2006: £nil) and were made up as below: During the fourth quarter the company purchased U.S. dollar denominated currencycontracts covering expected dollar income from programmes scheduled for 2008.The premium cost for these options was £51,000 (2006: £81,000) and has beencharged to profit and loss in the year. The maturing 2007 US dollar optionreturned £8,000, resulting in a net loss for the year of £36,000 (2006: gain of£62,000). During the first quarter the company redeemed £4,860,000 loan notes, resultingin a net credit of £47,000 (2006: charge of £190,000). Financial service charges primarily related to the cost of creating andmaintaining performance bonds were £16,000 in 2007. In 2006 the transfer to theAIM market resulted in the release of the provision for financial costs on shareissuance of £230,000. During the year the Company recorded a fair value adjustment of £10,000 (2006:£21,000) against the investment in Altek Power Corporation. Cash flows for the twelve months Cash outflow from operating activities Operating cash outflow before movements in working capital was £5.20 million forthe year (2006: £4.17 million), as a result of higher incurred costs on theaerospace development programmes in 2007. Movements in stocks, work in progress and debtors and creditors resulted in anet cash outflow of £0.79 million during the year (2006: outflow of £0.97million). Tax credits During the year the company received research and development tax credits of£0.31 million (2006: £0.12 million). Investing activities Purchases of long term tangible assets amounted to £0.73 million (2006: £0.22million) and relate to production equipment and leasehold property improvements. Cash outflows related to financial instruments of £0.05 million (2005: £0.06)are the net premium costs of currency contracts. Cash flow from financing activities Cash inflow from financing in 2007 of £3.80 million during the twelve monthsrelates to net funds received from the issue of shares in June 2007, when theCompany completed a £4,000,000 (gross) financing agreement with institutionalinvestors. The financing comprised placing of Common Shares in Turbo PowerSystems Inc. Cash inflow from financing in 2006 of £5.45 million during the twelve monthsrelates to net funds received from the issue of shares in December 2006, whenthe Company completed a £6,000,000 (gross) financing agreement withinstitutional investors. The financing comprised placing of Common Shares and A-Ordinary shares in Turbo Power Systems Limited. Overall cash outflow for the twelve months Overall the cash outflow for the period was £2.43 million. This compares with acash inflow of £0.14 million in 2006. Summary of quarterly results The following table sets forth selected quarterly consolidated financialinformation of the Company for the last two years; All amounts in £'000 Revenue Research General and Net loss Loss per and product administrative share development March 2006 969 826 752 (1,770) (0.9)June 2006 1,192 867 818 (1,742) (0.9)September 2006 1,470 917 814 (1,623) (0.8)December 2006 1,851 714 735 (1,123) (0.6) March 2007 2,033 1,015 841 (1,403) (0.5)June 2007 2,342 1,151 1,102 (1,768) (0.6)September 2007 2,700 1,736 1,083 (1,666) (0.5)December 2007 2,750 1,580 831 (1,578) (0.5) Quarterly revenue has increased during 2007 reflecting increased production.Research and development expenditure has increased reflecting developmentactivities on the new Bombardier Chicago and Toronto rail programmes andcontinuing development on the Eaton and Hamilton Sundstrand Boeing 787contracts. General and administrative costs increased as the Gateshead facilityrelocated to larger premises in quarter two of 2007. Diluted earnings per share figures have not been provided as the loss in eachperiod would be anti-dilutive. Review of fourth quarter 2007 Production revenue Production revenue in the three months ended 31 December 2007 was £2.75 millioncompared with £1.85 million in 2006 and comprised 2007 2006 £'000 £'000 Power electronics 2,726 1,798Electrical machines 24 53 -------------- 2,750 1,851 ============== Revenues from the Power electronics division increased as a result of productionrevenues from contracts with NREC, Toronto Transit Commission, Bombardier andPRC. Revenue in the Electrical machines division relates primarily to the SKFcontract. Development income Development income in the three months was lower in 2007 at £0.16 millioncompared with £0.22 million in 2006 as a result of fewer milestone paymentsfalling due in the quarter. 2007 2006 £'000 £'000 Development income 159 217 =============== Production costs The cost of product revenues in the three months amounted to £1.96 million (2006: £1.43 million). 2007 2006 £'000 £'000Power electronics 1,736 1,174Electrical machines 223 251 _____ _____ 1,959 1,425 Production costs include certain facilities costs attributable to themanufacturing operation. Included in production costs for the three months are stock compensation chargeson options awarded of £11,000 (2006: £17,000). Research and product development Research and product development expenditure in the three months was£1.58 million compared with £0.71 million in 2006, and comprised 2007 2006 £'000 £'000 Research and product development expenditure 1,607 1,074Accrued R&D tax credits (27) (360) _____ _____ Total expenditure 1,580 714 Included in research and product development costs for the three months arestock compensation charges on options awarded of £115,000 (2006: £67,000). General and administrative General and administrative costs in the three months of £0.83 million (2006:£0.74 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 £33,000 (2006: £55,000). Amortisation Amortisation was £0.20 million compared with £0.19 million in 2006. Interest income Interest income in the three months was £0.10 million compared with£0.02 million in 2006. Interest expense and finance charges Interest expenses arise from the issue of convertible bonds in July 2003 andMarch 2005 and comprise 2007 2006 £'000 £'000Interest payable 50 245Accretion of debt 49 (28) _____ _____ 99 151 During the quarter receipts on maturing options were received of £8,000 (2006:£17,000). During the fourth quarter the company purchased a U.S. Dollar option to coverexpected 2008 programme dollar income at a cost of £51,000. During the quarter the Company recorded an impairment of £10,000 (2006: £21,000)against the investment in Altek Power Corporation. Cash flows for the fourth quarter Cash outflow from operating activities Operating cash outflow before movements in working capital was £1.46 million forthe quarter (2006: £0.67 million). Movements in stocks, work in progress, and debtors and creditors produced a netcash inflow of £0.47 million during the quarter (2006: outflow of £0.75million). Tax credits During the quarter the company received no research and development tax credits(2006: £nil). Investing activities Cash outflows from capital investments in the three months were £0.14 millioncompared with £0.01 million in 2006. This spend was primarily on the newfacilities at Gateshead. Overall cash outflow for the period Overall the cash outflow during the three months was £1.34 million. Thiscompares with an overall cash inflow of £4.21 million for the fourth quarter of2006 which included fundraising receipts of £5.45 million. Balance sheet as at 31 December 2007 The Company ended the period with an unrestricted cash balance of £4.24 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 £1.36 million relating toperformance bonds entered into as part of contracts with the Toronto TransitCommission and Bombardier (2006: £1.50 million). Long term assets excluding restricted cash have decreased from £3.69 million at31 December 2006 to £3.00 million at 31 December 2007, after depreciationcharges of £0.86 million. Long term liabilities have decreased significantly to £1.98 million at 31December 2007 compared to £6.13 million at 31 December 2006, reflecting thereduction in Loan Notes following the redemption of 4,500,000 notes in January2007. Net working capital at 31 December 2007, excluding cash balances, was £1.62million, compared with £0.60 million as at 31 December 2006. As at 31 December 2007, the Company had 318,571,062 common shares issued andoutstanding and 115,000,000 A ordinary shares issued and outstanding. As at thatdate there were 30,847,250 outstanding share options and 10,500,000 outstandingwarrants. Contractual Obligations £'000 Payments Due by Periodat 31 December 2007 Total Less than 1 - 3 4 - 5 After 1 year years years 5 yearsConvertible notes 1,789 - 1,789 - -Operating leases 4,990 519 1,583 858 2,030Total contractual obligations 6,779 519 3,372 858 2,030 Liquidity Cash, cash equivalents and short-term investments at 31 December 2007 were£4,235,000, compared with £6,669,000 at 31 December 2006. Restricted cash at 31 December 2007 was £1,362,000, compared with £1,496,000 at31 December 2006. Convertible bonds On 11 March 2005 the Company completed a £8,000,000 (gross) financing agreementwith institutional investors. The financing comprised 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 Convertible notes are unsecured. The Warrants have a termof five years and are convertible into an aggregate of 7,000,000 Common Sharesin Turbo Power Systems Inc. at an exercise price of £0.15 per share. On 28December 2006 2,360,000 Convertible Notes were redeemed. On 6 January 2007 afurther 2,000,000 Convertible Notes were redeemed. At 31 December 2007 therewere 1,789,000 Convertible Notes outstanding.. On 11 July 2003, the Company completed a £5,000,000 financing agreement withIsland Investment (Securities) Ltd. and Argun Investments Limited. The financingcomprised Convertible Notes and Warrants. The Convertible Notes have a term offive years, bear an annual interest rate of 3.5% and are convertible into anaggregate of 25 million Common Shares of Turbo Power Systems Inc. at aconversion price of £0.20 per share. The Warrants had a term of three years andwere convertible into an aggregate of 3.5 million Common Shares of Turbo PowerSystems Inc. at an exercise price of £0.15 per share. These warrants expired on11 July 2007. On 28 December 2006 2,500,000 Convertible Notes were redeemed. Theremaining 2,500,000 Convertible Notes were redeemed on 6 January 2007. Currency risk management Principally all of the Company's expenditure is denominated in Sterling, whichis funded from Sterling cash balances. Exchange differences, which arise onconsolidation of the Company's Canadian operations, are included in exchangeadjustments within the income statement. At 31 December 2007 the Sterlingequivalent of Canadian Dollar denominated net assets amounted to £60,000 (2006 -£59,000), and the principle element comprised the investment of £25,000 in theloan note issued by Altek. Interest rate risk management The analysis of the Company's financial assets and borrowings analysed betweenfloating and fixed interest rates is shown below; 2007 2006 £'000 £'000 Floating rate financial assets 5,597 8,165 Fixed rate financial assets 25 31 Floating rate borrowings - - Fixed rate borrowings 2003 Bond - (2,500) Fixed rate borrowings 2005 Bond (1,789) (3,789) The fixed rate borrowings for the 2003 Bond were at 3.5% per annum, and for the2005 Bond are at 6.5% per annum, and the fixed rate financial assets are at 6.0%per annum. The Company invests surplus cash funds in short term money market deposits withfinancial institutions and cash funds which have at least a short term creditrating of F1. The maturity of the deposits is between one and three months. Derivative financial instruments During the fourth quarter the company purchased U.S. dollar denominated currencycontracts covering expected dollar income from programmes scheduled for 2008.The premium cost for these options was £51,000 (2006: £81,000) and has beencharged to profit and loss in the year. The maturing 2007 US dollar optionreturned £8,000, resulting in a net loss for the year of £36,000 (2006: gain of£62,000). TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT Notes Quarter ended 31 December Year ended 31 December 2007 2006 2007 2006 £'000 £'000 £'000 £'000 restated restated Production revenue 2,3 2,750 1,851 9,825 5,482Development income 2,3 159 217 1,176 794 ---------------------------------------------------- 2,909 2,068 11,001 6,276 Expenses Production costs 1,959 1,425 7,279 4,227 Research and product development 4 1,580 714 5,482 3,324 General and administrative 831 735 3,857 3,119 Amortisation 198 194 858 1,086 ---------------------------------------------------- 4,568 3,068 17,476 11,756Loss before interest, finance charges (1,659) (1,000) (6,475) (5,480)and foreign exchange Interest income (98) (20) (367) (226) Interest expense 5 99 151 248 1,049 Finance charge/(income) (52) - 66 - Foreign exchange loss/(gain) (30) (8) (7) (45) Net loss and Comprehensive loss ---------------------------------------------------- (81) 123 (60) 778 ---------------------------------------------------- (1,578) (1,123) (6,415) (6,258) ==================================================== Statement of Deficit Deficit, beginning of year, aspreviously stated (53,636) (44,718)Prior period adjustment 13 (68) (128) ----------------------Deficit, beginning of year, asrestated (53,704) (44,846)Net loss (6,587) (6,258)Transitional adjustment (140) -Equity adjustment onissue of shares (2,512) (2,600) ----------------------Deficit, end of year (62,943) (53,704) ====================== Loss per share - basic 7 (0.5)p (0.6)p (2.1)p (3.3)pLoss per share - diluted 7 (0.5)p (0.6)p (2.1)p (3.3)p Weighted average number of shares outstanding 318,571,062 195,079,375 310,387,089 191,827,517 TURBO POWER SYSTEMS INC.CONSOLIDATED BALANCE SHEETS Notes As at 31 December As at 31 December 2007 2006 £'000 £'000Current assets restated Cash and cash equivalents 4,235 6,669Restricted cash 8 - 765Trade and other receivables 2,871 1,817Stock and work in progress 2,376 1,230Prepayments 422 419R&D tax credits receivable 208 445 ------------------------------------------------- 10,112 11,345 -------------------------------------------------Long-term assetsRestricted cash 8 1,362 731Prepayments - 254Investments 9 25 31Intangible assets 9 47 77Goodwill 9 820 820Deferred finance charges 9 - 145Tangible assets 9 2,106 2,361 ------------------------------------------------ 14,472 15,764 ------------------------------------------------ Liabilities and shareholders' equityCreditors: amounts falling due withinone yearTrade and other payables 3,700 3,109Deferred income 555 206 ------------------------------------------------ 4,255 3,315 ------------------------------------------------Creditors: amounts falling due aftermore than one yearWarranty provision 151 303Convertible notes 1,661 5,827 ------------------------------------------------ 1,812 6,130 ------------------------------------------------Capital and reservesCommon share capital 10 55,804 51,919Class A Ordinary share 10 capital 13,310 6,123Contributed surplus 1,964 1,981Deficit (62,673) (53,704) ------------------------------------------------Shareholders' funds 8,405 6,319 ------------------------------------------------ 14,472 15,764 ================================================ TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENT OF CHANGES IN EQUITYUNAUDITED Common Share A Ordinary Contributed Deficit Total Equity capital capital surplus £'000 £'000 £'000 £'000 £'000 restated Balance at 1 January 2006 (restated) 44,753 - 2,144 (44,846) 2,051Net loss (restated) (6,258) (6,258)Stock compensation 511 511Conversion to shares 3,383 4,320 (674) (2,600) 4,429Issue of shares 4,059 2,000 6,059Expiry of warrants 117 117Share issue costs (393) (197) (590) ------------------------------------------------------------------Balance at 31 December 2006 (restated) 51,919 6,123 1,981 (53,704) 6,319Net loss (6,415) (6,415)Stockcompensation 699 699Conversion to shares 7,187 (716) (2,414) 4,057Issue of shares 4,017 4,017Share issue costs (132) (132)Transitional adjustment (140) (140) ------------------------------------------------------------------Balance at 31 December 2007 55,804 13,310 1,964 (62,673) 8,405 ================================================================== TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Quarter ended 31 December Year ended 31 December 2007 2006 2007 2006 £'000 £'000 £'000 £'000 restated restated Net loss from operations (1,578) (1,123) (6,415) (6,258) Amortisation 53 287 858 1,179Accretion of debt (2) 96 60 387Provision for impairment on investment 6 28 6 28Stock compensation charges 159 138 699 511 Deferred finance movement - (46) - (46)Foreign currency instrument loss 28 19 35 19Unrealised foreign exchange differences (23) 14 (7) (45) Movement in net interest accrual (100) 186 (440) 52 ---------------------------------------------------------- Cash outflow before movements in (1,457) (401) (5,204) (4,173)working capitalDecrease/(increase) in debtors (384) (711) (820) (1,589)Decrease/ (increase) in stock (128) (165) (1,146) (689)Increase/ (decrease) in creditors 977 124 1,176 1,309 --------------------------------------------------------- Net cash outflow from operating (992) (1,153) (5,994) (5,142)activities before tax ------------------------------------------------------------Tax credits - - 312 121 Net cash outflow from operatingactivities after tax (992) (1,153) (5,682) (5,021) ------------------------------------------------------------ Investing activities Purchase of long-term tangible assets (137) (25) (727) (217)Purchase of long-term intangible assets - - (6) (6)Grant income (150) - 100 -Movement in restricted funds (13) - 34 -Financial instruments (52) (63) (52) (63) ------------------------------------------------------------- Cash outflow from investing activities (352) (88) (551) (286) -------------------------------------------------------------- Financing activities Net proceeds from equity placing - 5,451 3,799 5,451 ------------------------------------------------------------Cash inflow/(outflow) from - 5,451 3,799 5,451financing activities ------------------------------------------------------------ Increase/(decrease) in cash in the (1,344) 4,210 (2,434) 144period ============================================================ Cash and cash equivalents:Beginning of period 5,579 2,459 6,669 6,525 ------------------------------------------------------------End of period 4,235 6,669 4,235 6,669 TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Basis of preparation The consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP). The Company provides a reconciliation from Canadian GAAP to International Financial Reporting Standards in Note 27 of the Consolidated Financial Statements for the year ended 31 December 2007. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Turbo Power Systems Inc, and the accounts of its wholly owned subsidiary company Turbo Power Systems Limited. The significant accounting policies are consistent with prior years. Certain comparative amounts have been reclassified to conform to the financial statement presentation adopted for 2007. 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 financial statements of the Company for the year ended 31 December 2007. 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 for the Company's 31 December 2007 financial statements. Derivative financial instruments are used by the Company to manage a portion of its exposure to foreign exchange rate fluctuations. The Company does notutilise derivative 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 income or expense when the changes occur. The fair value of these instruments is recorded as accounts receivable or payable. The Company's functional and reporting currency is Pound Sterling. Going concern These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred cumulative losses including a loss of £6.42 million for the year ended 31 December 2007 and has a cumulative deficit of £62.67 million as at 31 December 2007. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing. TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 Segmental analysis The Group's two reportable segments are the power electronics segment, which is involved 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 2006Year ended 31 DecemberRevenue 9,581 5,257 244 225 9,825 5,482Development income 1,176 794 - - 1,176 794Amortisation (143) (133) (715) (953) (858) (1,086)Interest income 183 142 184 84 367 226Interest expense (99) (658) (149) (391) (248) (1,049)Net loss (2,352) (1,902) (4,063) (4,356) (6,415) (6,258)Capital expenditure 523 190 50 33 573 223 Three months ended 31 DecemberRevenue 2,726 1,798 24 53 2,750 1,851Development income 159 217 - - 159 217Amortisation (39) (29) (159) (165) (198) (194)Interest income 49 20 49 - 98 20Interest expense (50) (75) (98) (76) (148) (151)Net loss (998) (662) (596) (402) (1,594) (1,064)Capital expenditure 115 103 22 3 137 106 As at 31 DecemberTotal assets 6,800 3,868 7,672 11,896 14,472 15,764Total liabilities 3,523 2,159 2,544 7,286 6,067 9,445 Total income £'000 Year ended Three months ended 31 December 31 December 2007 2006 2007 2006 UK 1,980 1,890 372 507USA 6,314 2,591 1,711 1,228Canada 2,465 790 729 175Rest of world 242 1,005 97 158 -------------------- ------------------- 11,001 6,272 2,909 2,068 ==================== =================== TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 Significant Customers During the year ended 31 December 2007, 67% of the Company's sales were derived from three customers (2006: 41% from three customers). During the three months to 31 December 2007, 65% of the Company's revenue was from two customer (2006: 48% from two customers). 4 Research and product development Research and product development expenditure incurred during the period comprised: Year ended Three months ended 31 December 31 December 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Research and product development cost 5,509 3,734 1,607 1,074 Accrued tax credits (27) (410) (27) (360) ------------------- ------------------ Total expenditure 5,482 3,324 1,580 714 =================== ================== Total accrued tax credits receivable at 31 December 2007 amounted to £208,000 (31 December 2006: £490,000). 5 Interest expense Year ended Three months ended 31 December 31 December 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Interest 139 662 50 55 Accretion of debt 60 387 49 96 ------------------- ------------------- 248 1,049 148 151 =================== =================== TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 Financial Instruments Certain of the Company's business transactions occur in currencies other than Sterling. The Company entered into foreign exchange average rate option contracts during the twelve months ended 31 December 2007 and 31 December 2006 to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars. During 2007 the Company purchased an average rate option over $4.200 million US Dollars at a strike rate of 2.09 U.S. Dollars, which expires between 26 March 2008 and 24 December 2008. During 2006 the Company purchased an average rate option over $1.965 million U.S. Dollars at a strike rate of 1.90 U.S. Dollars, which expired on 27 December 2006, and an average rate option over $5.898 million U.S. Dollars at a strike rate of 2.00 U.S. Dollars which expired on 27 December 2007. During the year a purchase cost of £51,000 (2006: £80,000) was recognised and a loss of £35,000 (2006: gain of £17,000) was realised on these options. As at 31 December 2007 the unrealised gain from the contracts, included within prepayments was £nil (2006: £44,000). Included within other debtors at the year end was an amount of £8,000 (2006: £nil) due following settlement of the 2006 options. The Company records unrealised gains or losses arising from these contracts in the income statement. 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 outstanding for each period. The weighted average number of shares outstanding in the year was 310,387,089 (2006: 191,827,517). The loss for the year ended 31 December 2007 was £6,415,000 (2006: £6,258,000). The weighted average number of shares outstanding in the three months ended 31 December 2007 was 318,571,062 (2006: 195,079,375 ). The loss for the three months ended 31 December 2007 was £1,578,000 (2006: £1,123,000) Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 31 December 2007 total 171,255,583 (2006: 128,892,281) 8 Restricted cash In 2004 the Company committed cash bonds in support of contracts placed by the Toronto Transit Commission for the CLRV and H6 programmes. The associated contracts required the bonds to remain in place until two years after all equipment is delivered. According to the current contract schedule that would result in the cash related to the H6 programme of £730,000 being under the performance bond restriction until 2010. In September 2005 the Company committed cash bonds of £250,000 in support of a development contract. The contract required the bonds to 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. In March 2007 the CLRV contract was cancelled and the cash bond of £515,000 in respect of this programme was cancelled and the cash became unrestricted. During March 2007 the Company committed cash bonds totalling USD$800,000 in support of contracts placed by Bombardier Transportation for the CTA and TTC programmes. The associated contracts require the bonds to remain in place until after development and the prototype equipment is delivered. TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8 Restricted cash (continued) The Company has also provided a property lease guarantee bond which is held in escrow and totals £231,000. At 31 December 2007 cash subject to restrictions totalled £1,362,000 (December 2006: £1,496,000). 9 Long - term assets Cost Impairment Amortisation Net book value £'000 £'000 £'000 £'000 At 31 December 2007: Investments 108 83 - 25 Intangible assets 4,078 1,663 2,368 47 Goodwill 863 43 - 820 Property, plant and equipment 8,782 - 6,676 2,106 ---------------------------------------------- Total long term assets 13,831 1,789 9,044 2,998 ============================================== At 31 December 2006: Investments 104 73 - 31 Intangible assets 4,073 1,663 2,334 76 Goodwill 863 43 - 820 Deferred finance 474 - 329 145 Property, plant and equipment 8,350 - 5,989 2,361 ---------------------------------------------- Total long term assets 13,864 1,779 8,652 3,433 ============================================== 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 32,450,000 3,435 31,250,000 4,320 Issue of common shares, net of share issue costs 50,442,668 3,666 25,000,000 1,803 ------------------------------------------------------- At 31 December 2006 273,944,592 51,919 56,250,000 6,123 ======================================================= Redemption of convertible notes - - 58,750,000 7,187 Share based compensation 176,470 17 - - Shares issued, net of share issue costs 44,450,000 3,868 - - -------------------------------------------------------- At 31 December 2007 318,571,062 55,804 115,000,000 13,310 ======================================================== TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10 Share capital - issued shares - continued No options or warrants were exercised during the nine months ended 30 September 2007. On 7 June 2007 the Company completed a £4,000,000 placing agreement with institutional investors for 44,450,000 Common shares of no par value in Turbo Power Systems Inc., at a price of £0.09 per placing share. 11 Financing On 11 July 2003 the Company completed a £5,000,000 financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years and bear interest at a rate of 3.5% per annum. They were 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 convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share, and lapsed on 10 July 2006 On 11 March 2005 the Company completed a £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. On 28 December 2006 the Company completed a £6,000,000 (gross) financingagreement with institutional investors. The financing comprised 50,000,000Common Shares in the company and 25,000,000 A-Ordinary shares in Turbo PowerSystems Limited. The financing included the issue of 3,500,000 Warrants, havinga term of three years and being convertible into an aggregate of 3,500,000Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 pershare. These warrants were issued on 6 January 2007 (see note 12).On 28 December 2006, per an agreement reached with the holders of theconvertible notes, the Company redeemed £2,500,000 of the 2003 Convertible LoanNotes 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 fortrading 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 priceof £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 EarlyConversion" (EIC96) in accounting for the early redemption of the convertiblenotes. EIC96 provides guidance on the treatment of the fair value of theconversion feature on the extinguishment of the convertible debenture.Redemption of the convertible debentures in January 2007 resulted in an increasein deficit of £82,000 (2006: £73,000) and an increase in retained deficit of£2,512,000 (2006: £2,600,000). TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12 Stock options, warrants and compensation expense The number of options and warrants outstanding as at 31 December 2007, and the movement during the year then ended, are as follows: Options Warrants Number Number Outstanding at 1 January 2007 21,567,281 7,000,000 Cancelled (1,737,000) - Lapsed (593,031) - Issued 11,610,000 3,500,000 ---------------------------- Outstanding at 31 December 2007 30,847,250 10,500,000 ============================ The stock based compensation expense for the year ended 31 December 2007, included in Production costs was £91,000 (2006: £51,000), in Research and product development was £405,000 (2006:£255,000), and in General and administrative costs was £203,000 (2006: £205,000). On 6 January 2007 the Company issued 3,500,000 warrants as part of its financing agreement with institutional investors. 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 free interest rate of 5.0% and an expected option life of 5 years have been assumed, and for options granted during the quarter ended 30 June 2007 a dividend yield of Nil, expected volatility of 75%, a risk free interest rate of 5.0% and an expected option life of 5 years have been assumed. The fair value of the stock options granted during the quarters ended 31 March 2007 and 30 June 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 uses expected 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 do not necessarily provide a reliable single measure of the fair value of the Company's stock options. 13 Prior year adjustment The Company has previously translated the operations of the Canadian parent company using the current rate method. During the year it was identified that the appropriate method for translation should be the temporal method. Accordingly a correction has been made with retroactive restatement of the 2006 comparative financial statements. The foreign exchange differences arising on consolidation have been reclassified and taken to the Income statement. This has resulted in a prior year adjustment to cancel the Currency Adjustment Reserve and increase the loss brought forward at 31 December 2005 in Retained Earnings by £128,000, and the loss for 2006 has been decreased by £60,000. TURBO POWER SYSTEMS INC.YEAR ENDED 31 DECEMBER 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14 Contingent loss The Company is currently working on a contract with Hamilton Sundstrand which could result in future losses. Since discussions are ongoing on the contract in question a reliable estimate of any contingent liability cannot be made at this time and no amount has been accrued. 15 Selected quarterly information The following table sets forth selected consolidated financial information of the Company for the eight most recent quarters. Revenue Net loss (Loss) per share UK pence £'000 £'000 March 2006 969 (1,770) (0.9)June 2006 1,192 (1,742) (0.9)September 2006 1,470 (1,623) (0.8)December 2006 1,851 (1,123) (0.6)March 2007 2,033 (1,403) (0.5)June 2007 2,342 (1,768) (0.6)September 2007 2,700 (1,666) (0.5)December 2007 2,750 (1,578) (0.5) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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