Turbo Genset Inc.
TSX : TGN
LSE : TGN

Turbo Genset Inc.

August 11, 2005 02:15 ET

Turbo Genset Inc. Announces its Results for the Half Year Ended 30 June 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Turbo Genset Inc. (TSX:TGN) (LSE:TGN)

Highlights

- Sales up 68% to Pounds Sterling 0.95m

- Loss before tax reduced by 21% to Pounds Sterling 3.6m

- Cash outflow before financing activities reduced by 17% to Pounds Sterling 2.8m

- Oil field application development agreement announced today

Commenting on the results, Michael Hunt, Chief Executive said,

"The increase in revenue during the first half as existing contracts move into their production phase, combined with the growing level of contract activity across all three key business sectors, is very encouraging. The recently announced contracts with FR-HiTemp, for motor drive systems to be deployed on the new Boeing 787, and with ALC for motors in an oil field application are indicative of a number of opportunities that are currently under discussion, harnessing the combined skills of our power electronics team at Gateshead and our high speed electrical machines team at Heathrow. In addition to the increase in revenues our improved cost control has contributed significantly to our cash burn improvement".

NOTES TO EDITORS

About Turbo Genset

Turbo Genset designs and manufactures innovative power solutions which provide local, high quality, controllable electrical power. The Group's products are focused on three independent market areas but are all based on its core technologies of power electronics and high speed electrical machines.

The Group operates across the following three market sectors:

- Turbine Based and Variable Speed Gensets

- High Speed Motors and Motor Drives

- Power Electronics

Forward Looking statements

This news release contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.

Operational Review

High Speed Electrical Machines and Drives

The ability of the company to broaden the application of its core generator/motor technology beyond gas turbine gensets gives us the opportunity to access new revenue streams. As a result we have seen significant growth in customer interest in our high speed electrical machines (both generators and motors) and their associated power electronics during the first half of 2005.

The recent announcement of the contract award from FR-Hitemp for the development and production of motor drives for their fuel pumps to be used on the new Boeing 787 "Dreamliner" is clearly a major event for the company. With a potential long term contract value of some $20 million for development, production units and after-market sales, it is not only the largest contract won by the company, but also demonstrates that Turbo Genset has the technical and commercial ability to break into new and highly demanding business sectors. The announcement today of a development contract with ALC in the oil field sector further underlines this ability.

In addition to the contracts already announced we are involved in a number of competitive bids on several major industrial equipment programmes with potential for significant ongoing production revenue.

The combined skills of our Gateshead and Heathrow staff give us a strong competitive advantage in this growing market as companies look to update their equipment designs to incorporate high speed systems which improve efficiency, reliability, size and weight.

Turning to contracts already underway, initial production of the SKF 15-35kW motor drive systems will begin in the last quarter of 2005 and will increase throughout 2006.Finally following the earlier announcement of the MoU between Turbo Genset and Lotus Engineering for the development of a hybrid vehicle motor drive system, the formal contract has now been received and work has commenced.

Turbine Based Gensets

The company continues to expand the number of detailed technical and commercial proposals under consideration for international gas turbine based combined heat and power(CHP)installations. It is clear that the procurement cycle for such high value installations will typically exceed twelve months, however a number of these proposals are scheduled to conclude in the second half of 2005.

Progress on testing the 1.2MW land fill gas Genset conversion has proceeded smoothly and the initial production unit scheduled to be located at a land fill site in Illinois is well advanced. Our launch customer Liquid Solutions has successfully commissioned and demonstrated its land fill site based waste treatment process, and are actively assessing multiple locations in the Mid-West where the process can be deployed.

Turbo Genset is now registered as a landfill gas equipment supplier in the US and has identified a number of state sponsored programmes for such equipment which we are currently investigating.

Testing of the 400kW system in France has now concluded, and negotiations are currently underway to relocate the hardware to the United Kingdom where it is intended to be deployed within an innovative CHP application for extended endurance and long term performance evaluation.

Power Electronics

The volume and value of bids submitted for international rail projects has significantly increased during the quarter.

Testing and commissioning of the National Rail Equipment Company ("NRE") traction controller in the US has been completed satisfactorily and trials and customer demonstrations will be carried out in Quarter 3. Initial production units are expected to be ordered before the end of 2005.

Production deliveries of the H6 Auxiliary Power Supplies for the Toronto Transit subway car began during Quarter 2 and will now continue with monthly shipments scheduled until 2007.

Manufacture and supply of air-conditioning power supplies for the London Underground District Line to Bombardier is proceeding smoothly.

I-Power our power electronics division continues to develop partnerships with other rail systems suppliers, and a number of combined programmes are under review.

Financial review

Review of First Half 2005 Results of Operations and Cash Flows

Revenue

Revenue in the six month period ended 30 June 2005 was Pounds Sterling 0.95 million compared with Pounds Sterling 0.57 million in 2004 and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 917 564
Generator systems 36 4
----------- -----------
953 568
----------- -----------
----------- -----------


Power electronics revenues have grown significantly in the first half as rail and industrial contracts have moved into production. The major contributors to revenue in the six month period were contracts with Bombardier, both on London Underground auxillary power units and 'at seat' power supplies, PRC and Rolls Royce. As the power electronics business moves into a production phase, spares and service revenues will become more significant. These revenues represent around Pounds Sterling 0.25 million of first half revenues.

Generator systems revenues represent sales of motor components to SKF.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling 0.88 million (2004: Pounds Sterling 0.81 million), resulting in a gross profit on sales of Pounds Sterling 0.07 million (2004: loss of Pounds Sterling 0.24 million) as follows:



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 307 66
Generator systems (237) (305)
----------- -----------
70 (239)
----------- -----------
----------- -----------


Certain fixed costs attributable to the manufacturing operation mean that the generator systems division recorded an overall loss on product sales.

Net development expenditure

Net development expenditure in the period was Pounds Sterling 1.46 million compared with Pounds Sterling 2.31 million in 2004, and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Development income (315) (241)
Research and product development
expenditure 1,475 2,333
Accrued tax credits (35) (171)
Amortisation 334 390
----------- -----------
Total expenditure 1,459 2,311
----------- -----------
----------- -----------


Development income of Pounds Sterling 0.31 million (2004: Pounds Sterling 0.24 million) consists mainly of receipts from the Toronto Transit Commission and SKF.

Research and product development expenditure decreased from Pounds Sterling 2.33 million in 2004 to Pounds Sterling 1.48 million in 2005 reflecting strict cost control and the movement of projects into the production phase. Included in research and product development expenditure is a non refundable cash receipt of Pounds Sterling 0.14 million recognized net of related expenditures, following the release from the Dtech contract.

The reduced research product development expenditure is reflected in lower research and development tax credit claims.

Impairment

During the period the company has made a provision for impairment of Pounds Sterling 0.09 million against its investment in shares and convertible debentures in Altek Power Corporation.

General and administrative

Reduced general and administrative costs for the half year of Pounds Sterling 1.40 million (2004: Pounds Sterling 1.54 million) reflect stronger general cost control and a lower headcount.

Amortisation

Amortisation on research and development assets was Pounds Sterling 0.33 million compared with Pounds Sterling 0.39 million in 2004. Non research and development amortisation was Pounds Sterling 0.36 million compared with Pounds Sterling 0.40 million in 2004.

Interest income

Interest income in the period was Pounds Sterling 0.13 million (2004: Pounds Sterling 0.15 million).

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005 and comprise;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 227 88
Amortisation of deferred finance charges 87 32
Debt accretion 166 91
----------- -----------
480 211
----------- -----------
----------- -----------


Convertible bonds are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 bond issue was estimated at Pounds Sterling 1.11million. The equity element of the 2003 bond issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the period this charge amounted to Pounds Sterling 0.17 million (2004:Pounds Sterling 0.09 million).

Cash flows

Cash outflow from operating activities

Cash outflow from operating activities for the half year was Pounds Sterling 2.82 million, compared with Pounds Sterling 3.44 million in 2004. In 2004 the Company recorded an operating loss of Pounds Sterling 4.50 million and had a decrease in working capital of Pounds Sterling 0.33 million. The 2005 operating loss was Pounds Sterling 3.24 million and working capital increased by Pounds Sterling 0.01 million during the period.

The decrease in working capital in 2004 was mainly due to a decrease in debtors of Pounds Sterling 0.52 million following the receipt of Pounds Sterling 0.59 million in UK R&D tax credits. The increase in working capital in 2005 reflects an increase in trade debtors due to improved sales in the second quarter.

Restructuring payments paid during the first half of 2005 relate to redundancy and property disposal payments charged to the profit and loss account in prior periods.

Interest paid of Pounds Sterling 0.09 million (2004: Pounds Sterling 0.08 million)during the period represents payments made on the convertible bonds issued in 2003.

Capital investment activities

Cash outflows from capital investments in the period were Pounds Sterling 0.02 million compared with Pounds Sterling 0.03 million in 2004 as shown below;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Purchase of capital assets 25 162
Capitalised R&D tax credits cash receipts - (128)
----------- -----------
25 34
----------- -----------
----------- -----------


The reduction in expenditure on capital assets reflects reduced expenditure on tangible fixed assets.

Cash flow from financing activities

Cash inflow from financing of Pounds Sterling 7.72 million in the period relates to net funds received from the issue of convertible notes in March.

On 11 March 2005 the Company completed an Pounds Sterling 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 Genset Inc. at a conversion price of Pounds Sterling 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 Genset Inc. at an exercise price of Pounds Sterling 0.15 per share.

Overall Cash outflow for the period

Overall the cash inflow during the period was Pounds Sterling 4.89 million, including proceeds of the debt issue of Pounds Sterling 7.71 million. This compares with an overall cash outflow of Pounds Sterling 3.40 million in 2004.

Review of Second Quarter 2005 Results of Operations and Cash Flows

Revenue

Revenue in the quarter was Pounds Sterling 0.59 million compared with Pounds Sterling 0.25 million in 2004 and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 557 249
Generator systems 36 -
----------- -----------
593 249
----------- -----------
----------- -----------


Cost of product revenues

The cost of product revenue in the quarter amounted to Pounds Sterling 0.51 million (2004:Pounds Sterling 0.40 million), resulting in a gross profit on sales of Pounds Sterling 0.08 million (2004:loss of Pounds Sterling 0.15 million) as follows:



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 197 17
Generator systems (115) (169)
----------- -----------
82 (152)
----------- -----------
----------- -----------


Net development expenditure

Net development expenditure in the quarter was Pounds Sterling 0.51 million compared with Pounds Sterling 1.14 million in 2004, and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Development income (256) (211)
Research and product
development expenditure 611 1,243
Accrued tax credits (15) (93)
Amortisation 173 196
----------- -----------
Total expenditure 513 1,135
----------- -----------
----------- -----------


Impairment

During the quarter the company has made a provision for impairment of Pounds Sterling 0.09 million against its investment in shares and convertible debentures in Altek Power Corporation.

General and administrative

General and administrative costs in the quarter of Pounds Sterling 0.73 million compare with Pounds Sterling 0.80 million in 2004 reflecting tighter cost control and lower headcount.

Amortisation

Amortisation on research and development assets was Pounds Sterling 0.17 million compared with Pounds Sterling 0.20 million in 2004. Non research and development amortisation was Pounds Sterling 0.18 million compared with Pounds Sterling 0.20 million in 2004.

Interest income

Interest income in the quarter increased to Pounds Sterling 0.09 million from Pounds Sterling 0.07 million in 2004, due to a higher average cash balance held during the period.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of convertible bonds in July 2003 and March 2005 and comprise;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 153 43
Amortisation of deferred finance charges 52 16
Debt accretion 102 45
----------- -----------
307 104
----------- -----------
----------- -----------


Cash flows

Cash outflow from operating activities

Cash outflow from operating activities in the quarter was Pounds Sterling 1.39 million, compared with Pounds Sterling 2.17 million in 2004. In 2004 the Company recorded an operating loss of Pounds Sterling 2.28 million and had an increase in working capital of Pounds Sterling 0.25 million. The 2005 operating loss was Pounds Sterling 1.44 million and working capital increased by Pounds Sterling 0.39 million during the quarter.

Interest paid of Pounds Sterling 0.18 million (2004 : Pounds Sterling 0.17 million) during the quarter represents payments made on the convertible bonds issued in 2003.

Overall Cash outflow for the period

Overall the cash outflow during the quarter was Pounds Sterling 1.35 million compared with an overall cash outflow of Pounds Sterling 2.17 million in 2004.

Balance sheet as at 30 June 2005

The Company ended the period with a cash balance of Pounds Sterling 6.95 million compared with Pounds Sterling 2.07 million at 31 December 2004. Substantially all of the Company's cash balances are denominated in Sterling.

The increase in cash funds relates to the Pounds Sterling 8,000,000 (gross) financing agreement with institutional investors.

In addition the Company had restricted cash amounts of Pounds Sterling 1.87 million relating to performance bonds entered into as part of a contract with the Toronto Transit Commission.

Long-term assets have decreased from Pounds Sterling 6.01 million at 31 December 2004 to Pounds Sterling 5.39 million at 30 June 2005. Deferred financing charges have increased by Pounds Sterling 437K due to the convertible fundraising and deferred development income has reduced by Pounds Sterling 450K following the write down of the remaining balance on the 400kW generator programme. Amortisation of long term assets was Pounds Sterling 0.69 million in the first half of 2005.

Deferred finance charges relate to the fair value of the warrants issued and the expenses in connection with the convertible bond issue that occurred in the period. These costs are amortised over the term of the convertible bonds and the warrants. The related amortisation charges are included in interest expense and finance charges.

Long term liabilities have increased to Pounds Sterling 10.43 million at 30 June 2005 compared to Pounds Sterling 4.64 million at 31 December 2004, reflecting the increase in debt attributable to the convertible bond issue.

Net working capital at 30 June 2005, excluding cash balances, was Pounds Sterling 0.85 million, compared with Pounds Sterling 0.31 million as at 31 December 2004.

During March 2005 investors who had subscribed for the convertible bond issue converted bonds into 10,549,997 ordinary shares. As at 30 June 2005, the Company had 186,176,927 common shares issued and outstanding. As at that date there were 32,804,750 outstanding share options and 10,500,000 outstanding warrants.



TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
UNAUDITED

Six months ended 30 June
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Revenue 4 953 2,218 568 1,382

Expenses
Production costs 883 2,055 807 1,963

Development income (315) (733) (241) (586)
Research and
development costs 5 1,774 4,128 2,552 6,209
---------- --------- ---------- ---------
Net development
expenditure 1,459 3,395 2,311 5,623

Provision for
impairment of
investment 90 209 - -
General and
administrative 1,398 3,253 1,543 3,754
Amortisation 360 838 403 980
---------- --------- ---------- ---------
4,190 9,751 5,064 12,320
---------- --------- ---------- ---------

Operating loss (3,237) (7,533) (4,496) (10,938)

Other income and expenses
Interest income 130 303 147 358
Interest expense
and finance charges 6 (480) (1,117) (211) (513)
Foreign exchange
gains/(losses) (16) (37) (7) (17)
---------- --------- ---------- ---------
(366) (851) (71) (172)
---------- --------- ---------- ---------

Loss before taxation (3,603) (8,384) (4,567) (11,110)
Taxation (17) (40) - -
---------- --------- ---------- ---------

Loss for the period (3,620) (8,424) (4,567) (11,110)
Deficit, beginning
of year (38,265) (84,422) (28,809) (69,993)
---------- --------- ---------- ---------
Deficit, end of period (41,885) (92,846) (33,376) (81,103)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Loss per share (2.0)p (4.6)c (2.6)p (6.3)c






TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
UNAUDITED

Three months ended 30 June
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Revenue 4 593 1,380 249 606

Expenses
Production costs 511 1,189 401 976

Development income (256) (596) (211) (513)
Research and product
development 5 769 1,789 1,346 3,275
---------- --------- ---------- ---------
Net development
expenditure 513 1,193 1,135 2,762

Provision for
impairment of
investment 90 209 - -
General and
administrative 732 1,703 795 1,934
Amortisation 184 428 202 491
---------- --------- ---------- ---------
2,030 4,723 2,533 6,163
---------- --------- ---------- ---------

Operating loss (1,437) (3,343) (2,284) (5,557)

Other income and expenses
Interest income 89 207 67 163
Interest expense
and finance charges 6 (307) (714) (104) (253)
Foreign exchange
gains/(losses) (9) (21) (5) (12)
---------- --------- ---------- ---------
(227) (528) (42) (102)
---------- --------- ---------- ---------

Loss before taxation (1,664) (3,871) (2,326) (5,659)
Taxation (17) (40) - -
---------- --------- ---------- ---------

Loss for the period (1,681) (3,911) (2,326) (5,659)

Loss per share (0.9)p (2.0)c (1.3)p (3.2)c




TURBO GENSET INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

As at 30 June As at 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Assets:
Current assets:
Cash and cash
equivalents 6,952 15,411 2,067 4,797
Debtors 10 1,888 4,185 1,711 3,970
Stock and work
in progress 530 1,175 482 1,119
---------- --------- ---------- ---------
9,370 20,771 4,260 9,886
---------- --------- ---------- ---------

Restricted cash 8 1,866 4,136 1,876 4,353
---------- --------- ---------- ---------

Long term assets:
Investments 9 90 200 180 418
Intangible assets 9 1,882 4,169 1,895 4,397
Tangible assets 9 3,419 7,579 3,932 9,124
---------- --------- ---------- ---------
5,391 11,948 6,007 13,939
---------- --------- ---------- ---------
16,627 36,855 12,143 28,178
---------- --------- ---------- ---------
---------- --------- ---------- ---------

Liabilities and
shareholders' equity:

Creditors: amounts
falling due within
one year 11 1,572 3,485 1,884 4,372
---------- --------- ---------- ---------

Creditors: amounts
falling due after
more than one year 12 10,432 23,125 4,643 10,774
---------- --------- ---------- ---------

Capital and reserves
Share capital and
other equity
instruments 2,13 46,611 103,322 43,959 102,007
Exchange adjustments 2 (103) (231) (78) (181)
Profit and loss
account deficit 2 (41,885) (92,846) (38,265) (88,794)
---------- --------- ---------- ---------
Shareholders' funds 4,623 10,245 5,616 13,032
---------- --------- ---------- ---------
16,627 36,855 12,143 28,178
---------- --------- ---------- ---------
---------- --------- ---------- ---------



TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS
UNAUDITED

Six months ended 30 June
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Cash outflow from
operating activities 3 (2,824) (6,571) (3,440) (8,370)

Interest received 122 284 157 382
Interest paid (88) (205) (84) (204)

---------- --------- ---------- ---------
Net cash outflow
from operating
Activities (2,790) (6,492) (3,367) (8,192)

Capital investment
activities
Purchase of long
term assets (25) (58) (34) (83)
---------- --------- ---------- ---------

Cash outflow from
capital investment
activities (25) (58) (34) (83)
---------- --------- ---------- ---------
Net cash outflow
before financing
activities (2,815) (6,550) (3,401) (8,275)

Tax (17) (40) - -

Financing activities
Net proceeds
from debt issue 7,707 17,934 - -
Movement in
restricted cash 10 23 - -

---------- --------- ---------- ---------
Cash inflow from
financing
activities 7,717 17,957 - -
---------- --------- ---------- ---------
Increase/(decrease)
in cash in
the period 4,885 11,367 (3,401) (8,275)
---------- --------- ---------- ---------
---------- --------- ---------- ---------

Cash and cash equivalents:
Beginning of year 2,067 9,819
---------- ----------
End of period 6,952 6,418
---------- ----------
---------- ----------


TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS
UNAUDITED

Three months ended 30 June
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Cash outflow from
operating activities 3 (1,389) (3,232) (2,168) (5,275)

Interest received 87 202 77 187
Interest paid (18) (42) (17) (41)

---------- --------- ---------- ---------
Net cash outflow
from operating
Activities (1,320) (3,072) (2,108) (5,129)

Capital investment
activities
Purchase of long
term assets (13) (30) (61) (148)
---------- --------- ---------- ---------
Cash outflow from
capital investment
activities (13) (30) (61) (148)
---------- --------- ---------- ---------
Net cash outflow
before financing
activities (1,333) (3,102) (2,169) (5,277)

Tax (17) (40) - -

Financing activities
Net proceeds
from debt issue (8) (19) - -
Restricted cash 10 23
---------- --------- ---------- ---------
Cash inflow from
financing
activities 2 4 - -
---------- --------- ---------- ---------
Decrease in cash
in the period (1,348) (3,138) (2,169) (5,277)
---------- --------- ---------- ---------
---------- --------- ---------- ---------

Cash and cash equivalents:
Beginning of period 8,300 8,587
---------- ----------
End of period 6,952 6,418
---------- ----------
---------- ----------


TURBO GENSET INC.
SIX MONTHS ENDED 30 JUNE 2005
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1 Basis of preparation

The financial statements of the Company have been prepared by management in accordance with International Accounting Standards and generally accepted accounting principles in Canada for interim financial statements. The financial statements have, in management's opinion, been properly prepared using judgement within reasonable limits of materiality. These financial statements do not include all the note disclosures required for annual financial statements and therefore they should be read in conjunction with the Company's audited consolidated financial statements for the year ended 31 December 2004. The significant accounting policies are consistent with prior years'.



2 Movements in shareholders' funds

Share Other Exchange Profit
capital equity adjustments and loss Total
Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000
--------- -------- ----------- -------- ---------

Balance at 1
January 2004 42,922 1,027 (83) (28,809) 15,057
Loss for the period (9,456) (9,456)
Exchange gain 5 5
Stock compensation 10 10
--------- -------- ----------- -------- ---------

Balance at 31
December 2004 42,932 1,027 (78) (38,265) 5,616
Loss for the period (3,620) (3,620)
Exchange (loss) (25) (25)
Stock compensation 41 41
Equity component of
financial instrument 1,114 1,114
Warrants issued 231 231
Conversion of bonds
to equity 1,266 1,266
--------- -------- ----------- -------- ---------
Balance at 30
June 2005 44,239 2,372 (103) (41,885) 4,623
--------- -------- ----------- -------- ---------
--------- -------- ----------- -------- ---------


3 Reconciliation of operating loss to cash outflow from operating
activities

Six months Three months
ended 30 June ended 30 June
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000


Operating loss for the period (3,237) (4,496) (1,437) (2,284)

Movements in working
capital balances
Decrease / (increase) in
debtors (172) 517 (380) (184)
Decrease / (increase) in
stocks and work in progress (48) - (54) 16
(Decrease) / increase in
creditors 95 (190) 48 (81)
Restructuring payments (248) (47) (23) (23)
Amortisation 694 792 356 396
Provision for impairment 90 - 90 -
Stock compensation expense 41 5 39 3
Foreign exchange (losses)/gains (39) (21) (28) (11)
------- ------- ------- -------

Cash outflow from operating
activities (2,824) (3,440) (1,389) (2,168)
------- ------- ------- -------
------- ------- ------- -------


4 Segmental analysis

The Group's three reportable segments are the power electronics segment, which is involved in the development and manufacture of electrical power supply and control systems and drives, the generator systems segment, which is involved in the development and commercialisation of gensets and high speed electrical machines, and the corporate segment which is responsible for the financing of the group and other related corporate activities. The power electronics and generator systems segments operate in the United Kingdom. The corporate segment operates in Canada.



All amounts in Pounds Sterling '000

Power Generator
electronics systems Corporate Total
2005 2004 2005 2004 2005 2004 2005 2004
Six months
ended 30 June
Revenue 917 564 36 4 - - 953 568
Net interest
income/(expense) - - (447) (204) 97 140 (350) (64)
Amortisation 96 106 264 297 - - 360 403
Loss for the
period (461) (997)(2,547)(3,057) (612) (513)(3,620)(4,567)
Capital
expenditure 14 36 11 126 - - 25 162

June Dec June Dec June Dec June Dec
As at 2005 2004 2005 2004 2005 2004 2005 2004
Total Assets 4,169 3,948 9,409 7,198 3,049 997 16,627 12,143
Total
Liabilities 627 643 11,303 5,839 74 45 12,004 6,527

Three months
ended 30 June
Revenue 557 249 36 - - - 593 249
Net interest
income/(expense) - - (280) (102) 62 65 (218) (37)
Amortisation 65 53 119 149 - - 184 202
Loss for the
period (64) (427)(1,300)(1,611) (317) (288)(1,681)(2,326)
Capital
expenditure 4 16 9 31 - - 13 47


5 Research and product development expenditure

Research and product development expenditures incurred during the period
comprised:

Six months Three months
ended 30 June ended 30 June
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product
development expenditure 1,475 2,333 611 1,243
Accrued tax credits (35) (171) (15) (93)
------- ------- ------- -------
Total expenditure 1,440 2,162 596 1,150
Amortisation 334 390 173 196
------- ------- ------- -------
Net expenditure charged
to profit and loss account 1,774 2,552 769 1,346
------- ------- ------- -------
------- ------- ------- -------


Following the mutual release from the Dtech contract the Company has recognised a non refundable cash deposit net of related expenditures of Pounds Sterling 139,000.

Deferred development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 30 June 2005 amounted to Pounds Sterling 241,000 (31 December 2004 - Pounds Sterling 691,000). Deferred development costs comprise materials, labour and allocated overheads.

Total accrued tax credits receivable at 30 June 2005, including those credited against deferred development expenditure, amounted to Pounds Sterling 492,000 (31 December 2004 - Pounds Sterling 457,000).



6 Interest expense and finance charges

Six months Three months
ended 30 June ended 30 June
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Interest payable 227 88 153 43
Debt accretion 166 91 102 45
Amortisation of deferred
finance charges 87 32 52 16
------- ------- ------- -------
480 211 307 104
------- ------- ------- -------
------- ------- ------- -------


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 and for diluted earnings per share, if applicable.

The weighted average number of shares outstanding in the period was 184,009,119 (2004 - 175,626,874). 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 six months ended 30 June 2005 was Pounds Sterling 3,620,000 (2004 - Pounds Sterling 4,567,000).

8 Restricted cash

In 2004 the Company committed cash bonds in support of contracts placed by the Toronto Transit Commission. The associated contracts require 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 being under the performance bond restriction until 2012. At 30 June 2005 cash subject to restrictions totalled Pounds Sterling 1,865,556 (December 2004 - 1,875,742) and is secured over an equivalent cash balance.



9 Long - term assets

Cost Impairment Amortisation Net book value
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 30 June 2005
Investments (a) 431 341 - 90
Intangible assets 5,783 2,002 1,899 1,882
Tangible assets 8,127 - 4,708 3,419
-------- ------- -------- -------
Total long term assets 14,341 2,343 6,607 5,391
-------- ------- -------- -------
-------- ------- -------- -------

At 31 December 2004
Investments (a) 431 251 - 180
Intangible assets 5,250 1,706 1,649 1,895
Tangible assets 8,111 - 4,179 3,932
-------- ------- -------- -------
Total long term assets 13,792 1,957 5,828 6,007
-------- ------- -------- -------
-------- ------- -------- -------


(a) In October 2003, the Group invested C$1,000,000 (Pounds Sterling 431,000) in a 6% Convertible Debenture issued by Altek Power Corporation ("Altek"). On 9 March 2005 the Company restructured its investment in Altek to release both Altek and the Company from the Memorandum of Understanding (MOU) entered into. Along with the release, the Company converted CDN $500,000 of the loan receivable from Altek into 892,857 shares of Altek. The term of the remaining CDN $500,000 Convertible Debenture has been extended to become due on October 9, 2008. During the period the Company has made a provision for impairment of Pounds Sterling 90,000 against the investment.



10 Debtors

June December
2004 2005
Pounds Pounds
Sterling Sterling
'000 '000

Trade debtors 889 610
Prepayments 475 534
Other debtors 12 26
Tax recoverable 512 541
------- -------
1,888 1,711
------- -------
------- -------


11 Creditors: Amounts falling due within one year

June December
2004 2005
Pounds Pounds
Sterling Sterling
'000 '000

Trade creditors 479 520
Other creditors 63 75
Tax and social security creditor 94 109
Accruals and deferred income 882 877
Provision for restructuring 54 303
------- -------
1,572 1,884
------- -------
------- -------

12 Creditors due after more than one year

Convertible bond 2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Balance at 1 January 4,364 4,181
Issued during the period 8,000 -
Conversion of Convertible Notes during
the period (note 2) (1,266) -
Less equity component (1,114) -
------- -------
9,984 4,181
Add: accretion of debt component during
the period (note 6) 166 91
------- -------

Balance at 30 June 10,150 4,272
------- -------
------- -------

Provisions for warranty claims 282 307
------- -------
10,432 4,579
------- -------
------- -------

13 Share capital - issued common shares
Number of shares

At 1 January 2004 and 31 December 2004 175,626,930
Shares issued on conversion of Convertible Notes 10,549,997
------------------
186,176,927
------------------
------------------

No options were exercised during the six months ended 30 June 2005.


14 Financing

On 11 March 2005 the Company completed an Pounds Sterling 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 Genset Inc. at a conversion price of Pounds Sterling 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 Genset Inc. at an exercise price of Pounds Sterling 0.15 per share.

15 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 30 June 2005, and the movement during the six months then ended, are as follows:



Options Warrants
Number Number

Outstanding at 1 January 2005 26,263,641 3,500,000
Cancelled (958,891) -
Issued 7,500,000 7,000,000
------------ -----------
Outstanding at 30 June 2005 32,804,750 10,500,000
------------ -----------
------------ -----------


The compensation expense in the six month period ended 30 June 2005 was Pounds Sterling 40,702 (2004 - Pounds Sterling 4,800).

16 Selected quarterly information

The following table sets forth selected consolidated financial information of the Company for the eight most recent quarters.



Revenue Net loss
Pounds Pounds (Loss)
Sterling Sterling per share
'000 '000 UK pence

September 2003 584 (1,974) (1.1)
December 2003 474 (3,612) (2.0)
March 2004 319 (2,241) (1.3)
June 2004 249 (2,326) (1.3)
September 2004 389 (2,609) (1.5)
December 2004 507 (2,280) (1.3)
March 2005 360 (1,939) (1.1)
June 2005 593 (1,681) (0.9)



17 Exchange rates

The Sterling amounts have been converted into Canadian Dollar for convenience purposes using either the average or the period end exchange rates shown below:



Six months and three months ended 30 June 2005 2.327
Six months, and three months ended 30 June 2004 2.433
As at 30 June 2005 2.217
As at 31 December 2004 2.321


18 Pensions

The Group operates and contributes to a number of defined contribution pension schemes. The group's contributions, which are on a method basis range from 3% to 10% of basic salary. The assets of the plans are held separately from those of the Group in independently administered funds. The contributions payable to the pension plan have been charged to the profit and loss account. The pensions charge for the six month period ended 30 June 2005 represents contributions payable to the Group to the plans and amounted to Pounds Sterling 70,000 (Six months to June 2004 - Pounds Sterling 92,000)

19 Comparative Figures

The comparative figures for the six month period ended 30 June 2004 have not been reviewed by the Group's auditors. The Group's auditors have reviewed the six month period ended 30 June 2005. The Group's auditors did not review the quarter ended 31st March 2005.

Contact Information

  • Turbo Genset - UK
    Michael Hunt
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Genset - UK
    Stephen Sadler
    Chief Financial Officer
    +44 (0)20 8564 4460
    Website: www.turbogenset.com
    or
    Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400