Turbo Genset Inc.
TSX : TGN
LSE : TGN

Turbo Genset Inc.

November 15, 2005 02:00 ET

Turbo Genset Inc. Announces its Results for the Nine Months Ended 30 September 2005

CALGARY, ALBERTA--(CCNMatthews - Nov. 15, 2005) - Turbo Genset Inc. (TSX:TGN) (LSE:TGN):

Highlights for the nine months to 30th September 2005

- Revenue up 84% to Pounds Sterling 1.8m (third quarter revenue up by 108%)

- Loss for the period reduced by Pounds Sterling 2.0m (27%) to Pounds Sterling 5.2m (third quarter loss reduced by 39%)

- Cash outflow before financing activities reduced by Pounds Sterling 1.5m (27%) to Pounds Sterling 4.0m (third quarter cash outflow reduced by 44%)

- $12.5m MoU for high-speed motor/drive system announced in quarter

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

"Our third quarter results reflect revenue generated by our new agreements with TTC, Lotus and ALC and underline the continued progress made against our key objective of building sustainable revenues. We continue to show progress in growing the order book whilst maintaining tight control of operating costs. We are seeing increased interest in our products in the new markets we have identified."

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:

- High Speed Motors and Motor Drives

- Power Electronics

- Turbine Based and Variable Speed Gensets

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

Quarter three has seen the business make encouraging progress, particularly in the area of high speed electrical machines and drives. First revenues have been recorded on the Lotus and ALC contracts. Development income has been boosted by the initiation of the FR-Hitemp Boeing 787 Dreamliner project. In addition, the contribution from our rail power electronics business has, for the first time, included revenue from the Toronto Transit Commission H6 contract.

Having made efforts to identify new market sectors for our core technology, we are encouraged by the current level of market interest in our products.

High-speed Electrical Machines and Drives

Our continued progress was highlighted in October when we announced an MoU with a major international capital equipment manufacturer for the design and manufacture of a range of high-speed direct drive motors and their associated power electronics.

This agreement is for the supply of a combined motor and motor drive system, and so draws on our power electronics and motor expertise, and will be jointly manufactured at our Heathrow and Gateshead sites. The agreement includes a commitment to purchase an initial production quantity of 500 systems following successful acceptance of the prototype. The value of the initial commitment is expected to exceed $12,500,000 with deliveries starting in 2007. This agreement represents a key milestone in validating our strategy to broaden the range of sectors for our core technology.

The contract with FR-Hitemp for motor drives to be used in conjunction with their fuel pumps on the new Boeing 787 commercial aircraft is proceeding well, with the product design now undergoing detailed review with both FR-Hitemp and Boeing. The initial units required for the Boeing flight qualification testing programme will be built early next year.

Production of the range of high-speed motors and drives being developed for SKF will commence in quarter four with the rate of deliveries of hardware increasing during 2006.

The design of the innovative oil and gas application, incorporating the Turbo Genset modular motor, with ALC is progressing well. ALC have reported significant customer interest in the programme. Field trials in Alaska, sponsored by a major oil company, are scheduled to take place during the second half of 2006 for the complete system.

The design programme for hybrid electrical drive systems for Lotus is progressing to plan, with final designs and hardware expected to be delivered to the customer by quarter two 2006.

Turbine Based Gensets

The company is in negotiation on a number of international gas turbine based combined heat and power (CHP) installations and continues to add further enquiries to the pipeline. These opportunities include both natural gas and bio-fuel applications.

The testing of the 1.2MW land-fill system in the United States demonstrated that the turbine could operate very effectively on low calorific value fuels such as biogas, and key markets such as Malaysia and Thailand are committed to a significant increase in distributed generating capacity fueled by biogas derived from processing agricultural products.

In order to further develop our potential markets in South East Asia, Turbo Genset is concluding a marketing and distribution agreement with a local partner in Malaysia.

Power Electronics

In quarter three we announced a contract to supply air-conditioning system power supplies to Trans-Elektro for inclusion in a train rebuild programme for the Dutch rail operator Nedtrain, with a contract value of the order of Pounds Sterling 500,000 for delivery in 2006.

This is the second order received by Turbo Genset for electronics designed to operate and control air conditioning systems (the previous order being for the London Underground through Bombardier UK), and this has consolidated our position in the growth area of on-board systems.

During the quarter we shipped initial units on the Toronto Transit Commission H6 contract and TTC have now begun their ongoing programme of progressively removing subway cars from revenue service in order to incorporate the new technology.

Turbo Genset is continuing to submit bids for major North American and International rail programmes to the leading rolling stock manufacturers.

With regard to our other electronics products, Turbo Genset has seen an increase in demand for its high voltage laser power supplies from PRC with an increase in scheduled quantities now in place for 2006.

Spares and services orders are now coming through and will play a significant part in underpinning our business plan.

Financial review

Review of Third Quarter 2005 Results of Operations and Cash Flows

Revenue

Revenue in the nine month period ended 30 September 2005 was Pounds Sterling 1.76 million compared with Pounds Sterling 0.96 million in 2004 and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 1,667 916
Motor and generator systems 95 41
---------- ----------
1,762 957
---------- ----------
---------- ----------


Revenues for 2005 in the power electronics division have grown significantly over the comparative period in 2004. Rail industry contracts have been the major contributor to revenue in the period through agreements with Bombardier (on London Underground and other projects), the Toronto Transit Commission and other international rail contractors. In addition industrial power supplies to PRC and the development of hybrid electrical drive systems for Lotus have generated revenue.

Spares and service revenues are making an increasing contribution to the power electronics business as it moves into production contracts and this revenue stream was worth Pounds Sterling 0.37million in the nine month period.

Motor and generator systems revenue derives from units shipped on the SKF contract and revenue from the contract with ALC.

In the third quarter the company raised invoices for Pounds Sterling 0.17 million to Rolls Royce Industrial Controls for retention payments on rail contracts purchased as part of the acquisition of certain business interests in 2002. This income has been shown under other income in the profit and loss account.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling 1.55 million (2004 : Pounds Sterling 1.22 million), resulting in a gross profit on sales of Pounds Sterling 0.26 million (2004 : loss of Pounds Sterling 0.27 million) as follows;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 591 150
Generator systems (329) (417)
---------- ----------
262 (267)
---------- ----------
---------- ----------


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

Research and product development costs

Net research and product development costs in the period were Pounds Sterling 2.28 million compared with Pounds Sterling 3.36 million in 2004, and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Development income (386) (241)
Research and product development expenditure 2,256 3,261
Accrued tax credits (60) (250)
Amortisation 471 586
---------- ----------
Total expenditure 2,281 3,356
---------- ----------
---------- ----------


Development income of Pounds Sterling 0.39 million (2004 : Pounds Sterling 0.24 million) consists mainly of receipts from the Toronto Transit Commission and FR-HiTemp.

Research and product development expenditure decreased from Pounds Sterling 3.26 million in 2004 to Pounds Sterling 2.26 million in 2005 reflecting strict cost control and the movement of projects into the production phase. This reduced expenditure is reflected in lower research and development tax credit claims.

General and administrative

Reduced general and administrative costs for the period of Pounds Sterling 2.09 million (2004 : Pounds Sterling 2.37 million) reflect stronger general cost control and a lower headcount.

Amortisation

Amortisation on research and development assets was Pounds Sterling 0.47 million compared with Pounds Sterling 0.59 million in 2004. Non research and development amortisation was Pounds Sterling 0.54 million compared with Pounds Sterling 0.60 million in 2004.

Interest income

Interest income in the period was Pounds Sterling 0.24 million (2004 : Pounds Sterling 0.19 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 380 131
Amortisation of deferred finance charges 140 50
Debt accretion 267 137
---------- ----------
787 318
---------- ----------
---------- ----------


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 0.27 million (2004:Pounds Sterling 0.14 million).

Cash flows

Cash outflow from operating activities

Cash outflow from operating activities for the period was Pounds Sterling 3.79 million, compared with Pounds Sterling 5.44 million in 2004. In 2004 the Company recorded an operating loss of Pounds Sterling 7.04 million and had a decrease in working capital of Pounds Sterling 0.20 million. The 2005 operating loss was Pounds Sterling 4.78 million and working capital increased by Pounds Sterling 0.32 million during the period.

The decrease in working capital in 2004 was mainly due to a decrease in debtors 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 increased sales in the period.

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

Interest paid of Pounds Sterling 0.38 million (2004 : Pounds Sterling 0.17 million)during the period represents payments made on the convertible bonds issued in 2003 and 2005.

Capital investment activities

Cash outflows from capital investments in the period were Pounds Sterling 0.04 million compared with Pounds Sterling 0.06 million in 2004 as shown below;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Purchase of capital assets 39 190
Capitalised R&D tax credits cash receipts - (128)
---------- ----------
39 62
---------- ----------
---------- ----------


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 8.09 million in the period primarily relates to net funds received from the issue of convertible notes in March and movements in restricted cash.

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.

Movements in restricted cash of Pounds Sterling 0.38 million reflect cash released from performance bonds in the period.

Overall Cash outflow for the period

Overall the cash inflow during the period was Pounds Sterling 4.10 million, including proceeds of the debt issue of Pounds Sterling 7.71 million. This compares with an overall cash outflow of Pounds Sterling 5.46 million in 2004.

Review of Third Quarter 2005 Results of Operations and Cash Flows

Revenue

Revenue in the quarter was Pounds Sterling 0.81 million compared with Pounds Sterling 0.39 million in 2004 and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 750 352
Motor and generator systems 59 37
---------- ----------
809 389
---------- ----------
---------- ----------


Power electronics revenue includes continued volume shipments on production contracts with Bombardier, PRC and other rail and industrial customers. In addition third quarter revenues reflect initial shipments on the Toronto Transit Commission H6 programme and first revenues from the Lotus hybrid electrical drive contract.

Motor and generator systems revenues reflect the first revenues from the ALC contract to supply motors for its oil field application.

Cost of product revenues

The cost of product revenue in the quarter amounted to Pounds Sterling 0.66 million (2004: Pounds Sterling 0.42), resulting in a gross profit on sales of Pounds Sterling 0.19 million.



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 284 84
Generator systems (92) (112)
---------- ----------
192 (28)
---------- ----------
---------- ----------


Research and product development costs

Net research and product development costs in the quarter were Pounds Sterling 0.82 million compared with Pounds Sterling 1.05 million in 2004, and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Development income (71) -
Research and product development expenditure 781 927
Accrued tax credits (25) (79)
Amortisation 137 197
---------- ----------
Total expenditure 822 1,045
---------- ----------
---------- ----------


General and administrative

General and administrative costs in the quarter of Pounds Sterling 0.69 million compare with Pounds Sterling 0.83 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 0.19 million in 2004.

Interest income

Interest income in the quarter increased to Pounds Sterling 0.11 million from Pounds Sterling 0.04 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 53 18
Debt accretion 101 46
---------- ----------
307 107
---------- ----------
---------- ----------


Cash flows

Cash outflow from operating activities

Cash outflow from operating activities in the quarter was Pounds Sterling 0.89 million, compared with Pounds Sterling 2.06 million in 2004. In 2004 the Company recorded an operating loss of Pounds Sterling 2.54 million and had a decrease in working capital of Pounds Sterling 0.16 million. The 2005 operating loss was Pounds Sterling 1.54 million and working capital increased by Pounds Sterling 0.19 million during the quarter.

Interest paid of Pounds Sterling 0.29 million (2004 : Pounds Sterling 0.09 million) during the quarter represents payments made on the convertible bonds issued in 2003 and 2005.

Overall Cash outflow for the period

Overall the cash outflow during the quarter was Pounds Sterling 0.78 million compared with an overall cash outflow of Pounds Sterling 2.06 million in 2004.

Balance sheet as at 30 September 2005

The Company ended the period with a cash balance of Pounds Sterling 6.17 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 1.50 million relating to performance bonds in connection with contracts with the Toronto Transit Commission and FR HiTemp.

Long-term assets have decreased from Pounds Sterling 6.01 million at 31 December 2004 to Pounds Sterling 5.01 million at 30 September 2005. Deferred financing charges have increased by Pounds Sterling 384K 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 1.34 million in the first nine months 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 10.55 million at 30 September 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 September 2005, excluding cash balances, was Pounds Sterling 0.87 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 September 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

Nine months ended 30 September
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Revenue 4 1,762 3,991 957 2,312

Expenses
Production costs 1,547 3,503 1,224 2,957

Development income (386) (874) (241) (582)
Research and
development costs 5 2,667 6,040 3,597 8,690
------ ------ ------ ------
Net development expenditure 2,281 5,166 3,356 8,108

Provision for impairment of
investment 90 204 - -
General and administrative 2,085 4,722 2,373 5,733
Amortisation 535 1,212 597 1,443

------ ------ ------ ------
6,585 14,807 7,550 18,241
------ ------ ------ ------


Operating loss (4,776) (10,816) (6,593) (15,929)

Other income and expenses
Other income 168 380 - -
Interest income 239 541 191 461
Interest expense and
finance charges 6 (787) (1,782) (318) (768)
Restructuring charge - - (445) (1,075)
Foreign exchange gains/(losses) (30) (68) (11) (26)

------ ------ ------ ------
(410) (929) (583) (1,408)
------ ------ ------ ------


Loss before taxation (5,186) (11,745) (7,176) (17,337)
Taxation (18) (41) - -
------ ------ ------ ------

Loss for the period (5,204) (11,786) (7,176) (17,337)

Deficit, beginning of year (38,265) (78,980) (19,282) (46,586)
------ ------ ------ ------
Deficit, end of period (43,469) (90,676) (26,458) (63,923)
------ ------ ------ ------
------ ------ ------ ------

Loss per share (2.8) p (6.4) c (4.1) p (9.7) c
------ ------ ------ ------
------ ------ ------ ------


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


Revenue 4 809 1,831 389 940

Expenses
Production costs 664 1,504 417 1,007

Development income (71) (161) - -
Research and product
development 5 893 2,022 1,045 2,525
------ ------ ------ ------
Net development expenditure 822 1,861 1,045 2,525

General and administrative 687 1,556 830 2,005
Amortisation 175 396 194 469
------ ------ ------ ------
2,395 5,317 2,486 6,006
------ ------ ------ ------

Operating loss (1,539) (3,486) (2,097) (5,066)

Other income and expenses
Other income 168 380 - -
Interest income 109 247 44 106
Interest expense and
finance charges 6 (307) (695) (107) (259)
Restructuring charge - - (445) (1,075)
Foreign exchange gains/(losses) (14) (32) (4) (10)
------ ------ ------ ------
(44) (100) (512) (1,238)
------ ------ ------ ------

Loss before taxation (1,583) (3586) (2,609) (6,304)
Taxation (1) (2) - -
------ ------ ------ ------

Loss for the period (1,584) (3,588) (2,609) (6,304)


Loss per share (0.9) p (1.9) c (1.5) p (3.6) c
------ ------ ------ ------
------ ------ ------ ------


TURBO GENSET INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

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

Assets:
Current assets:
Cash and cash equivalents 6,168 12,731 2,067 4,797
Debtors 10 2,041 4,213 1,711 3,970
Stock and work in progress 527 1,088 482 1,119
------ ------ ------ ------
8,736 18,032 4,260 9,886
------ ------ ------ ------

Restricted cash 8 1,496 3,088 1,876 4,353


Long term assets:
Investments 9 90 186 180 418
Intangible assets 9 1,808 3,732 1,895 4,397
Tangible assets 9 3,168 6,539 3,932 9,124
------ ------ ------ ------
5,066 10,457 6,007 13,939
------ ------ ------ ------
15,298 31,577 12,143 28,178
------ ------ ------ ------
------ ------ ------ ------

Liabilities and shareholders'
equity:

Creditors: amounts
falling due within
one year 11 1,695 3,499 1,884 4,372
------ ------ ------ ------
Creditors: amounts falling
due after more than one year 12 10,545 21,766 4,643 10,774
------ ------ ------ ------
Capital and reserves
Share capital and other
equity instruments 2,13 46,613 96,212 43,959 102,007
Exchange adjustments 2 (86) (178) (78) (181)
Profit and loss account
deficit 2 (43,469) (89,722) (38,265) (88,794)
------ ------ ------ ------
Shareholders' funds 3,058 6,312 5,616 13,032
------ ------ ------ ------
15,298 31,577 12,143 28,178
------ ------ ------ ------
------ ------ ------ ------


TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS
UNAUDITED

Nine months ended 30 September
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Cash outflow from
operating activities 3 (3,788) (8,579) (5,443) (13,150)

Interest received 239 541 214 517
Interest paid (380) (861) (171) (413)
------ ------ ------ ------
Net cash outflow from
operating activities (3,929) (8,899) (5,400) (13,046)

Capital investment activities
Purchase of long term assets (39) (88) (62) (150)
------ ------ ------ ------
Cash outflow from capital
investment activities (39) (88) (62) (150)
------ ------ ------ ------
Net cash outflow before
financing activities (3,968) (8,987) (5,462) (13,196)

Tax (18) (41) - -

Financing activities
Net proceeds from debt
issue 7,707 17,454 - -
Movement in restricted
cash 380 861 - -
------ ------ ------ ------
Cash inflow from financing
activities 8,087 18,315 - -
Increase/(decrease)
in cash in the period 4,101 9,287 (5,462) (13,196)
------ ------ ------ ------
------ ------ ------ ------

Cash and cash equivalents:
Beginning of year 2,067 9,819
------ ------
End of period 6,168 4,357
------ ------
------ ------


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

Cash outflow from
operating activities 3 (963) (2,181) (2,003) (4,839)

Interest received 117 265 57 138
Interest paid (293) (664) (87) (210)
------ ------ ------ ------
Net cash outflow from
operating Activities (1,139) (2,580) (2,033) (4,911)

Capital investment activities
Purchase of long term assets (14) (32) (28) (68)
------ ------ ------ ------
Cash outflow from capital
investment activities (14) (32) (28) (68)
------ ------ ------ ------
Net cash outflow before
financing activities (1,153) (2,612) (2,061) (4,979)

Tax (1) (2) - -

Financing activities
Net proceeds from debt
issue - - - -
Movement in restricted
cash 370 838 - -
------ ------ ------ ------
Cash inflow from
financing activities 370 838 - -

Decrease in cash
in the period (784) (1,776) (2,061) (4,979)
------ ------ ------ ------
------ ------ ------ ------

Cash and cash equivalents:
Beginning of period 6,952 6,418
------ ------
End of period 6,168 4,357
------ ------
------ ------


TURBO GENSET INC.
NINE MONTHS ENDED 30 SEPTEMBER 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

Profit
Share Other Exchange and
capital equity adjustments 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 (5,204) (5,204)
Exchange (loss) (8) (8)
Stock compensation 43 43
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 September 2005 44,241 2,372 (86) (43,469) 3,058
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------


3 Reconciliation of operating loss to cash outflow from operating
activities

Nine months ended Three months ended
30 September 30 September
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Operating loss for the period (4,776) (7,038) (1,539) (2,542)

Movements in working
capital balances
Decrease / (increase)
in debtors (330) 512 (158) (5)
Decrease / (increase)
in stocks and wip (45) (27) 3 (27)
(Decrease) / increase
in creditors 60 3 (35) 193
Restructuring payments (249) (71) - (24)
Amortisation 1,281 1,183 587 391
Provision for impairment 90 - - -
Stock compensation expense 43 7 2 2
Other income 168 - 168 -
Foreign exchange (losses)/gains (30) (12) 9 9
--------- --------- --------- ---------
Cash outflow from operating
activities (3,788) (5,443) (963) (2,003)
--------- --------- --------- ---------
--------- --------- --------- ---------


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, 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 Power Generator
Sterling '000 electronics systems Corporate Total
2005 2004 2005 2004 2005 2004 2005 2004
Nine months
ended 30
September
Revenue 1,667 916 95 41 - - 1,762 957
Net interest
income/
(expense) - - (300) (308) (248) 181 (548) (127)
Amortisation 159 302 1,117 881 - - 1,276 1,183
Loss for the
period (478) (1,505) (3,798) (4,865) (928) (806) (5,204) (7,176)
Capital
expenditure 16 41 23 148 - - 39 189

As at Sept Dec Sept Dec Sept Dec Sept Dec
2005 2004 2005 2004 2005 2004 2005 2004

Total Assets 4,376 3,948 5,801 7,198 5,121 997 15,298 12,143
Total
Liabilities 294 643 10,251 5,839 - 45 10,545 6,527

Three months
ended 30
September
Revenue 750 352 59 37 - - 809 389
Net interest
income/
(expense) - - 147 (104) (345) 41 (198) (63)
Amortisation 63 196 853 584 - - 916 780
Loss for the
period (17) (508) (1,251) (1,808) (316) (293) (1,584) (2,609)
Capital
expenditure 2 5 12 22 - - 14 27


5 Research and product development expenditure

Research and product development expenditures incurred during the
period comprised:

Nine months ended Three months ended
30 September 30 September
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product
development expenditure 2,256 3,261 781 927
Accrued tax credits (60) (250) (25) (79)
-------- -------- -------- --------
Total expenditure 2,196 3,011 756 848
Amortisation 471 586 137 197
-------- -------- -------- --------
Net expenditure charged
to profit and loss account 2,667 3,597 893 1,045
-------- -------- -------- --------
-------- -------- -------- --------


Deferred development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 30 September 2005 amounted to Pounds Sterling 164,000 (31 December 2004 - Pounds Sterling 691,000). Deferred development costs comprise materials, labour and allocated overheads.

Total accrued tax credits receivable at 30 September 2005, including those credited against deferred development expenditure, amounted to Pounds Sterling 517,000 (31 December 2004 - Pounds Sterling 457,000).



6 Interest expense and finance charges

Nine months ended Three months ended
30 September 30 September
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Interest payable 380 131 153 43
Debt accretion 267 137 101 46
Amortisation of deferred
finance charges 140 50 53 18
-------- -------- -------- --------
787 318 307 107
-------- -------- -------- --------
-------- -------- -------- --------


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 nine months ended 30 September 2005 was Pounds Sterling 5,204,000 (2004 - Pounds Sterling 7,176,000).

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. In September 2005 the Company committed cash bonds of Pounds Sterling 250,000 in support of the contract placed by FR HiTemp. The contract requires the bonds to remain in place until 31st December 2006 or completion of qualification testing, whichever is later. At 30 September 2005 cash subject to restrictions totalled Pounds Sterling 1,495,556 (December 2004 - 1,875,742) and is secured over an equivalent cash balance.



9 Long - term assets
Net book
Cost Impairment Amortisation value
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 30 September 2005
Investments 431 341 - 90
Intangible assets 5,790 2,002 1,980 1,808
Tangible assets 8,133 - 4,965 3,168
-------- -------- -------- --------
Total long term assets 14,354 2,343 6,945 5,066
-------- -------- -------- --------
-------- -------- -------- --------
At 31 December 2004
Investments 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
Sept 2005 Dec 2004
Pounds Pounds
Sterling Sterling
'000 '000

Trade debtors 903 610
Prepayments 379 534
Other debtors 200 26
Tax recoverable 559 541
-------- --------
2,041 1,711
-------- --------
-------- --------


11 Creditors: amounts falling due within one year

2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Trade creditors 597 520
Other creditors 57 75
Tax and social security creditor 120 109
Accruals and deferred income 867 877
Provision for restructuring 54 303
------- -------
1,695 1,884
------- -------
------- -------


12 Creditors: amounts 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) 267 183
------- -------
Balance at 30 September 10,251 4,364
------- -------
------- -------

Provisions for warranty claims 294 279
------- -------
10,545 4,643
------- -------
------- -------


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 nine months ended 30 September 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 September 2005, and the movement during the nine months then ended, are as follows:



Options Warrants
Number Number

Outstanding at 1 January 2005 26,263,641 3,500,000
Cancelled (4,809,762) -
Issued 7,500,000 7,000,000
------------ ------------
Outstanding at 30 September 2005 28,953,879 10,500,000
------------ ------------
------------ ------------


The compensation expense in the nine month period ended 30 September 2005 was Pounds Sterling 43,102 (2004 - Pounds Sterling 7,200).

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) per
Sterling Sterling share
'000 '000 UK pence

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)
September 2005 851 (1,543) (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:



Nine months and three months ended 30 September 2005 2.265
Nine months, and three months ended 30 September 2004 2.416
As at 30 September 2005 2.064
As at 31 December 2004 2.321



Contact Information

  • Turbo Genset Inc. - United Kingdom
    Michael Hunt
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Genset Inc. - United Kingdom
    Stephen Sadler
    Chief Financial Officer
    +44 (0)20 8564 4460
    or
    Turbo Genset Inc. - Canada
    Richard Kapuscinski
    (905) 690 1722
    Website: www.turbogenset.com
    or
    Gavin Anderson & Company (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson & Company (PR)
    Michael Turner
    +44 (0)20 7554 1400