Turbo Genset Inc.

Turbo Genset Inc.

March 29, 2005 02:00 ET

Turbo Genset Inc. Announces its Results for the Fourth Quarter and Year Ended 31 December 2004


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: TURBO GENSET INC.

TSX, LSE SYMBOL: TGN

MARCH 29, 2005 - 02:00 ET

Turbo Genset Inc. Announces its Results for the Fourth
Quarter and Year Ended 31 December 2004

CALGARY, ALBERTA--(CCNMatthews - March 29, 2005) - Turbo Genset Inc.
(TSX:TGN) (LSE:TGN):

Highlights:

- Revenue for the year of Pounds Sterling 1.5 million (2003:Pounds
Sterling 1.5 million)

- Loss before tax for the year of Pounds Sterling 9.5 million
(2003:Pounds Sterling 9.5 million)

- Cash outflow, before financing and investment sales, reduced by 11% at
Pounds Sterling 7.1 million

- Post balance sheet fundraising of Pounds Sterling 8.0 million

- Order book at 31st December Pounds Sterling 7.8 million

Commenting on the results Colin Besant, Chairman, said:

"2004 saw a major increase in order intake, the timing of which has
meant that the revenue impact will be seen in 2005 and onwards. Order
value at the 31st December was Pounds Sterling 7.8 million. A further
rail order for Pounds Sterling 2.7 million was awarded in January 2005
and confirms our belief that the Company is now beginning to realise its
commercial potential.

We appointed Michael Hunt as CEO in June 2004 and welcomed Ross Sayers
to the Board in January 2005. Stephen Sadler joined us as CFO in March
2005. With our fundraising completed we now have the team and resources
in place to exploit the opportunities in our chosen markets."

NOTES TO EDITORS

About Turbo Genset

Turbo Genset develops innovative products for power generation and power
conditioning. The Group was established in 1993 as a spin-off from
Imperial College, London and was floated on the London stock exchange in
July 2000 and soon after obtained a secondary listing in Toronto.

In July 2001, the Group acquired Intelligent Power Systems Limited
(I-Power) specialising in power electronics.

The Group operates across the following three market sectors:

- Turbine Based and Variable Speed Gensets

- High Speed Motors and Motor Drives

- Power Electronics

About Power Electronics

Power electronics products take a range of power inputs and condition
them to achieve outputs of precisely defined characteristics for
applications such as industrial lasers, Ultra Violet sterilization
systems and railway power electronics systems.

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.

Chief Executive's Review

Strategy

Turbo Genset (TG) 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.

During 2004, it became clear that there was significant sales potential
for the Company's high speed electrical machines in applications other
than gas turbine gensets. As a consequence the Group now operates across
the following three market sectors:

- Turbine Based and Variable Speed Gensets

- High Speed Motors and Motor Drives

- Power Electronics

The expansion of the Group's products into these three market areas
creates the potential for a more balanced business combining revenues
from high value/low volume capital projects, with more predictable
income from long-term production contracts.

The Company anticipates that all three sectors will make a significant
contribution to future revenues and profits.

TG's marketing strategy relies on collaboration with strong partners.
Technology partners such as SKF have been instrumental in the
development of the Company's high speed drives business whilst in power
electronics partnerships with original equipment manufacturers such as
PRC Lasers are driving continued growth.

In the genset sector, we have already developed relationships with
international channel partners with the capacity and resources to fully
support both the sales and service requirements for our products. TG
sees India, the Middle East, China and South East Asia as being key
strategic markets and as a consequence channel partner programmes and
marketing resource are concentrated in those areas. Agreements have been
implemented with a leading heat recovery equipment manufacturer, who has
produced product designs which match the high grade heat output from our
turbines and provide the optimum levels of usable thermal energy. The
Company has entered into marketing agreements with Tyree Holdings
(Australia), Tata International (India) and Cupola Group (Middle East)
and is in negotiation to add representation in Malaysia and China.

Operational review

Order Book

The outstanding order book at 31 December 2004, including the
conditional production elements of the Toronto Transit CLRV contract was
Pounds Sterling 7.8 million, a 105% increase on 31 December 2003. In
addition, in January 2005 a further contract with Toronto Transit
Commission worth Pounds Sterling 2.7 million was received.

Turbine Based Gensets and Variable Speed Gensets

Turbine Products

The Company designs and manufactures complete turbine based generating
systems in the size range 400kW to 1.2MW,providing electrical and
thermal energy to industrial and commercial customers.

Turbine Markets

Distributed Generation (DG), the use of small-scale power generation
close to the load being served, is a concept that is generating
significant interest in global markets. The requirement for reliable,
high quality power is increasing more rapidly than the ability of most
regions of the world to supply that power through the existing
distribution grid. Even in areas with well developed grid systems,
brownouts and interruptions in quality supply are happening with ever
increasing frequency and the ability of traditional power providers to
increase capacity is limited by a wide range of constraints.

Combined Heat and Power (CHP) extends the beneficial effects of DG by
utilising the waste heat products from the combustion process and
utilising them as a "free" energy source. Such thermal by-products
include hot water for heating requirements, steam for industrial
continuous process requirements, chilled water for air-conditioning and
direct heat for drying applications.

Turbine Competitive Advantage

Historically CHP schemes in the 400kW to 2MW size range have been based
on diesel or gas fired reciprocating gensets. However, turbine based
systems provide much larger volumes of recoverable heat from their
cleaner exhaust gases and are ideal for producing high temperature/high
pressure steam for CHP applications.

The TG generator products, which are based on small lightweight
aero-engines provide customers with:

- lower installation and life-cycle costs

- simple, controlled interface with the mains grid where required

- reliable high quality electrical power

- substantial savings in energy costs over conventional solutions

1.2MW

TG has seen significant interest in the 1.2MW size unit, where the
electrical and thermal output matches the requirements for continuous
process industries and larger commercial customers. As a consequence
this product is expected to be the main source of genset revenues in the
next two years.

The strategy for the 1.2MW product is based on penetrating the market
with an existing 3rd party low speed 1.2MW system from North America
using a conventional gearbox/synchronous generator combination and then
introducing the higher performance TG high speed generator ("HSG")
version from 2006 onwards. This will allow earlier sales than would
otherwise be achievable and will create the necessary window to carry
out extensive high temperature, high humidity testing for the new TG
generator and power electronics technologies prior to commercial release.

In August 2004 the Company announced an agreement with a US company to
provide a land-fill gas fuelled genset, and the initial evaluation unit
is scheduled to be installed in the US in 2005. It is intended that the
US partner will implement an ongoing programme of land fill
installations in the US.

Further 1.2MW proposals for conventional natural gas fuelled systems in
Asia are currently under customer review and negotiations and
installations are expected to be concluded during 2005.

In December 2004, TG decided not to proceed with a master distributor
agreement for a 1.2MW low-speed genset manufactured by Magellan
Aerospace of Ontario, Canada under contract to the Altek Power
Corporation of British Columbia, and to retain the flexibility to source
the low-speed genset from the most economic manufacturer for each
specific customer application.

400kW

The initial 400 kW pilot system is currently undergoing endurance
testing in Paris. However, negotiations for the initial commercial
launch of the systems in India were not completed in 2004 and are now
expected to reach a conclusion in 2005. Market feedback has confirmed
that the 400kW size is a niche product and as such the forward volume
assumptions for this product have now been reduced.

Variable Speed Gensets (VSG)

VSG Products

The Company has developed and tested a 130kW variable speed diesel
engine genset, which uses the TG power electronics technology to manage
the performance of the engine and increase effective power output and
fuel efficiency. The VSG design decouples the engine from the system
output frequency and therefore there is no longer any need to
continuously operate the engine at constant speed. The engine can be
controlled to run at the optimum operating speed over a wide range of
load conditions.

VSG Markets

The VSG product is targeted at specific customer applications where
size, weight or range of engine speeds and electrical loads are
critical. The TG strategy is to partner with specialist engine
manufacturers and the Company is currently discussing the potential for
VSG technology in a military application in Asia.

High Speed Motors and Drives

Products

The Company designs and manufactures bespoke, high-speed motor drives
including the electrical motor and associated power electronics hardware
and software. These systems range in size from 15kW up to 350kW.

Markets

The motor drive technology is applicable to a wide range of industries
and applications, including air and gas compressors, motion control
(traction drives), hybrid vehicles, renewable energy and turbo-chargers.
In combination with magnetic and air bearing systems the drives offer
improvements in performance, reliability and operational life over
conventional systems. TG designs drives for applications where the
performance or operating environment require non-standard solutions.

SKF

The SKF contracts announced in June 2004 and January 2005 demonstrate
the potential for this area of technology. TG signed an agreement for
the development of a 35kW, 25kW and 15kW high speed motor and drive for
a gas compressor application. The agreement consists of a development
and evaluation phase, and an initial 5 year production supply
arrangement.

Power Electronics

Products

The Company designs and manufactures high-voltage power supplies,
inverters, battery chargers, and auxiliary power supplies through its
I-Power division.

Markets

I-Power concentrates on supplying products to the following sectors:

- International rail and light transit. The Group supplies auxiliary
power supplies and power conversion products. The agreement in 2002 with
Rolls Royce Industrial Controls ("RRIC") to acquire certain rights to
rail product intellectual property has contributed greatly to the
growing number of rail contracts being won by TG.

- Industrial Products. -TG provides bespoke high voltage pulsed power
supplies to industrial laser and pulsed power systems manufacturers.

- Power Generation and Power Quality. -TG supplies grid connected
inverters for a wide range of power generation technologies including
TG's own turbine based gensets. The growing need to interconnect a wide
range of alternative and renewable energy technologies with the power
grid, safely and cost effectively, is creating an expanding market for
power converters using advanced microprocessor technologies. The TG
inverter technology meets international grid connection standards.

Major Power Electronics Contracts

Bombardier London Underground (LUL)

This Pounds Sterling 1.95 million contract to build 150 6KW 3-phase
inverters to power air-conditioning equipment on trains on the District
Line started shipping in May 2004, and runs to 2007.

Toronto Transit Commission (TTC) - Canadian Light Rail Vehicle (CLRV)

The Pounds Sterling 3.4 million contract from TTC announced in September
2004 covers the development and supply of 194 composite multiple output
power supplies to charge batteries and provide mains power for
air-conditioning on trams in Toronto. Deliveries are scheduled over the
period to 2012, commencing Q4 2005.

Toronto Transit Commission - H6 subway car Auxiliary Power Unit (APU)

The Pounds Sterling 2.7 million contract to supply 128 units over
2005-2008 was announced in January 2005 following extensive trials of
four prototypes.

Competitive Advantage

Rail and light transit customers require a combination of affordability,
proven reliability and low technical and safety risk. As a result there
are significant barriers to entry for new suppliers. With the
acquisition of rights to the RRIC intellectual property and the
recruitment of key members of their engineering team, TG has been able
to build on its experience, and demonstrate the performance of its own
new products.

The TG grid connected inverters use proprietary software algorithms to
control the process of connecting to and from the grid, in such a way as
to eliminate any voltage or transient effects being seen at the local
loads. The technology is scaleable up to 3MW.

Other Systems

Deliveries have now been made against the GE Global Research projects,
the locomotive hybrid turbocharger, and the Department of Environment
(DoE) funded 200kW generator for the Advanced Integration Microturbine
System (AIMS) programme. Once the GE development trials have concluded,
TG activities will cease pending the decision by GE Global Research on
whether to take the products into commercial manufacture.

Outlook

The coming year is extremely important to Turbo Genset and will see
further steps taken to transform the business from a development stage
company into a commercial enterprise.

In the genset business the Company intends to increase the level of
direct sales representation in South East Asia to facilitate sales of
its genset solutions and, in particular, sales of the Company's low
speed 1.2MW system.

In the area of high speed motors and drives the Group aims to expand the
product range to build on the success of the SKF contracts.

In its power electronics business the Group aims to continue to build on
the orders won in 2004 and deliver revenue growth in 2005.

The Company is committed to strict cost control and will continue to
explore opportunities to make cost savings wherever possible.

Financial review

Revenue

Revenue in 2004 was Pounds Sterling 1.46 million compared with Pounds
Sterling 1.54 million in 2003 and comprised;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 1,423 1,344
Generator systems 41 198
---------- ----------
1,464 1,542
---------- ----------
---------- ----------


Power electronics revenue comprised deliveries of high voltage power
supply products and rail products, in particular catering car converters
and "At-Seat" power supplies.

A reduction in the number of units called off against the existing
contract with Dtech resulted in a reduction in generator system revenues.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling
1.80 million, resulting in a loss on sales of Pounds Sterling 0.35
million. The gross loss on product revenue for 2004 and 2003 is as
follows;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 194 226
Generator systems (545) (720)
---------- ----------
(351) (494)
---------- ----------
---------- ----------


The loss is primarily due to the overheads attributable to the generator
system manufacturing operation, which is currently operating below
capacity due to the rescheduling of customer orders. The loss is reduced
in 2004 compared to 2003 due to a reduction in overheads.

Research and product development costs

Research and product development costs before amortisation were Pounds
Sterling 3.95 million in 2004 compared with Pounds Sterling 3.08 million
in 2003, and comprised;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Research and product development expenditure 4,498 4,257
Accrued tax credits (250) (420)
Sales of prototypes and development contributions (302) (758)
---------- ----------
Total expenditure 3,946 3,079


No research or development expenditure was deferred in 2003 or 2004.

Research and product development expenditure increased from Pounds
Sterling 4.26 million in 2003 to Pounds Sterling 4.50 million in 2004
primarily due to stock write offs of Pounds Sterling 0.31 million.

Accrued tax credits were lower in 2004 as projects moved from
development to commercialisation.

Sales of prototypes and development contributions reduced in the year as
development contributions in 2003 included payments from Dtech.

General and administrative

General and administrative costs in 2004 decreased to Pounds Sterling
3.02 million compared with Pounds Sterling 3.24 million in 2003 due
mainly to a reduction in general and administrative wage costs following
the redundancy programme in September.

Amortisation

Amortisation on research and development assets was Pounds Sterling 0.78
million compared with Pounds Sterling 0.82 million in 2003. Non research
and development and development amortisation was Pounds Sterling 0.88
million compared with Pounds Sterling 0.83 million in 2003.

Profit on sale of investments net of adjustments to carrying values

In November 2004 the Company disposed of its shareholding in Ceres Power
for a cash consideration of Pounds Sterling 1.27 million, realising a
profit on disposal of Pounds Sterling 0.97 million.

Following an impairment review at the year end the Company made a
provision of Pounds Sterling 0.25 million against the carrying value of
its investment in a convertible debenture issued by Altek Power
Corporation.

Interest income

Interest income in 2004 reduced to Pounds Sterling 0.22 million from
Pounds Sterling 0.38 million in 2003, due to a lower average cash
balance held throughout the year.

Interest expense and finance charges

Interest expense and finance charges arise from the issue of a Pounds
Sterling 5 million convertible bond in July 2003 and comprises;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 175 87
Amortisation of deferred finance charges 66 33
Debt accretion 183 91
---------- ----------
424 211
---------- ----------
---------- ----------


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 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
2004 this charge amounted to Pounds Sterling 0.18million (2003:Pounds
Sterling 0.09 million).

Provision for impairment of capitalised development expenditure

The Group reviews, at least annually, capitalised development costs to
ensure that no impairment has occurred. If a project's commercial
viability is not assured, then an impairment provision is recognised in
the period that such a determination is made.

In the year ended 31 December 2004 the Company provided Pounds Sterling
0.58 million against the carrying value of capitalised development costs
in respect of the 400kW generator system supplied to Dtech.

Since the development programme commenced in late 2000 the US Dollar has
significantly weakened. This weakening of the US Dollar has adversely
impacted the profitability of these systems, since the revenue is
denominated in US Dollars. In addition, the Company announced in
November 2003 that it had been advised that deliveries of 400kW gensets
to Dtech were to be rescheduled.

As a result the Company recorded an impairment provision in 2003 of
Pounds Sterling 700,000 against the development costs of the system. The
Company now expects the 400kW unit to provide a lower level of future
revenue than had previously been expected and accordingly has made a
further provision of Pounds Sterling 577,000 in 2004. At 31 December
2004, the net book value of the capitalised development costs in respect
of this project, and after the impairment provision, amounted to Pounds
Sterling 405,000.

Restructuring charges

In September 2004, the Company initiated a redundancy programme at its
London site, which resulted in a 15% reduction in the Company's
workforce. As a result a restructuring charge of Pounds Sterling 428,000
has been incurred.

Cash flows

Cash outflow from operating activities

Cash outflow from operating activities in 2004 was Pounds Sterling 7.06
million, compared with Pounds Sterling 7.09 million in 2003. In 2003 the
Company recorded an operating loss of Pounds Sterling 9.58 million,
which included an impairment charge of Pounds Sterling 1.13 million, and
had an increase in working capital of Pounds Sterling 0.56 million. The
2004 operating loss of Pounds Sterling 9.55 million included an
impairment charge of Pounds Sterling 0.58 million and working capital
decreased by Pounds Sterling 0.49 million during the year.

The decrease in working capital is partly due to a decrease in trade
debtors of Pounds Sterling 0.10 million and a decrease in tax
recoverable of Pounds Sterling 0.45 million, which is principally due to
a decrease in accrued R&D tax credits. The Company received Pounds
Sterling 0.72 million of R&D tax credits in 2004.

The decrease of stocks and work in progress during the year includes
write downs of Pounds Sterling 0.31 million against obsolete stock and
work in progress.

The decrease in creditors of Pounds Sterling 0.25 million is primarily
due to reductions in accruals and other creditors.

Interest received was Pounds Sterling 0.22 million in 2004, compared
with Pounds Sterling 0.38 million in 2003, and comprised interest
received on the Company's cash balances.

Interest paid of Pounds Sterling 0.17 million represents payments made
on the convertible bonds issued in 2003.

Capital investment activities

Cash inflows from capital investments in 2004 were Pounds Sterling 1.19
million compared with outflows of Pounds Sterling 0.98 million in 2003
as shown below;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Purchase of capital assets (85) (531)
Investment in debt instruments - (444)
Proceeds from sale of shares 1,273 -
---------- ----------
1,188 (975)
---------- ----------
---------- ----------


The reduction in expenditure on capital assets reflects reduced
expenditure on tangible assets following the completion of the Company's
investment programme at its London site.

The investment in debt instruments in 2003 comprised an investment of
Pounds Sterling 444,000 in a 6% Convertible Debenture issued by Altek
Power Corporation ("Altek"). The debenture was convertible, at the
option of the Company, over two years into an aggregate of 1,785,715
Units at a conversion price of $0.56 (Pounds Sterling 0.249) per Unit,
with each Unit consisting of one common share of Altek and one half of a
share purchase warrant. Each warrant entitled the Company to purchase,
at a price of $0.63 (Pounds Sterling 0.28) per share, up to 892,857
additional common shares in Altek for a two year period from the date
the warrants are issued. The debenture was secured against certain
design rights. This investment was part of an agreement that the Company
signed with Magellan Aerospace Corporation ("Magellan") of Ontario,
Canada and Altek Power Corporation ("Altek") of British Columbia, Canada
for the conversion of an industrial standard turbine engine, which can
be coupled directly to the Company's 1.2MW high speed generator.

On 9 March 2005 the Company restructured its investment in Altek to
release both Altek and the Company from the agreement entered into. As
part of the restructuring, 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 notes was extended to become due on 9
October 2008.

In November 2004 the Company sold its shareholding in Ceres Power for a
cash consideration of Pounds Sterling 1.27 million.

Cash flow from financing activities

Cash outflow from financing of Pounds Sterling 1.88 million in 2004
relates to a reclassification into restricted cash of cash set aside for
performance bonds. The performance bonds were put in place during the
year as part of a contract with The Toronto Transit Commission.

Cash flow from financing of Pounds Sterling 4.93 million in 2003
principally comprised Pounds Sterling 5 million from the issue of a
convertible bond in July 2003, net of loan repayments of Pounds Sterling
0.11 million. The loan was fully satisfied in 2003.

Cash outflow for the year

Overall the cash outflow during 2004 was Pounds Sterling 7.75 million,
including movements in restricted cash of Pounds Sterling 1.88 million.
This compares with an overall cash outflow of Pounds Sterling 3.14
million in 2003 which included proceeds from debt issues of Pounds
Sterling 5.0 million.

Balance sheet as at 31 December 2004

The Company ended the year with a cash balance of Pounds Sterling 2.07
million compared with Pounds Sterling 9.82 million at 31 December 2003.
Substantially all of the Company's cash balances are denominated in
Sterling.

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

Long-term assets have reduced from Pounds Sterling 8.67 million at 31
December 2003 to Pounds Sterling 6.01 million at 31 December 2004, due
to the amortisation charge of Pounds Sterling 0.88 million, an
impairment provision of Pounds Sterling 0.58 million, adjustments to
investment carrying values of Pounds Sterling 0.25 million and share
disposals of Pounds Sterling 0.30 million.

Net working capital at the year end, excluding cash balances, was Pounds
Sterling 0.31 million, compared with Pounds Sterling 1.10 million as at
31 December 2003, with the decrease mainly due to reductions in debtors
and stock.



Shareholders' equity

The movement in shareholders' funds comprised;

2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

As at 1 January 15,057 23,508
Loss for the year (9,456) (9,527)
Exercise of options - 32
Shares issued to directors' for fees - 32
Exchange adjustments arising on consolidation 5 (26)
Equity element of convertible bond - 910
Fair value of warrants issued - 117
Stock compensation expense 10 11
---------- ----------
5,616 15,057
---------- ----------
---------- ----------


As at 31 December

As at 31 December 2004, the Company had 175,626,874 common shares issued
and outstanding. As at that date there were 26,263,641 outstanding share
options and 3,500,000 outstanding warrants.

Review Of Fourth Quarter 2004 Results Of Operations And Cash Flows

Revenue

Revenue in the quarter was Pounds Sterling 0.51 million compared with
Pounds Sterling 0.47 million in 2003 and comprised;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 507 368
Generator systems - 106
---------- ----------
507 474
---------- ----------
---------- ----------


Power electronics revenues comprised deliveries of high voltage power
supply products and rail products, in particular catering car converters
and "At-Seat" power supplies. The reduction in generator systems revenue
reflects the reduction in systems called off against the Dtech contract.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling
0.59 million, (2003 - Pounds Sterling 0.66 million) resulting in a loss
on product sales of Pounds Sterling 0.08 million (2003 - Pounds Sterling
0.18 million). The loss on product sales during the period is as follows;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 44 34
Generator systems (128) (218)
---------- ----------
(84) (184)
---------- ----------
---------- ----------


The overall loss is primarily due to the overheads attributable to the
generator system manufacturing operation, which is currently operating
below capacity due to low volumes.

Research and product development costs

Research and product development costs charged to earnings in the
quarter were Pounds Sterling 1.37 million compared with Pounds Sterling
1.03 million in 2003, and comprised;



2004 2003
Pounds Pounds
Sterling Sterling
'000 '000

Research and product development expenditure 1,237 1,308
Accrued tax credits - (320)
Sales of prototypes and development contributions (61) (362)
---------- ----------
Total expenditure 1,176 626
Net amounts deferred during the period - 136
Amortisation 196 271
---------- ----------
Net expenditure charged to profit and loss account 1,372 1,033
---------- ----------
---------- ----------


Research and development expenditure decreased from Pounds Sterling 1.31
million to Pounds Sterling 1.24 million, and in 2004 relates primarily
to the 400kW and 1.2 MW turbine system programmes, and the variable
speed genset project.

No accrued R&D tax credits were recognised in the final quarter in 2004,
reflecting the adequacy of the existing rebate accrual. The sales of
prototypes and development contributions in 2004 and 2003 relate to
power electronics products.

The lower level of amortisation in 2004 compared to 2003 is due to
amortisation of capitalised development costs being based on a lower
amount in 2004 following the impairment write-off of Pounds Sterling
1.13 million in the final quarter of 2003.

Provision for impairment of capitalised development expenditure

In the quarter ended 31 December 2004, the Company provided Pounds
Sterling 0.58 million against the carrying value of the capitalised
development costs in respect of the 400kW generator system supplied to
Dtech.

General and administrative costs

General and administrative costs in the quarter were Pounds Sterling
0.64 million compared with Pounds Sterling 0.95 million in 2003. The
decrease is due to a reduction in general and administrative wage costs
following the redundancy programme in September 2004.

Interest income and expense

Interest income in 2004 of Pounds Sterling 0.03 million is lower than
2003 (Pounds Sterling 0.10 million), due to lower average cash balances
during the quarter.

Interest expense and finance charges of Pounds Sterling 0.10 million in
2004 is in line with 2003 (Pounds Sterling 0.10 million) and relates
primarily to the convertible bond that was issued in July 2003.

Cash flow

Cash outflow from operating activities was Pounds Sterling 1.67 million
in the quarter, compared with Pounds Sterling 1.62 million in 2003.

The net cash inflow in capital investment of Pounds Sterling 1.25
million in the quarter, compared with an outflow of Pounds Sterling 0.52
million in 2003, is principally due to the disposal of the shareholding
in Ceres Power for Pounds Sterling 1.27 million.

Cash outflow from financing of Pounds Sterling 1.88 million in the
quarter relates to the reclassification of cash under performance bonds
as restricted cash.

Overall the cash outflow during the quarter was Pounds Sterling 2.29
million compared with Pounds Sterling 2.02 million in 2003 and is due to
the investment disposal, movements in restricted cash in respect of
performance bonds and working capital movements.



TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT - PART 1 OF 2
YEAR ENDED 31 DECEMBER 2004

Notes Year ended 31 December
2004 2003
Pounds Pounds
Sterling Sterling
'000 C$'000 '000 C$'000

Revenue 1,464 3,482 1,542 3,541

Expenses
Production costs 1,815 4,316 2,036 4,676
Research and product
development 5 4,728 11,244 3,898 8,952
Provision for impairment
of capitalised
development costs 10 577 1,372 1,129 2,593
General and administrative 3,015 7,170 3,236 7,432
Amortisation 883 2,100 829 1,904
-------- -------- -------- --------
11,018 26,202 11,128 25,557
-------- -------- -------- --------
Operating loss (9,554) (22,720) (9,586) (22,016)

Other income and expenses
Profit on sale of
investments, net of
adjustments to carrying
values 722 1,717 - -
Interest income 219 521 382 877
Interest expense and
finance charges 6 (424) (1,008) (211) (485)
Restructuring charge 7 (428) (1,018) (123) (282)
Foreign exchange gains 9 21 11 25
-------- -------- -------- --------
98 233 59 135
-------- -------- -------- --------

Loss before taxation (9,456) (22,484) (9,527) (21,881)
Taxation - - - -
-------- -------- -------- --------

Loss for the year (9,456) (22,484) (9,527) (21,881)
Deficit, beginning of year (28,809) (66,310) (19,282) (44,429)
-------- -------- -------- --------
Deficit, end of year (38,265) (88,794) (28,809) (66,310)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share - pence (5.4)p (12.8)c (5.4)p (12.5)c


TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT - PART 2 OF 2
THREE MONTHS ENDED 31 DECEMBER 2004 - UNAUDITED

Notes Year ended 31 December
2004 2003
Pounds Pounds
Sterling Sterling
'000 C$'000 '000 C$'000

Revenue 507 1,206 474 1,089

Expenses
Production costs 591 1,406 658 1,511
Research and product
development 5 1,372 3,263 1,033 2,372
Provision for impairment
of capitalised
development costs 577 1,372 1,129 2,593
General and administrative 642 1,527 948 2,177
Amortisation 286 680 204 469
-------- -------- -------- --------
3,468 8,248 3,972 9,122
-------- -------- -------- --------
Operating loss (2,961) (7,042) (3,498) (8,033)

Other income and expenses
Profit on sale of
investments, net of
adjustments to carrying
values 722 1,717 - -
Interest income 28 67 95 218
Interest expense and
finance charges 6 (106) (252) (105) (241)
Restructuring charge 7 17 40 (126) (289)
Foreign exchange gains 20 48 22 51
-------- -------- -------- --------
681 1,620 (114) (261)
-------- -------- -------- --------

Loss before taxation (2,280) (5,422) (3,612) (8,294)
Taxation - - - -
-------- -------- -------- --------
Loss for the period (2,280) (5,422) (3,612) (8,294)
-------- -------- -------- --------
-------- -------- -------- --------

Loss per share (1.3)p (3.1)c (2.1)p (4.7)c


TURBO GENSET INC.
CONSOLIDATED BALANCE SHEETS
AS AT 31 DECEMBER 2004

Notes As at 31 December As at 31 December
2004 2003
Pounds Pounds
Sterling Sterling
'000 C$'000 '000 C$'000
Assets:
Current assets:
Cash and cash equivalents 2,067 4,797 9,819 22,600
Debtors 1,711 3,970 2,261 5,204
Stock and work in
progress 482 1,119 803 1,848
-------- -------- -------- --------
4,260 9,886 12,883 29,652
-------- -------- -------- --------

Restricted cash 1,876 4,353 - -
-------- -------- -------- --------

Long term assets:
Investments 10 180 418 734 1,689
Intangible assets 10 1,895 4,397 3,098 7,130
Tangible assets 10 3,932 9,124 4,834 11,126
-------- -------- -------- --------
6,007 13,939 8,666 19,945
-------- -------- -------- --------
12,143 28,178 21,549 49,597
-------- -------- -------- --------
-------- -------- -------- --------

Liabilities and
shareholders' equity:

Creditors: amounts
falling due within one
year 1,884 4,372 1,963 4,518
-------- -------- -------- --------

Creditors: amounts
falling due after more
than one year 4,643 10,774 4,529 10,424
-------- -------- -------- --------

Capital and reserves
Share capital and other
equity instruments 2,11 43,959 102,007 43,949 101,157
Exchange adjustments 2 (78) (181) (83) (192)
Profit and loss account
deficit 2 (38,265) (88,794) (28,809) (66,310)
-------- -------- -------- --------
Shareholders' funds 5,616 13,032 15,057 34,655
-------- -------- -------- --------
12,143 28,178 21,549 49,597
-------- -------- -------- --------
-------- -------- -------- --------


TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS - PART 1 OF 2
YEAR ENDED 31 DECEMBER 2004

Notes Year ended 31 December
2004 2003
Pounds Pounds
Sterling Sterling
'000 C$'000 '000 C$'000

Cash outflow from
operating activities 3 (7,112) (16,914) (7,466) (17,146)

Interest received 219 521 375 861
Interest paid (171) (407) (3) (7)
-------- -------- -------- --------
Net cash outflow from
operating Activities (7,064) (16,800) (7,094) (16,292)

Capital investment
activities
Purchase of long term
assets (85) (202) (531) (1,219)
Investment in debt
instruments - - (444) (1,020)
Proceeds from the sale
of investment 1,273 3,027 - -
-------- -------- -------- --------
Cash inflow/(outflow)
from capital investment
activities 1,188 2,825 (975) (2,239)
-------- -------- -------- --------
Net cash outflow before
financing activities (5,876) (13,975) (8,069) (18,531)

Financing activities
Proceeds from exercise
of share options and
warrants - - 32 73
Proceeds from debt issue - - 5,000 11,483
Movement in restricted
cash (1,876) (4,462) - -
Loan repayment - - (105) (241)
-------- -------- -------- --------
Cash inflow/(outflow) from
financing activities (1,876) (4,462) 4,927 11,315
-------- -------- -------- --------
Decrease in cash in the
year (7,752) (18,437) (3,142) (7,216)
-------- -------- -------- --------
-------- -------- -------- --------

Cash and cash equivalents:
Beginning of year 9,819 12,961
-------- --------
End of year 2,067 9,819
-------- --------
-------- --------

TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS - PART 2 OF 2
THREE MONTHS ENDED 31 DECEMBER 2004 - UNAUDITED

Notes Year ended 31 December
2004 2003
Pounds Pounds
Sterling Sterling
'000 C$'000 '000 C$'000

Cash outflow from
operating activities 3 (1,669) (3,969) (1,619) (3,718)

Interest received 5 12 87 200
Interest paid - - - -
-------- -------- -------- --------
Net cash outflow from
operating activities (1,664) (3,957) (1,532) (3,518)

Capital investment activities
Purchase of long-term assets (23) (55) (76) (174)
Investment in debt instruments - (444) (1,020)
Proceeds from the sale of
investment 1,273 3,027 - -
-------- -------- -------- --------
Cash inflow/(outflow) from
capital investment activities 1,250 2,972 (520) (1,194)
-------- -------- -------- --------
Net cash outflow before
financing activities (414) (985) (2,052) (4,712)

Financing activities
Proceeds from exercise
of share options and warrants - - 32 73
Proceeds from debt issue - - - -
Movement in restricted cash (1,876) (4,462) - -
Loan repayment - - - -
-------- -------- -------- --------
Cash inflow/(outflow)
from financing activities (1,876) (4,462) 32 73
-------- -------- -------- --------
Decrease in cash in the period (2,290) (5,447) (2,020) (4,639)
-------- -------- -------- --------
-------- -------- -------- --------

Cash and cash equivalents
Cash, beginning of the period 4,357 11,839
-------- --------
Cash, end of year 2,067 9,819
-------- --------
-------- --------


TURBO GENSET INC.
YEAR ENDED 31 DECEMBER 2004
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 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 2003 42,847 - (57) (19,282) 23,508
Loss for the
period (9,527) (9,527)
Exchange
(loss) /gain (26) (26)
Stock
compensation 11 11
Exercise of share
options and
warrants 32 32
Equity component
of financial
instrument 910 910
Warrants issued 117 117
Shares issued to
directors in
respect of fees 32 32
--------- -------- ----------- ---------- ---------

Balance at 31
December 2003 42,922 1,027 (83) (28,809) 15,057
Loss for the
period (9,456) (9,456)
Exchange
(loss)/gain 5 5
Stock
compensation 10 10
--------- -------- ----------- ---------- ---------

Balance at
31 December 2004 42,932 1,027 (78) (38,265) 5,616
--------- -------- ----------- ---------- ---------
--------- -------- ----------- ---------- ---------


3 Reconciliation of operating loss to cash outflow from operating
activities

Year ended Three months ended
31 December 31 December
2004 2003 2004 2003
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Operating loss for
the period (9,554) (9,586) (2,961) (3,498)

Movements in working
capital balances
Decrease / (increase)
in debtors 423 (611) (89) 43
Decrease / (increase)
in stocks and work
in progress 321 (77) 348 (321)
(Decrease) / increase
in creditors (251) 124 35 520

Restructuring payments (319) (127) (92) (22)
Adjustment for
amortisation (a) 1,665 1,647 482 474
Provision for
impairment 577 1,129 577 1,129
Stock compensation
expense 10 11 3 6
Foreign exchange
losses gains 16 24 28 50
--------- ---------- ----------- -----------
Cash outflow from
operating activities (7,112) (7,466) (1,669) (1,619)
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------


(a) The total amortisation for the three months ended 31 December 2004
and 31 December 2003 includes Pounds Sterling 196,000 and Pounds
Sterling 271,000, respectively which is included in research and product
development expenditure in the profit and loss account. The total
amortisation for the year ended 31December 2004 and 31 December 2003
includes Pounds Sterling 782,000 and Pounds Sterling 819,000,
respectively which is included in research and product development
expenditure in the profit and loss account.

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 system 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 system segment operate
in United Kingdom. The corporate segment operates in Canada.



All amounts in
Pounds Sterling Power Generator
'000 electronics systems Corporate Total
2004 2003 2004 2003 2004 2003 2004 2003
Year ended
31 December
Revenue 1,423 1,344 41 198 - - 1,464 1,542
Net interest
income/
(expense) - (3) (441) (123) 236 297 (205) 171
Amortisation 189 245 694 584 - - 883 829
Restructuring
charges - - 428 123 - - 428 123
Provision for
impairment of
capitalised
development
costs - 429 577 700 - - 577 1,129
Loss for
the period (1,991)(1,697)(6,223) (6,885)(1,242) (945)(9,456)(9,527)
Capital
Expenditure 38 136 160 360 - - 198 496

As at 31 December
Total Assets 3,948 3,497 7,198 10,058 997 7,994 12,143 21,549
Total
Liabilities 643 689 5,839 5,753 45 50 6,527 6,492

Three months
ended 31 December
Revenue 507 368 - 106 - - 507 474
Net interest
income /
(expense) - (3) (133) (86) 55 79 (78) (10)
Amortisation 37 56 249 148 - - 286 204
Loss for
the period (486) (800)(1,358) (2,549) (436) (263)(2,280)(3,612)

5 Research and product development expenditure

Research and product development expenditures incurred during the
period comprised:


Year ended Three months ended
31 December 31 December

2004 2003 2004 2003
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Research and product development
expenditure 4,498 4,257 1,237 1,308
Accrued tax credits (250) (420) - (320)
Sales of prototypes and
development contributions (302) (758) (61) (362)
--------- -------- -------- ---------
Total expenditure 3,946 3,079 1,176 626
Net amounts deferred during
the period - - - 136
Amortisation 782 819 196 271
--------- -------- -------- ---------
Net expenditure charged to
profit and loss account 4,728 3,898 1,372 1,033
--------- -------- -------- ---------
--------- -------- -------- ---------


Deferred development expenditure, net of accrued tax credits,
amortisation and provisions for impairment, at 31 December 2004 amounted
to Pounds Sterling 691,000 (2003 - Pounds Sterling 1,692,000). Total
accrued tax credits receivable at 31 December 2004, including those
credited against deferred development expenditure, amounted to Pounds
Sterling 457,000 (2003 - Pounds Sterling 925,000). Capitalised
development costs comprise materials, labour and allocated overheads.



6 Interest expense and finance charges

Year ended Three months ended
31 December 31 December

2004 2003 2004 2003
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Interest payable 175 87 44 43
Debt accretion 183 91 46 46
Amortisation of deferred
finance charges 66 33 16 16
--------- -------- -------- ---------
Cash outflow from operating
activities 424 211 106 105
--------- -------- -------- ---------
--------- -------- -------- ---------


7 Restructuring charges

In September 2004, the Company initiated a redundancy programme at its
London operations, which resulted in a 15% reduction in the Company's
workforce. A provision for severance costs amounting to Pounds Sterling
428,000 has been charged to the profit and loss account. During the last
quarter of 2004, payments totaling Pounds Sterling 225,000 were made and
the balance is expected to be paid by the end of March 2005.

The redundancy programme focused on the elimination of duplicated
functions in the London and Gateshead operations and a reduction in both
direct manufacturing labour and overhead staffing levels. The Company's
engineering capability for current and future product development is
unaffected.

The movements in the restructuring provisions during the year ended 31
December 2004 were as follows:



Property
Redundancy disposal
costs costs Total
Pounds Pounds Pounds
Sterling Sterling Sterling
'000 '000 '000

Provision at 1 January 2003 44 154 198
Charge/(credit) to profit and loss (3) 126 123
Cash payments (41) (86) (127)
-------- -------- ---------
Provision at 31 December 2003 - 194 194
Charge to profit and loss 428 - 428
Cash payments (225) (94) (319)
-------- -------- ---------
Provision at 31 December 2004 203 100 303
-------- -------- ---------
-------- -------- ---------

The amounts released to the profit and loss accounts comprised;

Year ended Three months ended
31 December 31 December

2004 2003 2004 2003
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Provision for redundancy costs 428 (3) (17) -
Provision for property disposal
costs - 126 - 126
--------- -------- -------- ---------
428 123 (17) 126
--------- -------- -------- ---------
--------- -------- -------- ---------


8 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 2004 was
175,626,874 (2003 - 175,281,939). 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 2004 was Pounds Sterling 9,456,000
(2003 - Pounds Sterling 9,527,000).

9 Restricted cash

During the year the Company has 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 31 December 2004 cash subject to restrictions totalled
Pounds Sterling 1,875,742 (2003 - Nil) and is secured over an equivalent
cash balance.



10 Long - term assets

Net book
Cost Impairment Amortisation value

Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 31 December 2004
Investments (a) (b) 431 251 - 180
Intangible assets (c) 5,250 1,706 1,649 1,895
Tangible asset 8,111 - 4,179 3,932
--------- ---------- ------------ ---------
Total long term assets 13,792 1,957 5,828 6,007
--------- ---------- ------------ ---------
--------- ---------- ------------ ---------
At 31 December 2003
Investments (a) 734 - - 734
Intangible assets 5,208 1,129 981 3,098
Tangible assets 7,955 - 3,121 4,834
--------- ---------- ------------ ---------
Total long term assets 13,897 1,129 4,102 8,666
--------- ---------- ------------ ---------
--------- ---------- ------------ ---------


(a) At 31 December 2003 the Group held 110,294 shares in Ceres Power
Ltd, a private company, at a cost of Pounds Sterling 300,000. These
shares were sold in November 2004 for a cash consideration of Pounds
Sterling 1,273,000 giving rise to a gain on disposal of Pounds Sterling
973,000.

(b) In October 2003, the Group invested C$1,000,000 (Pounds Sterling
444,400) in a 6% Convertible Debenture issued by Altek Power Corporation
("Altek"). The Company has reviewed the carrying value of the investment
with reference to the market value of Altek's shares, and has made a
provision for impairment in 2004 of Pounds Sterling 251,000. In March
2005 the Company restructured its investment in Altek as detailed in
note 13 of these financial statements.

(c) In the year ended 31 December 2004, the Company provided Pounds
Sterling 577,000 against the carrying value of capitalised development
costs in respect of the 400kW generator system supplied to Dtech.



11 Share capital - issued common shares

Number of shares

At 1 January 2004 and 31 December 2004 175,626,874

No options were exercised during the year ended 31 December 2004.

12 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:

Year and three months, ended 31 December 2004 2.378
Year and three months, ended 31 December 2003 2.297
As at 31 December 2004 2.321
As at 31 December 2003 2.302


13 Post balance sheet events

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.

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 has been extended to become due
on October 9, 2008.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    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 (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400
    or
    Seton Services (IR)
    Toni Vallen
    +44 (0)20 7727 3073
    +44 (0)20 7792 0430 (FAX)
    Email: toni@setonservices.com