Turbo Genset Inc.
TSX : TGN
LSE : TGN

Turbo Genset Inc.

March 22, 2006 02:00 ET

Turbo Genset Inc. Announces its Results for the Fourth Quarter and Year Ended 31 December 2005

CALGARY, ALBERTA--(CCNMatthews - March 22, 2006) - Turbo Genset Inc. (TSX:TGN) (LSE:TGN)

Highlights for the year ended 31st December 2005

- Revenue and development income increased by 77 percent to Pounds Sterling 3.12 million (2004:Pounds Sterling 1.77 million)

- Loss before tax reduced by 32 percent to Pounds Sterling 6.45 million (2004: Pounds Sterling 9.46 million)

- Operating cash outflow reduced by 49 percent to Pounds Sterling 3.62 million (2004: Pounds Sterling 7.06 million)

- Major contracts signed with Eaton, the National Rail Equipment Company, Trans Elektro and the Toronto Transit Commission

- Compact Power agreement announced today

- Toronto Transit Commission production order confirmed today

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

"We have made significant commercial progress this year and have had some key successes in our chosen markets. We now have a number of high-profile international customers and we have established strategic partnerships that will continue to fuel the company's growth. Our management team and operational infrastructure have been strengthened during 2005 and we now have the structure in place to move towards profitability."

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 sold into a number of markets but all are based on its core technologies of power electronics and high speed electrical machines.

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.

Chairman's statement

In 2005 we made good progress in addressing new markets both geographically and by application. This was evidenced by a number of long term contract wins with blue chip customers and a near doubling of turnover within the financial year.

From its inception, the inherent value in the Company has been in its innovative high speed generator and motor technology which combined with our leading edge power electronics skills and our new management team, has meant we are now able to provide products to a widening range of Industrial, Aerospace, Rail, Automotive, and Distributed and Renewable Energy equipment manufacturers.

Our biggest contract win in 2005 demonstrates how far the company has come not only commercially but also technically. Our order to supply Eaton with motor drives for their Boeing 787 fuel pumps demonstrated that we were capable of meeting the most rigorous and challenging standards of the Aerospace industry. This endorsement of our technical and operational capabilities underlines the potential of the business and bodes well for new opportunities.

The industrial high-speed motor/drive programmes with SKF and the major international capital equipment manufacturer announced in November 2005, will form the basis of a growing product range.

Our power electronics division, I-Power, continues to be successful across its product range. Rail contract successes in the last year include Trans-Elektro in support of the Netherlands Railways, and the order and long term agreement from US based National Rail Equipment Company for traction electronics used in emissions friendly switcher locomotives to be supplied to Union Pacific. As a result of this continuing success we are reviewing the potential for leasing larger premises in the Tyneside area.

In the Distributed and Renewable Energy field, we recently announced our participation in the Compact Power Ltd Biogas Energy project. The use of small-scale power generation close to consumers and Renewable Energy Technologies are becoming increasingly important markets. Our high speed generators and inverters provide system integrators with benefits in terms of efficiency, size and weight, life-cycle cost and ease of grid connection. During 2005, it became clear that access to these markets is best achieved by partnering with companies who have existing manufacturing and global service and support facilities rather than offering our own complete genset solutions to single end customers.

Our business has evolved over the last few years and has become more balanced as we continue to broaden our market reach. To reflect this and as an indication of our future direction we are proposing to change the name of the Company to Turbo Power Systems Inc at our AGM.

We anticipate an increasing order book in 2006 and expect revenues to grow strongly as a number of development contracts move into their production phase. With the addition of new sales resource and continued commercial focus we are confident that the business will continue to demonstrate positive progress.

Operational review

i) Direct Drive High-Speed Motors and Drives

The Company manufactures custom high-speed motors and variable frequency drives in the size range of 15kW to 500kW.

Markets:

Air and Gas Turbo-Machines:

- Gas Compressors and Expanders

- Industrial HVAC and Refrigeration Equipment

- Laser Blowers

- Fuel Cell Blowers

The Company's motor drive technology is applicable to a wide range of industrial applications where TG turbo-machines offer considerable technical and commercial advantages e.g.

- The overall system efficiency (and therefore customer operating cost) is improved by eliminating the gearbox, the mechanical drive-train and associated lubrication system. Direct drive systems also offer significant savings in life-cycle cost.

- The TG motors use frictionless magnetic bearing technology, providing longer life and contaminant free operation.

- The motor and drive package is considerably smaller and lighter than conventional solutions and can be better integrated into the customer's end product

Customers:

Industrial motor and drive agreement

In 2005, the Company announced that it had signed an agreement with an international capital equipment manufacturer to design and supply three sizes of motors and drives between 250kW and 500kW, and is currently in the process of designing and building the initial prototypes. This development will continue during 2006 and, subject to the satisfactory completion of the prototype trials, includes a commitment for the purchase of 500 systems to meet the anticipated volume requirements in the initial two years of production. The value of this initial commitment is expected to be in excess of Pounds Sterling 7 million with deliveries commencing in 2007.The product is planned to be formally launched at a North American industry trade show in early 2007.

SKF

Following receipt of the development contracts and the Supply Agreement for the 15, 25 and 35kW high speed motors and drives for the gas compressor application, initial production schedules were received during December 2005 and volumes will gradually ramp up, beginning in the first quarter of 2006.

ii) Specialist Drives and Motor Systems (Aerospace, Oil and Gas)

In developing its range of high speed electrical machines and associated power electronics, the Company has acquired scarce skills which have been successfully employed in breaking into new markets for motor and drive applications.

Markets:

The design of motors or drives, where the required performance in terms of reliability, operating environment, speed and complexity demands a customised solution.

Customers:

Eaton

The key success in 2005 was the Aerospace contract placed by Eaton for high performance electronic drives which provide motor control for the fuel transfer and jettison pumps on the new Boeing 787 commercial airliner. The Company won the contract against strong international competition, all of whom had an established Aerospace track record. The selection by Eaton confirms TG's capacity for meeting the challenging commercial and technical demands in this sector. Based on Boeing's projections up until 2020 for the 787 aircraft build and aftermarket sales the contract value for TG is expected to exceed Pounds Sterling 11 million. Development work will be ongoing with qualified flight hardware supplied as part of the aircraft pre-production flight trials in 2006 and initial production quantities are scheduled to commence in 2007.

ALC - Oil and Gas

The development contract placed by the Artificial Lift Company for a small diameter modular down-hole pump motor is proceeding to plan, with the initial underground test trials in the UK scheduled for the middle of 2006, and the field trials planned with a major US oil company in Alaska intended to commence by the end of the year.

This is a technically challenging project, however once the system has been rigorously proven in the oil field environment the commercial potential for the technology will be very significant given the number of wells world-wide whose daily oil output could be improved.

Lotus Engineering

In 2005 the Company won a contract from Lotus to design and manufacture a motor and drive system for a hybrid vehicle programme. The modified energy efficient passenger vehicles will be extensively tested by the sponsoring car manufacturer in 2006 prior to any decision regarding the production release.

iii) High Voltage Power Supplies, Auxiliary Power Systems, Grid-Connected Inverters for Energy Recovery Systems and Renewable Energy Systems

Markets:

Rugged high performance power electronics products:

- High-voltage power supplies for the laser and UV water disinfection sectors.

- Battery chargers, auxiliary power supplies and power converters for international rail and light transit systems.

- Grid connectable inverters for distributed and renewable energy technologies. With governments in the developed economies increasingly making commitments to significant and increasing proportions of their energy needs being met from renewable sources, there is a growing requirement for compatible electronics to seamlessly connect them to the relevant national electricity grids. TG with its practical experience in grid connection of gas turbines has developed hardware and software solutions which are well placed to support emerging technologies.

Customers:

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

In January 2005 TTC placed a Pounds Sterling 2.7 million contract with the Company for the supply of 128 units to be delivered between 2005 and 2008. The equipment is being installed as part of an upgrade programme for the existing H6 subway cars.

Toronto Transit Commission -CLRV Tram Upgrade Programme

TG delivered the initial prototype low voltage power supplies during 2005 and following extensive vehicle testing the customer plans to begin vehicle upgrades commencing in early 2007.

Trans Elektro

Trans Elektro (Holland) placed a contract valued at Pounds Sterling 500k for the design and manufacture of air-conditioning power supplies required as part of a refurbishment programme for rolling stock in service with the Netherlands rail operator, Nedtrain.

NREC

The National Rail Equipment Company (USA) placed a contract with TG at the end of 2004 for a prototype power electronics traction system to drive its planned range of low emissions switcher locomotives. The NREC requirement is in response to the imposition by the Environmental Protection Agency of strict deadlines for locomotive operators to meet reduced emissions levels.

NRE demonstrated the emissions friendly prototype switcher to Union Pacific in 2005 and in February 2006, they received an order for a quantity of the locomotives. NRE in turn placed an order with TG for Pounds Sterling 3 million covering its firm and forecast requirements until the end of 2007.

In addition, TG has now concluded an exclusive long term agreement to supply NREC with their traction electronics, with an initial term of 5 years.

In addition to Union Pacific, NREC continues to promote this technology to a wide range of rail freight companies and large industrial freight users in North America and anticipates continued growth in sales.

Future Opportunities

TG is currently bidding for auxiliary power electronics systems on a wide range of international rolling stock projects in North America, the United Kingdom, South East Asia, and Europe.

iv) Direct Drive High-Speed Generators and Inverters for the Distributed Generation and Renewable Energy Markets

Markets:

Distributed Generation (the use of small-scale power generation close to the load being served) and Renewable Energy Technologies remain an important market for TG. High speed generators and inverters in sizes up to 5MW provide system integrators with benefits in terms of efficiency, size and weight, life-cycle cost and ease of grid connection.

During 2005 the Company reviewed its performance in delivering complete turnkey genset sales into these sectors and has recognized that access to these markets is best achieved by partnering with companies who have existing manufacturing and global service and support facilities for the prime movers, whether they are gas turbines ,steam turbines, fuel cells or emerging renewable technology. TG will now concentrate on the design, manufacture and supply of the generator and inverter sub-systems to the generating system providers.

Customers:

Compact Power

TG has recently announced that it has signed an agreement to collaborate with Compact Power Ltd in the development of a packaged biomass distributed generation system. Compact Power has a successful existing biomass processing plant in Avonmouth operating on a wide range of municipal and biological waste products, and is in the process of developing a "green biomass" module for commercial exploitation.

TG will supply the generator and inverter technology which, in conjunction with a gas turbine and recuperator being provided by other partners, will improve the efficiency and power output of the overall system.

Hydro-Venturi

In the Renewable Energy sector, TG has identified a number of emerging technologies that have the potential to use our small lightweight generators or grid connectable inverters. To that end the Company intends to collaborate in a number of preliminary pilot schemes using items of our existing hardware, with the objective of being well positioned to take benefit from those renewable energy systems which can demonstrate technical and commercial viability.

One such collaboration is currently underway with Hydro-Venturi Ltd, where a TG generator is part of a pilot project to demonstrate electrical generation from a low-head hydro scheme currently running in the Midlands, UK.

RESULTS OF OPERATIONS



Revenue

Revenue in 2005 was Pounds Sterling 2.64 million compared with Pounds
Sterling 1.46 million in 2004 and comprised;

2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 2,482 1,423
Motor and generator systems 154 41
------------ ----------
2,636 1,464
------------ ----------
------------ ----------


Revenues for 2005 in the power electronics division grew by 74% over 2004. Rail industry contracts have been the major contributor to revenue in the year 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 income.

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 0.52 million in 2005 (2004:Pounds Sterling 0.41 million).

Motor and generator systems revenue derives from contracts with SKF and ALC.

During the year 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.

Development income

Development income in 2005 was Pounds Sterling 0.48 million compared with Pounds Sterling 0.30 million in 2004 and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 439 267
Motor and generator systems 42 35
------------ ----------
481 302
------------ ----------
------------ ----------


Development income in the power electronics division was made up primarily of income from the Toronto Transit Commission.

Motor and generator systems development income arises from the contract with Eaton Aerospace.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling 2.08 million and consists mainly of labour and material costs on shipped production units. The gross profit/loss on product revenue for 2005 and 2004 is as follows;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 691 194
Generator systems (136) (545)
------------ ----------
555 (351)
------------ ----------
------------ ----------


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

Research and product development

Research and product development costs were Pounds Sterling 2.50 million in 2005 compared with Pounds Sterling 4.25 million in 2004, and comprised;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000


Research and product development expenditure 3,232 4,498
Total tax credits (736) (250)
------------ ----------
Total expenditure 2,496 4,248


Gross research and product development expenditure decreased from Pounds Sterling 4.50 million in 2004 to Pounds Sterling 3.23 million in 2005 reflecting strict cost control and the movement of projects from development into the production phase.

In December 2005 the company received research and development tax credit cash of Pounds Sterling 1.03 million relating to tax claims for the 2003 and 2004 financial years. These receipts contributed to an overall credit to the profit and loss account of Pounds Sterling 0.74 million (2004 : Pounds Sterling 0.25 million).

No research or development expenditure was deferred in 2004 or 2005.

General and administrative

General and administrative costs in 2005 reduced to Pounds Sterling 2.90 million compared with Pounds Sterling 3.02 million in 2004. General and administrative costs consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings. In 2005 general and administrative costs included Pounds Sterling 0.13 million of stock compensation costs charged to the profit and loss account in respect of option gains.

Amortisation

Amortisation was Pounds Sterling 1.65 million in 2005 compared with Pounds Sterling 1.73 million in 2004.

Of this figure Pounds Sterling 1.51 million (2004:Pounds Sterling 1.66 million) was charged to operating costs, and Pounds Sterling 0.14 million (2004:Pounds Sterling 0.07 million) relates to amortisation of deferred finance costs.

The reduction in overall amortisation reflects a number of assets becoming fully written down in the year.

Loss / profit on sale of investments net of adjustments to carrying values

In March 2005 the Company restructured its investment in Altek Power Corporation ("Altek"). As part of the restructuring the Company converted CDN $500,000 of the loan receivable into shares of Altek.

Following an impairment review in June 2005 the Company made a further provision against the carrying value of its investment in the shares and the convertible debenture issued by Altek Power Corporation of Pounds Sterling 0.09 million ( 2004 : Pounds Sterling 0.25 million).

In December 2005 the Company disposed of its shareholding in Altek Power Corporation realising a loss of Pounds Sterling 0.01 million.

Interest income

Interest income in 2005 increased to Pounds Sterling 0.33 million from Pounds Sterling 0.22 million in 2004, due to a higher average cash balance following the Pounds Sterling 8 million fundraising in March 2005.

Interest expense and finance charges

Interest expense and finance charges primarily relate to the issue of a Pounds Sterling 5 million convertible bond in July 2003 and the subsequent issue of an Pounds Sterling 8 million convertible bond in March 2005 and comprise;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 520 175
Debt accretion 368 183
Amortisation of deferred finance charges 137 66
------------ ----------
1,025 424
------------ ----------
------------ ----------


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 2003 Bond was estimated at Pounds Sterling 0.91 million and of the 2005 Bond was Pounds Sterling 1.33 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 2005 this charge amounted to Pounds Sterling 0.37 million (2004:Pounds Sterling 0.18 million).

Provision for impairment of capitalised development costs

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. No impairment charge has been made in 2005 (2004 : Pounds Sterling 0.58 million).

CASH FLOWS

Cash outflow from operating activities

Cash outflow from operating activities was Pounds Sterling 3.52 million, compared with Pounds Sterling 7.11 million in 2004. In 2004 the Company recorded an operating loss of Pounds Sterling 9.55 million, which included an impairment charge of Pounds Sterling 0.58 million. The 2005 operating loss was Pounds Sterling 5.87 million.

Net working capital decreased by Pounds Sterling 0.61 million. The Company received Pounds Sterling 1.03 million of R&D tax credits in the year.

The increase of stocks and work in progress during the year is a reflection of the increase in manufacturing levels.

Interest received was Pounds Sterling 0.33 million in 2005, compared with Pounds Sterling 0.22 million in 2004, and comprised interest received on the Company's cash balances.

Interest paid of Pounds Sterling 0.44 million (2004: Pounds Sterling 0.17 million) represents payments made on the convertible bonds issued in 2003 and 2005.

Capital investment

Cash outflow from capital investments were Pounds Sterling 0.06 million compared with inflows of Pounds Sterling 1.19 million in 2004 as shown below;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Purchase of capital assets (55) (85)
Proceeds from sale of shares 49 1,273
------------ ----------
(6) 1,188
------------ ----------
------------ ----------


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 Heathrow site.

In 2003 the Company invested Pounds Sterling 444,000 in a 6% Convertible Debenture issued by Altek Power Corporation. 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 of Ontario, Canada and Altek Power Corporation 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 has been extended to become due on October 9, 2008.

In December 2005 the Company sold its share investment in Altek, realising consideration of Pounds Sterling 0.05 million which is included in debtors at the year end.

Cash flow from financing

Cash inflow from financing of Pounds Sterling 8.09 million in 2005 comprised Pounds Sterling 7.71 million from the issue of a convertible bond in March 2005, and Pounds Sterling 0.38 reflecting a reduction in the restricted cash balances set aside for performance bonds as part of contracts with The Toronto Transit Commission.

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 contracts with The Toronto Transit Commission.

Cash outflow for the year

Overall the cash inflow during 2005 was Pounds Sterling 4.46 million which included proceeds from debt issues of of Pounds Sterling 7.71 million. This compares with an overall cash outflow of Pounds Sterling 7.75 million in 2004 which included transfers to restricted cash of Pounds Sterling 1.88million.

REVIEW OF FOURTH QUARTER 2005 RESULTS OF OPERATIONS AND CASH FLOWS



Revenue

Revenue in the quarter was Pounds Sterling 0.87 million compared with
Pounds Sterling 0.51 million in 2004 and comprised;

2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 815 507
Generator systems 59 -
------------ ----------
874 507
------------ ----------
------------ ----------


Revenues for the quarter in the power electronics division grew by 61% over 2004. Power electronics revenue comprised rail contracts, power supplies to PRC and the development of hybrid electrical drive systems for Lotus Engineering.

Development income

Development income in the quarter was Pounds Sterling 0.10 million (2004: Pounds Sterling 0.06 million) and consists of income from the Toronto Transit Commission and Eaton.

Cost of product revenues

The cost of product revenue in the period amounted to Pounds Sterling 0.53 million, (2004 - Pounds Sterling 0.59 million) resulting in a profit on product sales of Pounds Sterling 0.34 million (2004 - Pounds Sterling 0.08 million loss). The profit on product sales during the period is as follows;



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 425 44
Generator systems (85) (128)
------------ ----------
340 (84)
------------ ----------
------------ ----------


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

Research and product development costs



Research and product development costs charged to earnings in the
Quarter were Pounds Sterling 0.15 million compared with Pounds Sterling
1.18 million in 2004, and comprised;

2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Research and product development expenditure 887 1,237
Total tax credits (736) -
------------ ----------
Total expenditure 151 1,176
------------ ----------
------------ ----------


Research and development tax credits of Pounds Sterling 1.03 million (2004: nil) were received in the quarter relating to claims for the 2003 and 2004 financial years.

General and administrative costs

General and administrative costs in the quarter were Pounds Sterling 0.79 million compared with Pounds Sterling 0.64 million in 2004. Stock compensation charges of Pounds Sterling 0.13 million (2004: nil) are included in general and administrative costs.

Interest income and expense

Interest income in 2005 of Pounds Sterling 0.10 million is higher than 2004 (Pounds Sterling 0.03 million), due to higher average cash balances during 2005.

Interest expense and finance charges of Pounds Sterling 0.24 million in 2005 are higher than 2004 (Pounds Sterling 0.10 million) and relate primarily to the convertible bonds that were issued in March 2005 and July 2003.

Cash flow

Cash inflow from operating activities was Pounds Sterling 0.31 million in the quarter, compared with a Pounds Sterling 1.67 million outflow in 2004.

Overall the cash inflow during the quarter was Pounds Sterling 0.36 million compared with a Pounds Sterling 2.29 million outflow in 2004 and is due principally to the receipt of R&D tax credits of Pounds Sterling 1.03 million in the quarter.

BALANCE SHEET AS AT 31 DECEMBER 2005

The Company ended the year with a cash balance of Pounds Sterling 6.53 million compared with Pounds Sterling 2.07 million at 31 December 2004. Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of Pounds Sterling 1.50 million relating to performance bonds entered into under contracts with the Toronto Transit Commission and Eaton.

Long-term assets have reduced from Pounds Sterling 6.01 million at 31 December 2004 to Pounds Sterling 4.54 million at 31 December 2005 due to amortisation.

Net working capital at the year end, excluding cash balances, was Pounds Sterling (0.30) million, compared with Pounds Sterling 0.31 million as at 31 December 2004, with the decrease mainly due to increases in creditors and reductions in tax debtors.

During 2005 investors who had subscribed for the convertible bond issue converted bonds into 114,883,385 common shares. As at 31 December 2005 the Company had 190,510,259 common shares issued and outstanding. As at that date there were 34,995,134 outstanding share options and 10,500,000 warrants.



TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT - PART 1 OF 2
YEAR ENDED 31 DECEMBER 2005

Year ended 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Revenue 4 2,636 5,807 1,464 3,482
Development Income 5 481 1,059 302 718

Expenses
Production costs 2,081 4,585 1,815 4,316
Research and product
development 5 2,496 5,499 4,248 10,102
Provision for
impairment of
capitalised
development costs - - 577 1,372
General and
administrative 2,897 6,382 3,015 7,170
Amortisation 1,511 3328 1,665 3,960
-------- -------- -------- --------
8,985 19,794 11,320 26,920
-------- -------- -------- --------
Operating loss (5,868) (12,928) (9,554) (22,720)

Other income and expenses
Loss/Profit on sale of
investments, net of
adjustments to
carrying values (99) (218) 722 1,717
Other income 168 370 - -
Interest income 334 736 219 521
Interest expense and
finance charges 6 (1,025) (2,258) (424) (1,008)
Restructuring charge 7 - - (428) (1,018)
Foreign exchange gains 37 82 9 21
-------- -------- -------- --------
(585) (1,288) 98 233
-------- -------- -------- --------

Loss before taxation (6,453) (14,216) (9,456) (22,487)
Taxation - - - -
-------- -------- -------- --------
Loss for the year 2 (6,453) (14,216) (9,456) (22,487)
Deficit, beginning of year (38,265) (75,533) (28,809) (66,310)
-------- -------- -------- --------
Deficit, end of year 2 (44,718) (89,749) (38,265) (88,794)
-------- -------- -------- --------
-------- -------- -------- --------

Loss per share - pence 8 (3.5) p (7.6) c (5.4) p (12.8) c


TURBO GENSET INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT - PART 2 OF 2
THREE MONTHS ENDED 31 DECEMBER 2005 - UNAUDITED

Three Months ended 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Revenue 4 874 1,925 507 1,206
Development Income 5 95 209 61 145

Expenses
Production costs 534 1,177 591 1,406
Research and product
development 5 151 332 1,041 2,476
Provision for impairment
of capitalised
development costs - - 577 1,372
General and administrative 792 1,791 642 1,527
Amortisation 584 1,240 678 1,612
-------- -------- -------- --------
2,061 4,540 3,529 8,393
-------- -------- -------- --------
Operating loss (1,092) (2,406) (2,961) (7,042)

Other income and expenses
Loss / Profit on sale of
investments, net of
adjustments to
carrying values (99) (218) 722 1,717
Interest income 95 209 28 67
Interest expense and
finance charges 6 (238) (524) (106) (252)
Restructuring charge 7 - - 17 40
Foreign exchange gains 67 148 20 48
-------- -------- -------- --------
(175) (385) 681 1,620
-------- -------- -------- --------

Loss before taxation (1,267) (2,775) (2,280) (5,422)
Taxation 18 39 - -
-------- -------- -------- --------
Loss for the period 2 (1,249) (2,752) (2,280) (5,422)
-------- -------- -------- --------
-------- -------- -------- --------

Loss per share 8 (0.6) p (1.2) c (1.3) p (3.1) c


TURBO GENSET INC.
CONSOLIDATED BALANCE SHEETS
AS AT 31 DECEMBER

As at 31 December As at 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000
Assets:
Current assets:
Cash and cash
equivalents 6,525 13,096 2,067 4,797
Debtors 11 1,346 2,701 1,711 3,970
Stock
and work in
progress 541 1,086 482 1,119
8,412 16,883 4,260 9,886
-------- -------- -------- --------
Restricted cash 9 1,496 3,002 1,876 4,353
-------- -------- -------- --------
Long term assets:
Investments 10 59 118 180 418
Intangible assets 10 1,471 2,952 1,895 4,397
Tangible assets 10 3,007 6,036 3,932 9,124
-------- -------- -------- --------
4,537 9,106 6,007 13,939
-------- -------- -------- --------
14,445 28,991 12,143 28,178
-------- -------- -------- --------
-------- -------- -------- --------

Liabilities and
shareholders' equity:

Creditors: amounts
falling due within
one year 12 2,183 4,381 1,884 4,372
-------- -------- -------- --------
Creditors: amounts
falling due after
more than one year 13 10,211 20,494 4,643 10,774
-------- -------- -------- --------
Capital and reserves
Share capital and
other equity
instruments 2,14 46,897 94,122 43,959 102,007
Exchange adjustments 2 (128) (257) (78) (181)
Profit and loss account
deficit 2 (44,718) (89,749) (38,265) (88,794)
-------- -------- -------- --------
Shareholders' funds 2 2,051 4,116 5,616 13,032
-------- -------- -------- --------
14,445 28,991 12,143 28,178
-------- -------- -------- --------
-------- -------- -------- --------


TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS - PART 1 OF 2
YEAR ENDED 31 DECEMBER 2005

Year ended 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000


Cash outflow from
operating activities 3 (3,517) (7,748) (7,112) (16,914)

Interest received 329 725 219 521
Interest paid (435) (958) (171) (407)
-------- ------ -------- ---------
Net cash outflow from
operating Activities (3,623) (7,981) (7,064) (16,800)

Capital investment
activities
Purchase of long
term assets (55) (121) (85) (202)
Proceeds from the
sale of investment 49 108 1,273 3,027
-------- ------ -------- ---------
Cash inflow/(outflow)
from capital investment
activities (6) (13) 1,188 2,825
-------- ------ -------- ---------
Net cash outflow before
financing activities (3,629) (7,994) (5,876) (13,975)

Proceeds from debt issue 7,707 16,978 - -
Movement in restricted cash 380 837 (1,876) (4.462)
-------- ------ -------- ---------
Cash inflow/(outflow) from
financing activities 8,087 17,815 (1,876) (4,462)
-------- ------ -------- ---------
Increase / (decrease)
in cash in the year 4,458 9,821 (7,752) (18,437)
-------- ------ -------- ---------
-------- ------ -------- ---------

Cash and cash equivalents:
Beginning of year 2,067 9,819
-------- --------
End of year 6,525 2,067
-------- --------
-------- --------


TURBO GENSET INC.
CONSOLIDATED CASH FLOW STATEMENTS - PART 2 OF 2
THREE MONTHS ENDED 31 DECEMBER 2005- UNAUDITED

Three Months ended 31 December
2005 2004
Pounds Pounds
Sterling Sterling
Notes '000 C$'000 '000 C$'000

Cash inflow /
(outflow) from
operating activities 3 271 553 (1,669) (3,969)

Interest received 90 184 5 12
Interest paid (55) (112) - -
-------- ------ -------- ---------
Net cash outflow from
operating activities 306 625 (1,664) (3,957)

Capital investment
activities
Purchase of long-term
assets (16) (33) (23) (55)
Proceeds from the
sale of investment 49 100 1,273 3.027
-------- ------ -------- ---------
Cash inflow/(outflow)
from capital investment
activities 33 67 1,250 2,972
-------- ------ -------- ---------
Net cash outflow before
financing activities 339 692 (414) (985)

Taxation 18 37 - -

Financing activities
Movement in restricted
cash - - (1,876) (4,462)
-------- ------ -------- ---------

Cash inflow/(outflow)
from financing activities - - (1,876) (4,462)
-------- ------ -------- ---------

Increase / (decrease)
in cash in the period 357 729 (2,290) (5,447)
-------- ------ -------- ---------
-------- ------ -------- ---------
Cash and cash
equivalents
Cash, beginning
of the period 6,168 4,357
-------- --------
Cash, end of year 6,525 2,067
-------- --------
-------- --------


TURBO GENSET INC.

YEAR ENDED 31 DECEMBER 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 2005. The significant accounting policies are consistent with prior years.



2 Movements in shareholders' funds

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

Balance at 1
January 2004 42,922 1,027 (83) (28,809) 15,057
Loss for the period (9,456) (9,456)
Exchange (loss) /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 (6,453) (6,453)
Exchange (loss)/gain (50) (50)
Stock compensation 133 133
Equity component of
financial instrument 1,331 1,331
Conversion to shares 1,786 (298) 1,488
Equity adjustment 35 (49) (14)
--------- -------- ----------- -------- ---------
Balance at 31
December 2005 44,753 2,144 (128) (44,718) 2,051
--------- -------- ----------- -------- ---------
--------- -------- ----------- -------- ---------

3 Reconciliation of operating loss to cash outflow from operating
activities

Year ended Three months ended
31 December 31 December
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Operating loss for the period (5,868) (9,554) (1,092) (2,961)

Movements in working capital balances
Decrease / (increase) in debtors 365 423 823 (89)
Decrease / (increase) in stocks
and work in progress (59) 321 (14) 348
(Decrease) / increase in creditors 346 (235) 465 63

Restructuring payments (203) (319) 46 (92)
Amortisation 1,511 1,665 (47) 482
Provision for impairment 90 577 - 577
Stock compensation expense 133 10 90 3
Other income 168 - - -
--------- -------- ---------- ---------
Cash outflow from operating
activities (3,517) (7,112) 271 (1,669)
--------- -------- ---------- ---------
--------- -------- ---------- ---------


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 motor and generator systems segment, which is involved in the development and commercialisation of 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 motor and generator systems segments operate in United Kingdom. The corporate segment operates in Canada and the United Kingdom.



All amounts in Pounds Sterling '000's

Motor and
Power Generator
electronics systems Corporate Total
2005 2004 2005 2004 2005 2004 2005 2004

Year ended
31 December
Revenue 2,482 1,423 154 41 - - 2,636 1,464
Gross profit/
(loss) on sales 691 194 (136) (545) - - 555 (351)
Development
income 439 267 42 35 - - 481 302
Amortisation 181 189 1,370 1,476 - - 1,551 1,665
Restructuring
charges - - - 428 - - - 428
Provision for
impairment of
capitalised
development
costs - - - 577 - - - 577
Loss for the
period (875)(1,991)(4,379)(6,223)(1,199)(1,242)(6,453)(9,456)

Capital
expenditure 16 38 39 160 - - 55 198

As at 31 December
Total assets 4,468 3,948 5,604 7,198 4,373 997 14,445 12,143
Total liabilities 787 643 11,494 5,839 113 45 12,394 6,527

Three months ended
31 December
Revenue 815 507 59 - - - 874 507
Gross profit/
(loss) on sales 425 44 (85) (128) - - 340 (84)
Development income 95 61 - - - - 95 61
Amortisation 101 170 483 508 - - 584 678
Loss for the
period (397) (486) (581)(1,358) (271) (436)(1,249)(2,280)

5 Research and product development

Research and product development income and expenditures incurred during
the period comprised:

Three months ended Year ended
31 December 31 December
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Sales of prototypes and
development contributions (95) (61) (481) (302)
--------- -------- ---------- ---------
--------- -------- ---------- ---------
Research and product
development expenditure 887 1,176 3,232 4,498
Tax credits (736) - (736) (250)
--------- -------- ---------- ---------
--------- -------- ---------- ---------
Total expenditure 151 1,176 2,496 4,248


Deferred development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 31 December 2005 amounted to Pounds Sterling 198,000 (2004 - Pounds Sterling 691,000). Total accrued tax credits receivable at 31 December 2004, including those credited against deferred development expenditure, amounted to Pounds Sterling 190,000 (2004 - Pounds Sterling 457,000). Capitalised development costs comprise materials, labour and allocated overheads.



6 Interest expense and finance charges

Three months ended Year ended
31 December 31 December
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Interest payable 140 44 520 175
Debt accretion 101 46 368 183
Amortisation of deferred
finance charges (3) 16 137 66
--------- -------- ---------- ---------
238 106 1,025 424
--------- -------- ---------- ---------
--------- -------- ---------- ---------


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 Nil (2004: Pounds Sterling 428,000) has been charged to the profit and loss account. During early 2005 final cash payments totaling Pounds Sterling 203,000 were made.

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 2005 were as follows:

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

Provision at 1 January 2004 - 194 194
Charge/(credit) to profit and loss 428 - 428
Cash payments (225) (94) (319)
---------- -------- ---------
Provision at 31 December 2004 203 100 303
Charge to profit and loss - (45) (45)
Cash payments (203) - (203)
---------- -------- ---------
Provision at 31 December 2005 - 55 55
---------- -------- ---------
---------- -------- ---------

The amounts released to the profit and loss accounts comprised;

Three months ended Year ended
31 December 31 December
2005 2004 2005 2004
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Provision for redundancy costs - (17) - 428
Provision for property disposal
costs - - (45) -
Property charges - - 45 -
--------- -------- ---------- ---------
- (17) - 428
--------- -------- ---------- ---------
--------- -------- ---------- ---------


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.

The weighted average number of shares outstanding in 2005 was 184,946,854 (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 2005 was Pounds Sterling 6,453,000 (2004 - Pounds Sterling 9,456,000).

9 Restricted cash

During 2004 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. In September 2005 the Company committed cash bonds of Pounds Sterling 250,000 in support of the contract placed by Eaton Aerospace. The contract requires the bonds to remain in place until 31 December 2006 or completion of qualification testing, whichever is later. At 31 December 2005 cash subject to restrictions totalled Pounds Sterling 1,496,000 (2004 - Pounds Sterling 1,876,000) 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 2005
Investments (a) 104 45 - 59
Intangible assets 5,527 1,706 2,350 1,471
Tangible asset 8,133 - 5,126 3,007
-------- ---------- ------------ ---------
Total long term assets 13,764 1,751 7,476 4,537
-------- ---------- ------------ ---------
-------- ---------- ------------ ---------
At 31 December 2004
Investments (a) 431 251 - 180
Intangible assets 5,250 1,706 1,649 1,895
Tangible assets 8,111 - 4,179 3,932
-------- ---------- ------------ ---------
Total long term assets 13,792 1,957 5,828 6,007
-------- ---------- ------------ ---------
-------- ---------- ------------ ---------


(a) In October 2003, the Group invested C$1,000,000 (Pounds Sterling 444,400) 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 C$500,000 of the loan receivable from Altek into 892,857 shares of Altek. The term of the remaining C$500,000 Convertibale 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. In December 2005 the Company sold it's shareholding in Altek for a cash consideration of Pounds Sterling 49,000 giving rise to a loss on disposal of Pounds Sterling 9,000.



11 Debtors

31 December 31 December
2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Trade debtors 631 610
Prepayments 507 534
Other debtors 18 26
Tax recoverable 190 541
---------- -----------
1,346 1,711
---------- -----------
---------- -----------

12 Creditors: Amounts falling due within one year

31 December 31 December
2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Trade creditors 547 520
Other creditors 234 75
Tax and social security creditor 126 109
Accruals and deferred income 1,221 877
Provision for restructuring 55 303
---------- -----------
2,183 1,884
---------- -----------
---------- -----------

13 Creditors due after more than one year

31 December 31 December
2005 2004
Pounds Pounds
Sterling Sterling
'000 '000
Convertible bond

Balance at 1 January 4,364 4,181
Issued during the period 8,000 -
Conversion of convertible
notes during the period (note 2) (1,331) -
Less equity component (1,488) -
---------- -----------
9,545 4,181
---------- -----------
Add: accretion of debt component
during the period (note 6) 368 183
---------- -----------
9,913 4,364
---------- -----------
---------- -----------

Provision for warranty claims 298 279
---------- -----------
10,211 4,643
---------- -----------
---------- -----------

14 Share capital - issued common shares

Number of shares

At 1 January 2004 and 31 December 2004 175,626,874
Conversion of convertible notes 14,883,385
-----------------
-----------------
At 31 December 2005 190,510,259

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


15 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.



16 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 31 December 2005,
and the movement during the twelve months then ended, are as follows:

Options Warrants
Number Number

Outstanding at 1 January 2005 26,263,641 3,500,000
Cancelled (4,493,620) -
Lapsed (324,887) -
Issued 13,550,000 7,000,000
---------- -----------
Outstanding at 31 December 2005 34,995,134 10,500,000
---------- -----------
---------- -----------

17 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 UK
'000 '000 pence


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 809 (1,584) (0.9)
December 2005 874 (1,249) (0.6)


18 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 2005 2.203
Year and three months, ended 31 December 2004 2.378
As at 31 December 2005 2.007
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
    Website: www.turbogenset.com
    or
    Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400