Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

November 15, 2006 02:00 ET

Turbo Power Systems Inc. Announces Its Results for the Nine Months Ended 30 September 2006

CALGARY, ALBERTA--(CCNMatthews - Nov. 15, 2006) - Turbo Power Systems Inc. (TSX:TPS) (LSE:TPS):

Highlights

- Revenue and development income up 96% to Pounds Sterling 4.2m (2005: Pounds Sterling 2.1m)

- Operating loss before stock compensation charges (Pounds Sterling 0.37m)(2005: Pounds Sterling 0.04m) reduced by 13% to Pounds Sterling 4.1m (2005: Pounds Sterling 4.7m)

- Operating cash outflow reduced by 3% to Pounds Sterling 3.7m (2005: Pounds Sterling 3.8m)

- US$3.5m follow on contract from PRC lasers announced in September

- Pounds Sterling 6m equity placing, redemption of Pounds Sterling 8.8m of loan notes and proposed move to AIM announced in October

- New rail contracts with Bombardier and NREC announced today

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

"We have seen continued order book and revenue growth in the third quarter. The recently announced placing and loan note conversions will transform our balance sheet while today's contract announcements further underpin our growth prospects for 2007."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc. 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 are all based on its core technologies of power electronics and high speed electrical machines.

The Group operates across the following market sectors:

- Direct Drive High-Speed Electrical Machines and Electronics

- Specialist Drives and Motor applications (Aerospace, Oil and Gas)

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

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.

Notice of no auditor review of interim financial statements

Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements' they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying un-audited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

OPERATIONAL REVIEW

The third quarter saw the further development of the business as we recorded continued revenue growth and announced a placing and loan note conversion in October.

The announcement of a Pounds Sterling 6.0m equity placement, the conversion of Pounds Sterling 8.8m of the Pounds Sterling 11.2m outstanding 2003 and 2005 convertible loan notes and the proposal to transfer the Company listing to the AIM market resolves some key issues for the Company.

The raising of funds to support the working capital needed for our rapidly expanding order book, and the transformation of the Company's balance sheet, enables us to look forward with increased confidence towards continuing the growth we have experienced over the last 18 months. The proposed transfer to AIM will provide us with a regulatory framework more appropriate to a company of our size and should provide the potential to generate additional cost savings.

Our recent commitment to lease a new, larger power electronics factory in Gateshead is a reflection of the rapid increase in demand for our technology. The move is being supported by a Pounds Sterling 550k capital grant from One North East, and production is planned to commence at the end of the first quarter 2007.

In November, the Company saw a further consolidation of its rail business with the agreement from Bombardier Germany for a new range of standard battery chargers to be deployed on European and International rolling stock, and an additional order for NREC traction electronics.

Production revenue for the nine months to 30 September increased 106% to Pounds Sterling 3.6m as production increased on our rail and industrial power electronics programmes.

While the power electronics division at Gateshead continues to be the main contributor to the revenues generated for the period the development contracts currently underway at Heathrow are progressing to plan and are expected to make a positive contribution to group revenues from the second half of next year.

The power electronics division experienced a shortage in component supply in August which, although quickly resolved, led to a significant proportion of the quarter's revenue being billed in September. As a result debtor collections in the quarter were reduced and this is reflected in an operating cash outflow of Pounds Sterling 1.5m for the third quarter. These debtors will now be collected in the fourth quarter.

Direct Drive High-Speed Motors and Drives

Industrial Motor and Drive Design and Supply

Test rigs for the initial prototype 500 kW motor and drive systems are currently being commissioned in conjunction with the end customer, and initial testing is expected to commence soon.

The production systems are still planned to be launched during the latter part of 2007 following extensive field testing during the summer.

SKF

Initial deliveries of motors and drives for SKF have now been made. Production will now be held until the completion of an extended field testing programme by the end customer. Volume production is expected to re-commence during the early part of 2007.

Specialist Drives and Motor applications (Aerospace, Oil and Gas)

Hamilton Sundstrand

The TPS engineering team for the Boeing 787 Ram Fan Motor Controller is working closely with Hamilton Sundstrand and Boeing and has recently successfully completed its Critical Design Review milestone.

The qualification hardware is scheduled for completion during early 2007 and, as with the Eaton contract, flight certification hardware deliveries will continue through 2007 with production runs commencing in early 2008.

Eaton Aerospace

The Boeing 787 Override Jettison Pump motor controller for Eaton Aerospace continues to proceed well through the pre-qualification and qualification phases. Initial hardware was delivered to the Boeing Aircraft Electrical Model laboratory where the equipment will undergo system integration and coordination with other equipment on the aircraft.

ALC - Oil and Gas

Electrical tests have been carried out on the prototype motor assembly at Heathrow, and the demonstrated performance closely matched the challenging target specification for the equipment. Following further trials in the TPS test cells the system including the submersible pump will be transferred to the test well in East Anglia for initial down hole operations. Final field trials are scheduled in North America in 2007.

Although this remains a very technically challenging "leading edge" design, commercial interest from the sponsoring oil company remains very high, with current oil prices favouring an easily deployable technology which has the potential to make a significant improvement in the barrels per day output of existing wells.

Lotus Engineering Hybrid Vehicle Drive

Testing of the units in the demonstrator cars continues at Lotus and it is expected that this first phase of evaluation will conclude shortly.

Once that stage is completed, then the vehicles will be delivered to the sponsoring car manufacturer for extensive testing prior to any decision regarding production release.

High Voltage Power Supplies and Auxiliary Power Systems

New Rail Contracts

Bombardier Transport - Germany

The Company has been selected by Bombardier Berlin to supply a range of standard battery chargers for passenger trains in European and International markets. The agreement is for an initial period of three years and Bombardier's intention is to maximize economies of scale by proposing these standard products in as many of their proposals as possible.

TPS will produce four different products, and annual quantities are expected to generate up to EUR 1m annually.

National Rail Equipment Company

NREC have recently placed a US$700,000 order for further traction control hardware for delivery in early 2007.

Production of the innovative shunting locomotives has now begun at NREC's facilities in Illinois, and demand for their low emissions engine, which also reduce fuel consumption by in excess of 20%, is increasing rapidly in the US and in International markets including Australia, Eastern Europe and Turkey.

Existing long-term Rail Contracts

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

Production continues to proceed well with deliveries scheduled until 2008.

Bombardier - Beijing

Design of the auxiliary power units for the Beijing Light Rapid Transit System is continuing to plan with initial units expected to be available by February 2007.

Trans Elektro

Production of the air-conditioning system power supplies are on schedule with deliveries continuing into the early part of 2007.

NREC

Production deliveries against the initial customer contract commenced early in Q3 2006 and have increased during the quarter. A further US$700,000 order has been announced today. Production of these systems, each comprising nine separate large electronic units, is expected to continue at least until late 2007.

London Underground

Production deliveries of the air-conditioning power supplies used in the District Line refurbishment project increased during the quarter to meet customer demand.

Bombardier - First Great Western

Production of 'At Seat' Power supplies and Catering Car power converters for the refurbishment programme for First Great Western, announced in Q2 2006, commenced during Q3 2006 with deliveries scheduled to continue into Q4 2007.

Other Products/Activities

PRC

During Q3 2006 the Company received a follow-on contract worth US$3.5 million for additional laser power supplies. The existing contract provides for production until the end of 2006, with deliveries under the new contract commencing in the first quarter of 2007 and continuing until early 2008.

After Market

Spares and After Market revenues have continued to grow during Q3 2006 and are expected to continue to do so as the volume of products in service increases.

Direct Drive High-Speed Generators and Inverters for the Distributed Generation and Renewable Energy markets

Discussions are continuing with potential turbine partners for projects including:

- 100 kW Generator and Inverter

- 600 kW Generator and Inverter.

- 5000 kW Generator and Inverter

Compact Power, with whom TPS have a product development agreement for the supply of a generator and inverter for use with the 600kW gas turbine designed into their Biomass Generation project, are well advanced in planning their pilot installation which is scheduled to commence in March 2007.

Renewable and Energy Saving Projects

TPS is continuing it's strategy of participating in early "technology demonstrators" across a range of energy efficient and renewable projects, where 3rd party funding is available and existing TPS hardware can be adapted for use at the feasibility stage. This is particular directed towards expanding the potential for our grid connected inverter technology.

Consequently at present we have preliminary participation in the following areas:

- A demonstration Low-Head Hydro energy recovery scheme in the UK Midlands. TPS is providing generator and inverter hardware.

- An EU funded programme for a externally fired micro-turbine (less than 10kW) system for domestic CHP. TPS will provide a high-speed generator and -inverter.

- An EU funded programme examining inter-connection issues with the grid, in anticipation of an increasing proportion of the overall electrical demand being met from embedded renewable generation sources. TPS will be providing an inverter for this programme.

- A DTI funded programme investigating the potential for a grid connected battery storage scheme to offset peak and off peak demand, utilizing an innovative 3rd party patented battery design. TPS will be providing an inverter.

RESULTS OF OPERATIONS

REVIEW OF NINE MONTHS TO 30 SEPTEMBER 2006

Revenue

Revenue in the nine months ended 30 September 2006 was Pounds Sterling 3.63 million compared with Pounds Sterling 1.76 million in 2005 and comprised;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 3,459 1,667
Electrical machines 172 95
---------- ----------
3,631 1,762
---------- ----------
---------- ----------


The Power Electronics division has seen strong turnover growth, both as a result of increased volumes on established programmes and the start of production runs on new contracts. Output volumes have grown significantly on the existing production contracts for Toronto Transit Commission H6, PRC laser power supplies, London Underground and Lotus. In addition the contract with Trans Elektro for air conditioning power supplies, which entered production in Q1, has made a significant contribution to revenue for the year to date. Production on the NREC programme began in the third quarter and is scheduled to continue production throughout 2006 and 2007.

Spares and service revenues were Pounds Sterling 0.84m for the nine months (2005:Pounds Sterling 0.37m).

In the Electrical Machines division revenue has increased over the prior period as the SKF contract has moved into production and revenue has been received from ALC. Increased volumes were shipped on the SKF programme in the third quarter but volumes will reduce in the fourth quarter while the end customer conducts field surveys.

Development income

Development income in the nine months was Pounds Sterling 0.58 million compared with Pounds Sterling 0.39 million in 2005 and included receipts from Eaton Aerospace and Hamilton Sundstrand on the Boeing 787 Dreamliner programme.



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Development income 577 386
---------- ----------
---------- ----------


Production costs

The cost of product revenues in the nine month period amounted to Pounds Sterling 2.80 million (2005 : Pounds Sterling 1.55 million), resulting in a gross profit on sales of Pounds Sterling 0.83 million (2005 : gross profit of Pounds Sterling 0.26 million) as follows;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 1,272 591
Electrical machines (443) (329)
---------- ----------
829 262
---------- ----------
---------- ----------


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

Overall, gross margin has improved to 23% (2005: 16%) as production programmes have become more established.

Research and product development

Research and product development expenditure in the nine months was Pounds Sterling 2.61 million compared with Pounds Sterling 2.20 million in 2005, and comprised;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Research and product development expenditure 2,660 2,256
Accrued R&D tax credits (50) (60)
---------- ----------
Total expenditure 2,610 2,196
---------- ----------
---------- ----------


Product development costs have increased in 2006 as work has started on both the Eaton contract and the Hamilton Sundstrand contract for the Boeing 787 Dreamliner.

Included in research and product development costs for the nine months are stock compensation charges on options awarded of Pounds Sterling 188,000 (2005: nil).

General and administrative

General and administrative costs of Pounds Sterling 2.38 million (2005: Pounds Sterling 2.18 million) consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings. Included in general and administrative costs for the nine months are stock compensation charges on options awarded of Pounds Sterling 151,000 (2005: Pounds Sterling 43,000), and increased costs for additional sales and marketing personnel and activities.

Amortisation

Amortisation was Pounds Sterling 0.89 million compared with Pounds Sterling 1.00 million in 2005.

Interest income

Interest income for the nine months was Pounds Sterling 0.21 million compared with Pounds Sterling 0.24 million in 2005.

Interest expense and finance charges

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



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 420 398
Amortisation of deferred finance charges 121 140
Debt accretion 291 267
---------- ----------
832 805
---------- ----------
---------- ----------


The cost in 2006 has increased due to the inclusion of a full nine month charge on the convertible bonds issued in March 2005.

Convertible bonds are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 bond issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 bond issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the nine months this charge amounted to Pounds Sterling 0.29 million (2005: Pounds Sterling 0.27 million).

Financial instruments

During the third quarter the company purchased U.S. dollar denominated currency contracts covering receipts from programmes scheduled for 2006 and 2007. The premium cost for these options was Pounds Sterling 81,000 and has been charged to profit and loss in the quarter. This charge is offset by the value of the option as at 30 September 2006.

CASH FLOWS FOR THE NINE MONTHS

Cash outflow from operating activities

Cash outflow from operating activities for the nine months was Pounds Sterling 3.70 million, compared with Pounds Sterling 3.79 million in 2005. In the first nine months of 2005 the Company recorded an operating loss of Pounds Sterling 4.78 million and had an increase in working capital outflow of Pounds Sterling 0.40 million. The 2006 operating loss was Pounds Sterling 4.48 million and working capital outflow increased by Pounds Sterling 0.46 million during the period.

Although revenue growth was strong in the third quarter, compared to the prior year, much of this amount was shipped and invoiced in September. Following component shortages in August debtor collections were reduced in the third quarter. The debtor collections associated with the September invoicing will be made in the fourth quarter.

Stocks, work in progress and creditors increased by Pounds Sterling 1.37 million during the first nine months reflecting the increase in manufacturing volume.

Restructuring payments of Pounds Sterling 0.25 million paid during 2005 relate to redundancy and property disposal payments charged to the profit and loss account in prior periods.

Interest paid of Pounds Sterling 0.50 million during the nine months represents payments made on the convertible bonds issued in 2003 and 2005 (2005: Pounds Sterling 0.38 million payment).

Capital investment activities

Cash outflows from capital investments in the nine months were Pounds Sterling 0.12 million compared with Pounds Sterling 0.04 million in 2005.

Cash flow from financing activities

No cash movements resulting from financing activities occurred in the nine months.

Cash inflow from financing in 2005 of Pounds Sterling 8.09 million during the nine months relates to the release of restricted cash funds of Pounds Sterling 0.38 million and Pounds Sterling 7.71 million net funds received from the issue of convertible notes in March 2005 when 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 Power Systems 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 Power Systems Inc. at an exercise price of Pounds Sterling 0.15 per share.

Overall cash outflow for the first nine months

Overall the cash outflow for the nine month period was Pounds Sterling 4.07 million. This compares with a cash inflow of Pounds Sterling 4.10 million in 2005, including proceeds from the debt issue of Pounds Sterling 7.72 million, and movements in restricted cash of Pounds Sterling 0.38 million.

REVIEW OF THREE MONTHS ENDED 30 SEPTEMBER 2006

Revenue

Revenue in the three months ended 30 September 2006 was Pounds Sterling 1.47 million compared with Pounds Sterling 0.81 million in 2005 and comprised;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 1,380 750
Electrical machines 90 59
---------- ----------
1,470 809
---------- ----------
---------- ----------


Revenues from the Power electronics division increased as a result of production revenues from contracts with Toronto Transit Commission, Bombardier, NREC and Trans Elektro, which had not commenced in 2005, and a significant increase in spares business in line with the increasing sales volumes.

Revenue in the Electrical machines division relates primarily to the SKF contract.

Development income

Development income in the three months was higher in 2006 at Pounds Sterling 0.29 million compared with Pounds Sterling 0.07 million in 2005 and included receipts from Eaton Aerospace and Hamilton Sundstrand on the Boeing Dreamliner programme.



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Development income 285 71
---------- ----------
---------- ----------


Production costs

The cost of product revenues in the three months amounted to Pounds Sterling 1.13 million (2005 : Pounds Sterling 0.66 million), resulting in a gross profit on sales of Pounds Sterling 0.34 million (2005 : gross profit of Pounds Sterling 0.15 million) as follows;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Power electronics 538 284
Electrical machines (198) (137)
---------- ----------
340 145
---------- ----------
---------- ----------


Certain facilities costs attributable to the manufacturing operation mean than the electrical machines division recorded an overall loss on product sales.

Overall, gross margin has improved to 23% (2005: 18%) due to the increased contribution from the power electronics division.

Research and product development

Research and product development expenditure in the three months was Pounds Sterling 0.92 million compared with Pounds Sterling 0.76 million in 2005, and comprised;



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Research and product development expenditure 927 781
Accrued R&D tax credits (10) (25)
---------- ----------
Total expenditure 917 756
---------- ----------
---------- ----------


Included in research and product development costs for the three months are stock compensation charges on options awarded of Pounds Sterling 67,000 (2005: nil).

General and administrative

General and administrative costs in the three months of Pounds Sterling 0.81 million (2005: Pounds Sterling 0.69 million) consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings. Included in general and administrative costs for the quarter are stock compensation charges on options awarded of Pounds Sterling 55,000 (2005: Pounds Sterling 2,000) and costs for additional sales, marketing and management personnel and activities.

Amortisation

Amortisation was Pounds Sterling 0.23 million compared with Pounds Sterling 0.31 million in 2005.

Interest income

Interest income in the three months was Pounds Sterling 0.06 million compared with Pounds Sterling 0.11 million in 2005.

Interest expense and finance charges

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



2006 2005
Pounds Pounds
Sterling Sterling
'000 '000

Interest payable 132 154
Amortisation of deferred finance charges 40 53
Debt accretion 97 101
---------- ----------
269 308
---------- ----------
---------- ----------


Convertible bonds are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component. The equity element of the March 2005 bond issue was estimated at Pounds Sterling 1.11 million. The equity element of the 2003 bond issue was estimated at Pounds Sterling 0.91 million. The carrying value of the debt element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the period this charge amounted to Pounds Sterling 0.10 million (2005: Pounds Sterling 0.10 million).

Financial instruments

During the third quarter the company purchased U.S. dollar denominated currency contracts covering receipts from programmes scheduled for 2006 and 2007. The premium cost for these options was Pounds Sterling 81,000 and has been charged to profit and loss in the quarter. This charge is offset by the value of the option as at 30 September 2006.

CASH FLOWS FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2006

Cash outflow from operating activities

Cash outflow from operating activities for the three months was Pounds Sterling 1.50 million, compared with Pounds Sterling 0.96 million in 2005. In the third quarter of 2005 the Company recorded an operating loss of Pounds Sterling 1.54 million and had a decrease in working capital outflow of Pounds Sterling 0.09 million. The third quarter 2006 operating loss was Pounds Sterling 1.34 million and working capital outflow increased by Pounds Sterling 0.52 million during the period.

A significant proportion of the invoiced revenue for the three months was billed in September and so does not impact on operational cash flow in the third quarter but will be collected in the fourth quarter.

Interest paid of Pounds Sterling 0.19 million (2005: Pounds Sterling 0.29 million) during the three months represents payments made on the convertible bonds issued in 2003 and 2005.

Capital investment activities

Cash outflows from capital investments in the three months were Pounds Sterling 0.07 million compared with Pounds Sterling 0.01 million in 2005. This spend was primarily on plant and software associated with the Hamilton Sundstrand programme.

Overall cash outflow for the period

Overall the cash outflow during the three months was Pounds Sterling 1.66 million. This compares with an overall cash outflow of Pounds Sterling 0.78 million for the third quarter of 2005, and reflects the increased working capital requirement as production volumes increase.

BALANCE SHEET AS AT 30 SEPTEMBER 2006

The Company ended the period with a cash balance of Pounds Sterling 2.46 million compared with Pounds Sterling 6.53 million at 31 December 2005. 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 as part of contracts with the Toronto Transit Commission and Eaton ( 2005: Pounds Sterling 1.50 million ).

Long-term assets have decreased from Pounds Sterling 4.54 million at 31 December 2005 to Pounds Sterling 3.64 million at 30 September 2006, after depreciation charges of Pounds Sterling 0.89 million and deferred financing charges of Pounds Sterling 0.12 million.

Deferred finance charges relate to the fair value of warrants issued in 2003, and expenses in connection with the March 2005 convertible bond issue. These costs are amortised over the term of the convertible bonds and the warrants. The related amortisation charges are included in interest expense and finance charges.

Long term liabilities have increased to Pounds Sterling 10.45 million at 30 September 2006 compared to Pounds Sterling 10.21 million at 31 December 2005, reflecting the accretion of debt attributable to the convertible bond issue partially offset by a reduction in debt following the conversion of Pounds Sterling 65,000 of convertible bonds into 541,665 shares during the first half year.

Net working capital at 30 September 2006, excluding cash balances, was Pounds Sterling 0.27 million, compared with (Pounds Sterling 0.30) million as at 31 December 2005.

As at 1 November 2006, the Company had 191,494,592 common shares issued and outstanding. As at that date there were 27,771,083 outstanding share options and 10,500,000 outstanding warrants.

On 20 October the company announced its intention to transfer to AIM, in addition to an institutional placing of Common shares and 'A' shares raising Pounds Sterling 6.0 million before expenses. In addition it announced the redemption of Pounds Sterling 8.8 million of convertible loan notes. Shareholder approval will be sought for this transaction at a special meeting of the company on 27 November 2006.



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
UNAUDITED

Notes Nine months ended 30 September
2006 2005
Pounds Sterling Pounds Sterling
'000 '000

Revenue 4,5 3,631 1,762
Development income 4 577 386
-------- --------
4,208 2,148
Expenses
Production costs 2,802 1,547
Research and product
development 6 2,610 2,196
General and administrative 2,384 2,175
Amortisation 892 1,006
-------- --------
8,688 6,924
-------- --------
Operating loss (4,480) (4,776)

Other income and expenses
Other income - 168
Interest income 206 239
Interest expense and finance
charges 7 (832) (805)
Financial currency instruments 8 (58) -
Loss on disposal of assets (8) -
Foreign exchange losses (22) (30)
-------- --------
(714) (428)
-------- --------
Loss for the period (5,194) (5,204)

Deficit, beginning of period (44,718) (38,265)
-------- --------
Deficit, end of period (49,912) (43,469)
-------- --------
-------- --------
Loss per share (2.7) p (2.8) p


TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
UNAUDITED

Notes Three months ended 30 September
2006 2005
Pounds Sterling Pounds Sterling
'000 '000

Revenue 4 1,470 809
Development income 4 285 71
-------- --------
1,755 880
Expenses
Production costs 1,130 664
Research and product
development 6 917 756
General and administrative 814 687
Amortisation 230 312
-------- --------
3,091 2,419
-------- --------
Operating loss (1,336) (1,539)

Other income and expenses
Other income - 168
Interest income 59 109
Interest expense and finance
charges 7 (269) (308)
Financial currency instruments 8 (58) -
Loss on disposal of assets (8) -
Foreign exchange losses (11) (14)
-------- --------
(287) (45)
-------- --------
Loss for the period (1,623) (1,584)

Loss per share (0.8) p (0.9) p


TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
Notes As at 30 As at 31
September December
2006 2005
Pounds Sterling Pounds Sterling
'000 '000

Assets

Current assets
Cash and cash equivalents 2,459 6,525
Debtors 12 2,224 1,346
Stock and work in progress 1,065 541
-------- --------
5,748 8,412
-------- --------
Restricted cash 10 1,496 1,496
-------- --------
Long-term assets
Investments 11 57 59
Intangible assets 11 1,136 1,471
Tangible assets 11 2,443 3,007
-------- --------
3,636 4,537
-------- --------
10,880 14,445
-------- --------
-------- --------

Liabilities and shareholders'
equity

Creditors: amounts falling
due within one year 13 3,024 2,183
-------- --------

Creditors: amounts falling
due after more than one year 14 10,452 10,211
-------- --------
Capital and reserves
Share capital and other
equity instruments 2,15 47,385 46,897
Currency exchange
adjustments 2 (69) (128)
Loss deficit 2 (49,912) (44,718)
-------- --------
Shareholders' funds (2,596) 2,051
-------- --------
10,880 14,445
-------- --------
-------- --------



TURBO POWER SYSTEMS INC.
CONSOLIDATED CASH FLOW STATEMENTS
UNAUDITED

Notes Nine months ended 30 September
2006 2005
Pounds Sterling Pounds Sterling
'000 '000
Cash outflow from operating
activities 3 (3,700) (3,788)

Interest received 206 239
Interest paid (495) (380)
--------- ---------
Net cash outflow from
operating activities (3,989) (3,929)

Non operating activities
Purchase of long-term assets (117) (39)
Financial instruments 8 (81) -
--------- ---------
Cash outflow from non
operating activities (198) (39)
--------- ---------
Net cash outflow before
financing activities (4,187) (3,968)

Tax 121 (18)

Financing activities
Proceeds from debt issue - 7,707
Movements in restricted cash - 380
--------- ---------
Cash inflow from financing
activities - 8,087
--------- ---------
Increase/(decrease) in cash
in the period (4,066) 4,101
--------- ---------
--------- ---------
Cash and cash equivalents:
Beginning of period 6,525 2,067
--------- ---------
End of period 2,459 6,168
--------- ---------
--------- ---------


TURBO POWER SYSTEMS INC.
CONSOLIDATED CASH FLOW STATEMENTS
UNAUDITED

Notes Three months ended 30 September
2006 2005
Pounds Sterling Pounds Sterling
'000 '000
Cash outflow from operating
activities 3 (1,497) (963)

Interest received 59 117
Interest paid (192) (293)
------- -------
Net cash outflow from
operating activities (1,630) (1,139)

Non operating activities
Purchase of long-term assets (69) (14)
Financial instruments 8 (81) -
------- -------
Cash outflow from non
operating activities (150) (14)
------- -------
Net cash outflow before
financing activities (1,780) (1,153)

Tax 121 (1)

Financing activities
Proceeds from debt issue - -
Movements in restricted cash - 370
------- -------
Cash inflow from financing
activities - 370
------- -------
Increase/(decrease) in cash
in the period (1,659) (784)
------- -------
------- -------
Cash and cash equivalents:
Beginning of period 4,118 6,952
------- -------
End of period 2,459 6,168
------- -------
------- -------


TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 2006
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED


1 Basis of preparation

The unaudited 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. These unaudited 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. Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2006.

Derivative financial instruments are used by the Company to manage a portion of its exposure to foreign exchange rate fluctuations. The Company does not utilise derivative financial instruments for trading or speculative purposes. The Company enters into foreign currency options denominated in U.S. Dollars, to manage foreign exchange rate fluctuation exposure on receipts from customers billed in U.S. Dollars. These derivative contracts, not accounted for as hedges, are marked to market, and any changes in the market value are recorded in income or expense when the changes occur. The fair value of these instruments is recorded as accounts receivable or payable.

Most of the Company's operations are conducted by its United Kingdom subsidiaries in Sterling. All numbers reported in these financial statements are stated in Sterling unless otherwise noted.



2 Movements in shareholder's funds

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


Balance at 1 January 2005 42,932 1,027 (78) (38,265) 5,616
Loss for the period (6,453) (6,453)
Exchange (loss) (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
Loss for the period (5,194) (5,194)
Exchange gain 59 59
Stock compensation 373 373
Conversion to shares 65 (11) 54
Issue of shares 61 61
-------- -------- ----------- ------- --------

Balance at 30 September
2006 44,879 2,506 (69)(49,912) (2,596)
-------- -------- ----------- ------- --------
-------- -------- ----------- ------- --------


3 Reconciliation of operating loss to cash outflow from operating
activities

Nine months ended Three months ended
30 September 30 September
2006 2005 2006 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Operating loss for the period (4,480) (4,776) (1,336) (1,539)
Movements in working capital balances
Decrease / (increase) in debtors (878) (330) (749) (158)
Decrease / (increase) in stocks and (524) (45) (110) 3
work in progress
(Decrease) / increase in creditors 939 335 341 240
Restructuring payments - (249) - -
Amortisation 892 1,006 230 312
Provision for impairment - 90 - -
Stock compensation expense 373 43 138 2
Other income - 168 - 168
Foreign exchange (losses)/gains (22) (30) (11) 9
-------- -------- -------- --------
Cash outflow from operating activities (3,700) (3,788) (1,497) (963)
-------- -------- -------- --------
-------- -------- -------- --------


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 electrical machines segment, which involved in the development and commercialization of generators and motors, and the corporate segment which is responsible for the financing of the group and other related corporate activities.

The power electronics and electrical machines segments operate in the United Kingdom. The corporate segment operates in Canada and the United Kingdom.



All amounts Power Electrical
in Pounds electronics machines Corporate Total
Sterling '000 2006 2005 2006 2005 2006 2005 2006 2005

Nine months
ended 30
September

Revenue 3,459 1,667 172 95 - - 3,631 1,762
Development
income 577 386 - - - - 577 386
Net interest
income/
(expense) - - (832) (300) 206 (248) (626) (548)
Amortisation 104 159 788 847 - - 892 1,006
Operating
Loss (372) (475)(3,037) (3,221) (1,071) (1,080) (4,480) (4,776)
Net Loss (348) (478)(3,894) (3,798) (952) (928) (5,194) (5,204)
Capital
expenditure 87 16 30 23 - - 117 39

Three months
ended 30
September
Revenue 1,380 750 90 59 - - 1,470 809
Development
income 285 71 - - - - 285 71
Net interest
income/
(expense) - - (326) 147 116 (345) (210) (198)
Amortisation 34 63 196 249 - - 230 312
Operating
Profit/(Loss) 110 (21) (982) (1,064) (464) (454) (1,336) (1,539)
Net Profit/
(Loss) 110 (17)(1,318) (1,251) (415) (316) (1,623) (1,584)
Capital
expenditure 48 2 6 12 - - 54 14


All amounts
in Pounds Power Electrical
Sterling '000 electronics machines Corporate Total
As at Sep Dec Sep Dec Sep Dec Sep Dec
2006 2005 2006 2005 2006 2005 2006 2005
Total Assets 4,935 4,468 1,858 5,604 4,087 4,373 10,880 14,445
Total
Liabilities 1,602 787 11,642 11,494 232 113 13,476 12,394


5 Significant Customers

During the nine month period ended 30 September 2006, 41% of the Company's revenue was from three customers (2005: 61% from four customers).

6 Research and product development

Research and product development expenditure incurred during the period comprised:



Nine months ended Three months ended
30 September 30 September
2006 2005 2006 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
Research and product development
cost 2,660 2,256 927 781
Accrued tax credits (50) (60) (10) (25)
-------- -------- -------- --------
Total expenditure 2,610 2,196 917 756
-------- -------- -------- --------
-------- -------- -------- --------


Deferred research and product development expenditure, net of accrued tax credits, amortisation and provisions for impairment, at 30 September 2006 amounted to Pounds Sterling nil (31 December 2005 - Pounds Sterling 198,000). Deferred research and product development expenditure comprised materials, labour and allocated overheads.

Total accrued tax credits receivable at 30 September 2006, including those credited against deferred research and product development expenditure, amounted to Pounds Sterling 119,000 (31 December 2005- Pounds Sterling 190,000).



7 Interest expense and finance charges

Nine months ended Three months ended
30 September 30 September
2006 2005 2006 2005
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Interest payable 420 398 132 154
Amortisation of deferred finance
charges 121 140 40 53
Debt accretion 291 267 97 101
-------- -------- -------- --------
832 805 269 308
-------- -------- -------- --------
-------- -------- -------- --------


8 Financial Instruments

Foreign currency risk

Certain of the Company's business transactions occur in currencies other than Sterling. The Company has entered into foreign exchange average rate option contracts during the nine months ended 30 September 2006 ( 2005: nil ) to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars.

The Company has purchased an average rate option over $1.965million U.S. Dollars at a strike rate of 1.90 U.S. Dollars which expires on 27 December 2006, and an average rate option over $5.898million U.S. Dollars at a strike rate of 2.00 U.S. Dollars which expires on 27 December 2007.

As at 30 September 2006 the unrealised gain from these contracts was Pounds Sterling 23k (2005 - Pounds Sterling nil).

9 Loss per share

Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods. The treasury stock method was used in determining the weighted average number of shares outstanding for each period.

The weighted average number of shares outstanding in the period was 191,165,301 (2005 - 184,009,119). No diluted earnings per share have been reported as the Company has losses in both years and the effect would be anti-dilutive. The loss for the nine months ended 30 September 2006 was Pounds Sterling 5,194k (2005 - Pounds Sterling 5,204k).

10 Restricted cash

The Company has committed cash bonds in support of contracts placed by certain of its customers. The associated contracts require the bonds to remain in place until up to two years after all equipment is delivered. According to the current contract schedules that would result in cash being under the performance bond restrictions until 2012. At 30 September 2006 cash subject to restrictions totalled Pounds Sterling 1,496k (December 2005 -1,496k).



11 Long-term assets

Net book
Cost Impairment Amortisation value

Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
At 30 September 2006:
Investments 102 45 - 57
Intangible assets 5,528 1,706 2,686 1,136
Tangible assets 8,246 - 5,803 2,443
-------- -------- -------- --------
Total long term assets 13,876 1,751 8,489 3,636
-------- -------- -------- --------
-------- -------- -------- --------

At 31 December 2005:
Investments 104 45 - 59
Intangible assets 5,527 1,706 2,350 1,471
Tangible assets 8,133 - 5,126 3,007
-------- -------- -------- --------
Total long term assets 13,764 1,751 7,476 4,537
-------- -------- -------- --------
-------- -------- -------- --------


12 Debtors

Sep 2006 Dec 2005
Pounds Pounds
Sterling Sterling
'000 '000

Trade debtors 1,249 631
Prepayments 740 507
Other debtors - 18
Tax recoverable 235 190
---------- ---------
2,224 1,346
---------- ---------
---------- ---------


13 Creditors: amounts falling due within one year

Sep 2006 Dec 2005
Pounds Pounds
Sterling Sterling
'000 '000

Trade creditors 1,219 547
Other creditors 357 234
Tax and social security creditor 132 126
Accruals and deferred income 1,261 1,221
Provision for restructuring 55 55
-------- --------
3,024 2,183
-------- --------
-------- --------


14 Creditors: due after more than one year

Sep 2006 Dec 2005
Pounds Pounds
Sterling Sterling
Convertible bond '000 '000

At 1 January 2006 9,913 4,364
Issued during the period - 8,000
Conversion of Convertible Notes during the period (54) (1,331)
Less equity component - (1,488)
-------- --------
9,859 9,545
Add: accretion of debt component during the period 291 368
-------- -------
At 30 September 2006 10,150 9,913
-------- --------
-------- --------

Provisions for warranty claims 302 298
-------- --------
10,452 10,211
-------- --------
-------- --------


15 Share capital - issued common shares

Number of
shares

At 1 January 2006 190,510,259
Conversion of convertible notes 541,665
Issue of common shares 442,668
----------------
At 30 September 2006 191,494,592
----------------
----------------

No options were exercised during the nine months ended 30 September 2006.


16 Financing

On 11 March 2005 the Company completed an Pounds Sterling8,000,000 (gross) financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling0.12 per share. The Warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of Pounds Sterling0.15 per share.

17 Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 30 September 2006, and the movement during the nine months then ended, are as follows:



Options Warrants
Number Number

Outstanding at 1 January 2006 34,995,134 10,500,000
Cancelled (13,286,051) -
Issued 6,062,000 -
------------- ------------
Outstanding at 30 September 2006 27,771,083 10,500,000


The stock based compensation expense for the nine month period ended 30 September 2006, included in Production costs was Pounds Sterling34,000 (2005: Pounds Sterlingnil), in Research and product development was Pounds Sterling188,000 (2005: Pounds Sterlingnil), and in General and administrative costs was Pounds Sterling151,000 (2005: (pound)43,000).

18 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

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)
March 2006 969 (1,859) (1.0)
June 2006 1,192 (1,712) (0.9)
September 2006 1,470 (1,623) (0.8)


19 Subsequent event

On 20 October the company announced its intention to transfer to AIM, in addition to an institutional placing of Common shares and 'A' shares raising Pounds Sterling 6.0million before expenses. In addition it announced the redemption of Pounds Sterling 8.8 million of convertible loan notes. Shareholder approval will be sought for this transaction at a special meeting of the company on 27 November 2006.

Contact Information

  • Turbo Power Systems Inc.
    Michael Hunt
    Chief Executive Officer
    +44 (0)20 8564 4460
    or
    Turbo Power Systems Inc.
    Stephen Sadler
    Chief Financial Officer
    +44 (0)20 8564 4460
    Website: www.turbopowersystems.com
    or
    Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400
    or
    KBC Peel Hunt
    Oliver Scott
    +44 (0) 20 7418 8905