Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

October 20, 2006 02:00 ET

Turbo Power Systems Inc 'the "Company" or "TPS"' Placing, Loan Note Redemption, Transfer to AIM and Alteration of Stock Option Plan

CALGARY, ALBERTA--(CCNMatthews - Oct. 20, 2006) - Turbo Power Systems Inc. (TSX:TPS) (LSE:TPS) -

Highlights

- Pounds Sterling 6.0m raised through a placing of Common Shares and A-Shares

- Received commitments to redeem Pounds Sterling 8.8m of loan notes

- Proposed resolution to transfer the Company's listing to AIM

- A special meeting of shareholders to be held on 27 November 2006

Colin Besant, Chairman commented:

"The last 18 months have seen TPS make considerable commercial progress and we are now involved in a number of high profile programmes with blue chip customers. The funds from the placing announced today will ensure that we have the infrastructure to service these programmes and can invest in sales and marketing to underpin our continued growth. I am delighted that a significant number of our loan note holders have chosen to exchange their holdings for common stock and our balance sheet is substantially strengthened as a result. 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 cost savings."

Turbo Power Systems, the innovative power generation and power conditioning equipment provider, is pleased to announce that it has conditionally raised Pounds Sterling 6 million (before expenses) by the placing (the "Placing") of a combination of common shares of no par value in the Company ("Common Shares") and of A-Shares of 8 pence each in the capital of its subsidiary, Turbo Power Systems Limited ("TPSL" or "the Subsidiary"), (the "A-Shares"). In addition, the Company has received conditional commitments from, and/or undertakings in respect of holders of up to Pounds Sterling 8.8 million of loan notes to accept either Common Shares or A-Shares upon a redemption of those Loan Notes by TPSL (the "Loan Note Redemption"). The Company will also issue 3,500,000 warrants over A-Shares to holders of certain loan notes.

The Company also announces that it is today posting a circular to its shareholders convening a special meeting of shareholders ("Special Meeting") to approve the cancellation of its listing on the Official List of the UK Listing Authority ("Official List") and transferring the Company's quotation to AIM (the "Transfer to AIM"). As required by the Listing Rules, a resolution will be proposed at the Special Meeting being convened for 27 November 2006 to cancel the Company's listing on the Official List. Application will be made for the Company's shares to be admitted to trading on AIM ("Admission") and it is expected that the last date of dealings in the Company's shares on the Official List will be 27 December 2006 and admission to AIM is expected to occur at 8.00a.m on the following day. The Toronto Stock Exchange ("TSX") has conditionally approved the listing of these securities. Listing is subject to the Company fulfilling all of the requirements of the exchange on or before 11 January 2007.

The Transfer to AIM will not affect the Company's listing on the TSX.

Under the Placing, the Company has conditionally placed with institutions and other investors, in aggregate 50,000,000 new Common Shares (the "Placing Shares") and 25,000,000 new A-Shares (the "A-Placing Shares") at a price of 8 pence per share.

Once completed, the Placing will raise approximately Pounds Sterling 5.5 million (net of expenses). The total net proceeds of the Placing received will be used over time as follows: approximately Pounds Sterling 5.0 million to fund working capital and Pounds Sterling 0.5 million for premises relocation.

As part of the Placing, the directors of the Company ("the Directors") will in aggregate be subscribing for 612,500 Placing Shares under the terms of the Placing.

KBC Peel Hunt has agreed to subscribe or procure subscribers for 50,000,000 Placing Shares which are not taken up by placees under the Placing.

On Admission KBC Peel Hunt, the Company's financial adviser and broker, has agreed to act as the Company's nominated adviser and broker.

The Placing and the Loan Note Redemption are conditional, inter alia, on the passing of the Special Resolution and Admission.

Background to and reasons for the Placing

The Company has made significant sales progress in 2005 and 2006 and has seen continued order book growth, winning a number of new contracts with major industrial customers. Most of these contracts have design, prototype development and fieldtesting phases, which need to be completed before production revenue is available. Once into the production phase significant expenditure is made on stock and work in progress ahead of receiving payment for shipped production units, creating a requirement for additional working capital.

Having experienced strong growth in its order book, the power electronics division of the Company will require larger premises in the northeast of England. The Company has today announced that a suitable site has been selected and the relocation is expected to take place in early 2007. Conditional grant funding of Pounds Sterling 550,000 has been confirmed by One North East, a regional grant development agency covering the northeast of England, but some additional funds are required to complete the factory fit out.

Although the majority of the Company's product development expenditure is covered by customer funding in the preproduction phase of contracts, the Company is continuing to develop its product portfolio, particularly in its larger size motors and generators where the Directors see considerable market potential.

Over the next six to nine months the Company has to raise additional cash to continue operations. The Company has identified a number of different methods of raising the funds that it will require. However, the Directors believe that the Placing is the most appropriate way to secure the Company's long-term future.

If Shareholders do not vote in favour of the Transfer to AIM, there will be uncertainty relating to the Company's ability to continue as a going concern. If the Special Resolution is not passed, the Directors will immediately start exploring alternative sources of funding. Based on current expectations the Company will have to complete any fundraising by the end of June 2007, at the latest, in order to continue its operations.

The total net proceeds of the Placing received by the Company will be used over time as follows: approximately Pounds Sterling 5.0 million to fund working capital and Pounds Sterling 0.5 million for premises relocation.

Reasons for the Loan Note Redemption

The Directors believe that a Loan Note Redemption would be beneficial to the Group, as it would result in a reduction in long-term debt and an associated reduction in the Group's gearing which would help to strengthen the Group's balance sheet. The Directors believe that this would enhance the Group's financial credibility with potential customers and partners. In addition, a Loan Note Redemption would result in a reduction in annual interest payments and so be beneficial to the Group's cash flows.

Background and reasons for the Transfer to AIM

The Directors believe that AIM is a more appropriate market for the Company and should lead to a simplification of administration requirements and lower ongoing costs associated with being a public company. The Directors also believe that the intended admission to AIM will enable the Company to agree and execute transactions more quickly should any acquisition or other development opportunities arise in the future. The Directors, however, envisage no alteration in the standards of reporting and governance which the Group currently achieves. The Directors therefore see the Company as continuing to be attractive to specialist institutional investors as well as to the retail investor.

Current Trading and Prospects

During 2005 and 2006 the Company has made significant progress both in building its order book and reducing its cash burn. Revenues have grown significantly and substantial strides have been made in focusing resources on commercial programmes.

First half results for 2006 show revenue and development income of Pounds Sterling 2.5 million and operating cash outflow of Pounds Sterling 2.2 million.

Since August 2005 the Company has announced a number of significant contract wins including:

- Eaton Aerospace - In August 2005 the Company announced a contract for the supply of motor drive systems for the onboard fuel pumps used on the Boeing 787 'Dreamliner'. The contract is estimated to be worth in excess of US$20 million before after market sales, which could exceed US$10 million.

- ALC - Also in August 2005 the Company announced a development contract for an oil field application to include field trials in Alaska. Subject to successful trial results, the contract includes the provision for a longterm production supply contract. The addressable market for the technology is in excess of 600,000 wells.

- TransElektro - In October 2005 the Company announced an agreement to supply power converters for use on the Dutch rail system. The initial production contract is worth Pounds Sterling 0.5 million.

- Industrial motor/drive agreement with an international OEM - The Company announced in November 2005 that it had signed an agreement to supply a range of
high speed motor and variable drive systems to an international OEM. Subject to satisfactory completion of prototype trials, the initial two year production contract is expected to yield revenues in excess of US$12.5 million.

- National Rail Equipment Company ("NREC") - The Company announced a long-term supply agreement with NREC for the supply of traction motor controllers and low voltage power supply units in February 2006. Deliveries commenced in August 2006 and are expected to generate revenues in excess of US$5.5 million by the end of 2007. Orders have already been received for the launch quantity of 69 systems on behalf of Union Pacific Railroad. There is the potential for further significant orders.

- Toronto Transit Commission - In March 2006 the Company announced a production contract to supply the Toronto Transit Commission with low voltage power supply units for Canadian light rail vehicles in Toronto. The initial production order is for Pounds Sterling 1.8 million.

- Compact Power - In March 2006 Compact Power and Turbo Power Systems announced an agreement to collaborate in the development of a packaged biomass distributed generation system. The Company will supply generator and inverter technology to the programme.

- Bombardier - In May 2006 the Company announced a contract to supply Bombardier Transportation with auxiliary power converters for use on the Beijing Capital International Airport link. The contract is expected to be worth US$1.5 million.

- Bombardier (UK) - In July 2006 the Company announced a contract from Bombardier Derby for power converters and "atseat" power supplies. The contract is worth Pounds Sterling 0.8 million.

- Hamilton Sundstrand - In July 2006 the Company announced a contract to supply motor drives for use on the Boeing 787 'Dreamliner' estimated to be worth in excess of US$26 million with the potential for significant additional after market sales, which could exceed US$10 million.

- PRC Lasers - In September 2006 the Company announced a follow-on order worth US$3.5 million from PRC Lasers for high voltage power supplies. The current contract, worth US$2.4 million and signed in December 2003 will continue until the end of 2006. The new contract will cover deliveries beginning in the first quarter of 2007 and continuing until early 2008.

These contracts cover different production periods, with the longest being the Hamilton Sundstand contract which extends to 2021.

As a result of these contract wins the Company's order book has grown substantially and the Company now has long term trading relationships with a number of blue chip customers. Most of the new contracts are characterised by an up front design, prototype and testing phase before moving into a production phase. Whilst the majority of the contracts receive customer funding in the initial phases it is in the production phase that the most significant revenues and cash margins are expected to be achieved.

Most contracts entered into by the Company have a preproduction phase of 12 to 18 months. As a consequence of this order book profile the Company expects to continue to make losses, and thus have a working capital requirement, until a number of these contracts have moved into the production phase.

The Company has noted a growing customer interest in its technology and has increased its investment in sales and marketing resources in 2006. In addition the Company expects to expand its potential sales pipeline in the near term and is encouraged that opportunities, such as the recently announced Hamilton Sundstrand contract, have arisen with the help of end customer referrals.

Details of the Placing

The Company is proposing to raise in total approximately Pounds Sterling 6.0 million (before expenses) by means of the Placing. Pursuant to the terms of the Placing Agreement, KBC Peel Hunt, as agent for the Company, has agreed conditionally to place the Placing Shares and the A-Placing Shares with investors procured by it.

The Placing Price of 8 pence per Placing Share and A-Placing Share represents a discount of approximately 23.8 per cent. to the closing mid-market price of 10.5 pence per Common Share on 19 October 2006, being the last dealing day prior to the date of this document.

The Placing Shares are equivalent to approximately 26.1 per cent. of the Company's existing issued share capital (before redemption of the Loan Notes). The Placing Shares will, when issued, represent approximately 18.8 per cent. of the enlarged share capital of Common Shares in the Company assuming the implementation of the Loan Note Redemption ("Enlarged Share Capital"). As part of the Placing, the Directors will in aggregate be subscribing for 612,500 Placing Shares under the terms of the Placing.

The issue of the Placing Shares is conditional, inter alia, upon:

(i) the passing of the Special Resolution;

(ii) Admission; and

(iii) the placing agreement between the Company and KBC Peel Hunt (the "Placing Agreement") becoming unconditional in all other respects.

An application will be made to the London Stock Exchange for the Placing Shares to be admitted to trading on AIM. The Placing Shares are expected to be admitted to AIM and to commence trading at 8.00 a.m. on 28 December 2006. The Toronto Stock Exchange ("TSX") has conditionally approved the listing of these securities. Listing is subject to the Company fulfilling all of the requirements of the exchange on or before 11 January 2007. For the avoidance of doubt, the A-Placing Shares will not be listed on any stock exchange.

Under Canadian law there are no pre-emption rights attached to shares in Canadian companies. Accordingly no resolutions are required to be proposed at the Special Meeting in order to issue the Placing Shares. In addition TPSL has duly passed a resolution creating the A-Shares and altered its articles of association to reflect this new class of shares. All A-Shares are exchangeable on no less than 61 days' written notice into Common Shares of the Company.

Under the terms of the Placing Agreement, KBC Peel Hunt has agreed to subscribe or procure subscribers for 50,000,000 Placing Shares which are not taken up by placees under the Placing.

Details of the Loan Note Redemption and issue of warrants

As at the date of this announcement, the Subsidiary has in issue Pounds Sterling 11,149,000 of loan notes being Pounds Sterling 5,000,000 loan notes 2003 ("Loan Notes 2003") and Pounds Sterling 6,149,000 loan notes 2005 ("Loan Notes 2005") (together the "Loan Notes"), details of which are set out below.



Loan Notes 2003
Amount in issue Pounds Sterling 5,000,000
Annual interest 3.5%
Conversion price of loan notes 20 pence

Loan Notes 2005
Amount in issue Pounds Sterling 6,149,000
Annual interest 6.5%
Conversion price of loan notes 12 pence


The Company has received commitments from holders of Pounds Sterling 5,000,000 of Loan Notes 2003 and up to Pounds Sterling 3,780,000 Loan Notes 2005 that they are willing, conditional upon Admission, to permit the Subsidiary to redeem such Loan Notes and to accept either 24,475,000 Common Shares or 90,000,000 A-Shares on such redemption of their Loan Notes by the Subsidiary.

The Loan Notes 2003 may, at the option of the Subsidiary, be redeemed at face value in exchange for A-Shares issued at a rate of 8 pence per share (equivalent to 12.5 A-Shares for every Pounds Sterling 1 of Loan Notes 2003 redeemed). The holders of Loan Notes 2003 would also receive 70 Warrants for every Pounds Sterling 100 of Loan Notes 2003 that are redeemed by the Subsidiary, resulting in the possible issue of 3,500,000 Warrants.

The Company has received conditional undertakings in respect of certain registered holders of Pounds Sterling 1,780,000 of the Loan Notes 2005 that such Loan Notes may be redeemed at a premium of 10 per cent. to face value in exchange for Redemption Shares at a rate of 8 pence per share (equivalent to 13.75 Redemption Shares for every Pounds Sterling 1 of Loan Notes 2005 redeemed).

An additional Pounds Sterling 2,000,000 of Loan Notes 2005 may, at the option of the Subsidiary, be redeemed at a premium of 10 per cent. to face value in exchange for either A-Shares at a rate of 8 pence per share (equivalent to 13.75 A-Shares for every Pounds Sterling 1 of Loan Notes 2005 redeemed).

The redemption of Loan Notes 2005 is conditional on the passing of a written extraordinary resolution to be proposed to the holders of Loan Notes 2005 ("Extraordinary Resolution of the Holders of Loan Notes 2005") which will be sent to holders of Loan Notes 2005 shortly. The modifications under the Extraordinary Resolution of the Holders of Loan Notes 2005 provide, among other things, for the Loan Notes 2005 to be redeemable now to enable those holders of the Loan Notes 2005 who wish to participate in the Loan Note redemption to do so. They also remove the discretion of the Subsidiary to elect to satisfy the payment of interest due through the issue of Common Shares, and provide instead that a holder may in its discretion elect to receive Common Shares in satisfaction of interest due.

The Company has received undertakings in respect of holders of approximately 82 per cent. of Loan Notes 2005 to vote in favour of the Extraordinary Resolution of the Holders of Loan Notes 2005. This percentage will be sufficient to pass the Extraordinary Resolution of the Holders of Loan Notes 2005. For the avoidance of doubt Shareholders are not being asked to vote on the Extraordinary Resolution of the Holders of Loan Notes 2005 at the Special Meeting.

The redemption price for the Loan Notes represents a discount of approximately 23.8 per cent. to the closing mid-market price of 10.5 pence per Common Share on 19 October 2006, being the last dealing day prior to the date of this announcement. The Common Shares to be issued pursuant to the Loan Note Redemption would represent approximately 9.2 per cent. of the Company's Enlarged Share Capital.

The Loan Note Redemption is conditional, inter alia, upon:

(i) the passing of the Special Resolution;

(ii) the passing of the Extraordinary Resolution of Holders of Loan Notes 2005;

(iii) Admission; and

(iv) the Placing Agreement becoming unconditional in all other respects.

Application will be made to the London Stock Exchange and to the TSX for the Common Shares arising from the Loan Note Redemption to be admitted to trading on AIM and the TSX and it is anticipated that dealings in these shares will commence at 8.00a.m on 28 December 2006. The A-Shares will not be listed on any stock exchange.

Following the implementation of the Loan Note Redemption the Company would have Pounds Sterling 2,369,000 of Loan Notes 2005 still in issue.

Stock Options

Conditional upon the passing of an ordinary resolution ("Ordinary Resolution") being approved at the Special Meeting, the Directors propose to amend the Company's current stock option plan (the "Stock Option Plan").

The Stock Option Plan currently provides that, subject to the aggregate number of shares to be delivered upon the exercise of all options granted under the Stock Option Plan does not exceed 20 per cent. of the issued shares of the Company at the time of granting of options, the maximum aggregate number of shares which may be reserved for the exercise of options under the Stock Option Plan is 35,044,280.

To be consistent with industry practice of similar companies listed on AIM and the TSX, the Directors propose that the Stock Option Plan be amended to remove the reference to a maximum number of Common Shares to be reserved for the exercise of options under the Stock Option Plan and to authorize that the aggregate number of shares to be delivered upon the exercise of all options granted under the Stock Option Plan will not exceed 14 per cent. of the issued share capital of the Company from time to time.

Under the Stock Option Plan there are currently 27,771,083 stock options issued and outstanding (which represents 14.5 per cent. of the Company's existing share capital). These stock options are exercisable at various dates between now and 30 March 2016.

Directors Interests

As part of the Placing, the Directors will in aggregate be subscribing for 612,500 Placing Shares under the terms of the Placing. Immediately following Admission the Directors will have the following interests in the Company:



------------------------------------------------------------------------
Name Title Common shares Common Shares % interest in
subscribed under held post Enlarged
the Placing Admission Share Capital
------------------------------------------------------------------------
Michael Chief Executive
Hunt Officer 87,500 198,167 0.07
------------------------------------------------------------------------
Stephen Chief Financial
Sadler Officer 87,500 198,167 0.07
------------------------------------------------------------------------
Colin Non-executive
Besant Chairman 87,500 15,687,500 5.90
------------------------------------------------------------------------
Nicholas Senior
Brigstocke Independent
Non-executive
Director 87,500 911,381 0.34
------------------------------------------------------------------------
Wayne Non-executive
Macleod Director 87,500 237,881 0.09
------------------------------------------------------------------------
Michael Non-executive
Webber Director 87,500 87,500 0.03
------------------------------------------------------------------------
David Non-executive
Hawksworth Director 87,500 87,500 0.03
------------------------------------------------------------------------


Special Meeting

A Special Meeting has been convened for holders of Common Shares at 9.00 a.m. on 27 November 2006 at the offices of KBC Peel Hunt, 111 Old Broad Street, London, EC2N 1PH to approve the Special Resolution and the Ordinary Resolution.

At the Special Meeting the Special Resolution will be proposed to approve the cancellation of the listing of the Common Shares on the Official List and the admission of the Enlarged Share Capital to trading on AIM. At the meeting the Ordinary Resolution to approve the Amended Stock Option Plan will also be proposed.

A circular incorporating the notice convening the Special Meeting is being posted to holders of Common Shares and will also be available for collection from the offices of KBC Peel Hunt Ltd, 111 Old Broad Street, London EC2N 1PH for a period of one month from the date of this announcement.

Importance of Special Meeting

Shareholders should be aware that the Placing is conditional upon their voting in favour of the Special Resolution and so approving the Transfer to AIM. The Directors believe that the Placing is the most appropriate way to secure the long-term future of the Company. They therefore believe that it is essential for Shareholders to vote in favour of the Special Resolution and so effect the Placing.

If Shareholders do not vote in favour of the Transfer to AIM, there will be uncertainty relating to the Company's ability to continue as a going concern. If the Special Resolution is not passed, the Directors will immediately start exploring alternative sources of funding. Based on current expectations the Company will have to complete any fundraising by the end of June 2007, at the latest, in order to continue its operations.

Recommendation

The Directors are of the opinion that the Transfer to AIM and the Amended Stock Option Plan are in the best interests of the Company's shareholders as a whole. Accordingly, the Directors unanimously recommend that Shareholders vote in favour of both the Special Resolution and the Ordinary Resolution to be proposed at the Special Meeting, as they intend to do in respect of their own beneficial holdings of 16,795,596 Common Shares, representing 8.8 per cent of the Company's issued share capital.

Copies of the circular have been sent to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, located at:



Financial Services Authority

25 The North Colonnade
Canary Wharf
London
E14 5HS


NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems develops innovative products for power generation and power conditioning. The Group was established as a spin-off from Imperial College, London, was floated on the London stock exchange in July 2000 and soon after obtained a secondary listing in Toronto. In July 2001, the Group acquired Intelligent Power Systems Limited (I-Power), a company specialising in power electronics.

Forward Looking statements

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

Contact Information

  • Gavin Anderson & Company (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Gavin Anderson & Company (PR)
    Michael Turner
    +44 (0)20 7554 1400
    Website: www.turbopowersystems.com