Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

March 26, 2009 03:00 ET

Turbo Power Systems Inc. (TPS) Announces Results for the Year and Quarter Ended 31 December 2008

CALGARY, ALBERTA--(Marketwire - March 26, 2009) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS) -

Highlights

- Production and development income for the year of Pounds Sterling 7.8 million (2007: Pounds Sterling 11.0 million)

- Production revenues in Q4 increased by 49% to Pounds Sterling 1.9 million over Q3(Pounds Sterling 1.2 million)

- Operating loss before financial and impairment charges reduced to Pounds Sterling 1.5 million in the quarter (2007: Pounds Sterling 1.7 million loss)

- Continued development spend reduction in Q4 as programmes transition into production.

- Operating Cash outflow before tax receipts reduced by 78% to Pounds Sterling 0.3 million Q4 (Q3 Pounds Sterling 1.53m)

Paul Summers, CEO, said:

"During 2008 Turbo Power Systems has undertaken some significant steps in strengthening the position of the business.

The transitioning of programmes from development to production in the fourth quarter has reduced the spend on R&D and now provides the business with a solid base for 2009 and beyond.

Business processes have been strengthened in order to be able to better plan and develop the business. Overheads have been reduced during the second half of the year and are anticipated to reduce further in 2009.

The 2008 Q4 profit results have been adversely affected by stock and goodwill write-offs, however, there has been an improvement in the underlying performance of the business during the quarter, with further improvement anticipated throughout 2009.

Our markets are bearing up well in the current climate and are still providing the business with growth opportunities."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS) is a leading UK based designer and manufacturer of innovative power solutions. The Group's products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company's products provide improved efficiency and reduced energy consumption compared to existing technologies.

Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation and Eaton Aerospace.

Forward looking statements

This press 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.

Definition of Non-GAAP financial measures

EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax charges and receipts, depreciation, amortisation, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortisation. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.

CHAIRMAN'S STATEMENT

The year 2008 has seen significant changes in the management and financial performance of the business. In the middle of the year the Board brought in a new CEO and appointed a new Finance Director, with the remit to conduct a broad-ranging review of business strategy and to set the business on a path of profitable, sustainable growth towards profitability. The Company now has a realistic 5-year Strategic Plan that focuses on markets we anticipate will provide top-line growth, and that will change the mix of the business to improve the balance between new product development, production and after market.

Progress towards the Plan objectives has been made in 2008, especially in the second half of the year. Spending on new product development has been brought under control and the agreed transfer of one of our aerospace programmes to our customer significantly reduced our exposure in 2008 and beyond. We retain the ability to operate in the aerospace market, but in our strategic review have concluded that other markets will take higher priority.

The Company arranged Pounds Sterling 3 million of Loan Note financing during the year that provided the working capital necessary to fund the build up of new production lines for the energy and rail transport markets. Careful cash management and alignment of our cost base with realistic sales forecasts meant that the Company ended the year with significantly reduced overall cash outflows, and was able to produce a modest cash generative operating cash flow during the last quarter. The management of cash remains a top priority for the Board and the management team going forward.

The year 2008 was also significant in that the Company secured its first defence order for a high-performance electrical generator system from a prestigious USA prime contractor. Our capabilities in power electronics and advanced electrical machines design have also attracted the interest of several major UK defence contractors, demonstrating again the significant technical capability the Company brings to these highly demanding markets.

In the rail transport and energy markets the delivery of production units started in 2008 and will continue in 2009 and beyond, steadily building an installed base of product that will provide long-term aftermarket business.

In summary, 2008 has been a year of turn around in the financial performance and management of the business. The operating result reflects a year of exceptional investment but one where costs have been brought rapidly under control during the latter part of the year. The Company now has a set of clear financial goals over the next 5 years, and a clear strategy to achieve them. Our key customers continue to place orders with us, and the Company is making inroads into the defence market where we have demonstrated excellent technical capability. I expect the Company to continue to build on the successes of the past year, and to continue to develop its order book.

OPERATIONAL REVIEW

This review has been prepared as at 25 March 2009.

Business of the Company

Turbo Power Systems:

- designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology.

- designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.

2008 Summary

Strategic Direction

During the latter part of 2008 the management team and main Board undertook a comprehensive review of the strategic direction of the business.

As part of this review we looked at our products and markets to determine where to focus our resources. The activities of the business over previous years in positioning itself in a wide range of markets and sectors gave the management team the opportunity to be selective in determining where to place the emphasis going forward.

For each of the markets/sectors the assessment took into account :

- current strengths of TPS,

- size of the market/sector TPS could address,

- levels of investment required to capture and execute orders

- probability of turning the identified opportunities into orders.

From this assessment it was determined that we should place our primary focus on the following markets :

- Transport

--Power Electronics For The Rail Industry

- Energy

-- Grid Link Inverters

-- Motors & Generators

- Industrial Equipment

-- Motors & Generators

-- Power Supplies

- Defence

-- Power Electronics

-- Motors & Generators

Whilst the business will continue to service existing programmes in other areas (eg. aerospace and automotive) it will behave in a reactive manner to these markets and only engage in new programmes that meet the requirements of the business in terms of risk, cash flow and profitability.

From this strategic review the vision for the business can be summarised as follows :

"Be a world class provider of specialist Power Electronics and Electrical Machines maximising stakeholder benefit."

The business will achieve this through :

- Market leading technologies and programme delivery

- Long term partnerships with our customers

- Strong year on year organic growth

- A culture of continuous improvement of individual and business performance and capability

- Accelerating business growth by acquisitions

In terms of the development of the business this means we intend to :

- Structure the business to achieve the projected turnover without outside investment or acquisitions

- Develop technological advantage and customer partnerships in the following business sectors :

-- Transport

-- Energy

-- Industrial

-- Defence

- Be a preferred supplier for five key customers

- Balance business activities across development, production and after sales

Current Operating Climate

The current economic climate is clearly a concern for many businesses, including TPS. However, so far, the majority of our customers and markets are proving to be resilient to the current economic turmoil. Additionally the spread of markets provides some degree of resilience to downturns in any one sector.

Governments are continuing to grow their infrastructure and, indeed, see transport initiatives such as new rail programmes as a way of helping to sustain their industries whilst providing necessary public transportation and having a positive effect on the environment.

The defence spend in both the US & UK appears relatively stable and the future opportunities for TPS technology appear favourable. We will be investigating this market more over the course of this year and hope to see increased activity during the coming years.

As a result of the many Green Initiatives the energy as a sector is still seeing significant growth and we will be looking to strengthen our position during the course of this year.

The industrial sector is the most vulnerable to the downturn but so far our customers are reporting minimal impact and are indicating continued activity throughout 2009. However, we are continuing to monitor the current environment so that we can adjust activities quickly if needed.

The weak pound is making TPS more competitive in its North American market and many of our current contracts are U.S. Dollar based. We are therefore benefiting from the recent exchange rate movements. The exposure to exchange rate fluctuations is something that the business is very conscious of and management take measures in our contracting, purchasing and financial arrangements to mitigate against exchange rate risk.

- Transport

-- Rail

The major programmes (Chicago Transit Authority and Toronto) being undertaken during 2008 were predominantly for Bombardier of Montreal. These have been slower to complete development than was envisaged but are now in their production phases and will continue production over the next three years.

Other rail programmes have included converters and power supplies for both the European and North American markets.

-- Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace concluded their qualification during the year and production units are now being delivered. Whilst these are at lower levels than originally planned, the quantities are envisaged to increase in the later part of 2009 and into 2010.

During the second half of 2008 the business determined that it was not in its best interests to continue with the RAM Fan motor drive contract with Hamilton Sundstrand and is in the process of completing the transition of this contract back to Hamilton Sundstrand.

- Energy

-- Oil

Contracted work in the energy sector has centred around the Artificial Lift Company (ALC) down hole pumps. The units have been delivered and we are awaiting the outcome of the field trials being undertaken by ALC in Q1 2009.

-- Solar Energy

There has been continued European funded R&D work in this area relating to Grid linked inverters. The output of which is being used as the basis for our business development activities for the future in the energy sector.

- Industrial

-- Laser Power Supplies

We have continued to deliver the product to our customer (PRC) and were successful within in the first few weeks of 2009 of being awarded a contract for the development and delivery of the next generation of the product.

-- Industrial Motors and Drives

The delivery of the initial 75 Industrial Motors and Drives for our major international Capital Equipment Manufacturer have progressed well (as evidenced by their decision in early 2009 to purchase the designs for the products being delivered). Under the Design and Manufacturing Rights Agreement concluded in early 2009 TPS will be manufacturing these products for a further 5 years with an anticipated delivery of 500 units.

TPS also completed the delivery of several proto-type and development units to other major industrial equipment providers such as a North American industrial and process gas company, a Far Eastern steel manufacturer and a European industrial research company. These customers are now evaluating the products (and their own systems) with a view to developing their overall systems into a commercial offering.

- Defence

The contract awarded during 2008 for a 1MW high-speed generator by a US defence contractor has now progressed into manufacture. The full system is scheduled to be trialled during the spring of 2009. Dependant on a successful outcome of these trials further orders are anticipated in the second half of 2009.

TPS also conducted a small amount of funded R&D looking at the use of its rotor technology in submarine propulsion. Further discussions are underway on other defence applications for TPS technology.

Financial Performance

Total revenues in the year of Pounds Sterling 7.78 million were 28% lower than in 2007 (2007: Pounds Sterling 11.00 million), primarily due to a reduction in production volume on existing rail programmes of Pounds Sterling 4.30 million as several contracts completed. During the first half of the year our existing major rail production programmes reached completion, but delays in final qualification on our current rail development programmes resulted in a low production volume, particularly in the second and third quarters. Development costs fell in Q3 and throughout Q4 as our major development programmes are now in final customer qualification stages, and our expenditure has reduced accordingly. R&D tax credits received during the year totaled Pounds Sterling 0.57 million and further reduced our development outlay.

Administrative costs have decreased over the year as the impact of our cost review programme took effect which offset the increased operating charges related to the new Gateshead facility that became operational during the second quarter of 2007.

The group's loss before interest, tax, depreciation, amortisation and stock compensation for the year increased to Pounds Sterling 8.4 million (2007: Pounds Sterling 4.9 million) as a result of reduced production volumes and one off impairment charges recorded in Quarter 4 to remove obsolete stock holdings and reduce the carried goodwill valuation which had arisen on the purchase of Intelligent Power Systems in 2002.

Operating cash outflows before tax increased to Pounds Sterling 6.2 million (2007: Pounds Sterling 6.0 million), but have fallen during Quarter 3 and Quarter 4 following the reduction in development and overhead spend. Operating cash outflow before tax in Quarter 4 was Pounds Sterling 0.38million, a decrease of 75% from Q3 and earlier levels. After tax credit receipts, the Company experienced a net operational cash inflow of Pounds Sterling 0.15 million in the fourth quarter.

The Company finished the year with an unrestricted cash balance of Pounds Sterling 1.05 million and held further cash of Pounds Sterling 1.35 million associated with performance bonds.

On 19 June 2008 the Company completed a potential Pounds Sterling 3,000,000 gross financing agreement with institutional investors. The financing comprised secured Convertible Notes and Warrants. The Convertible Notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.04 per share. The Convertible Notes are issuable upon drawdown of the loan, of which Pounds Sterling 1,500,000 were issued on 19 June 2008. The loan is repayable over three years by way of regular quarterly repayments, commencing March 2009. The Warrants have a term of ten years and are convertible into an aggregate of 12,857,142 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of Pounds Sterling 0.035 per share.

On 15 August 2008 the Company amended the terms of the loan agreement in order to facilitate a further drawdown of Pounds Sterling 1.5 million. The new terms provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS, or its subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company under the transaction before deducting any balance of the Loan Notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1.5m plus 75% of the next Pounds Sterling 6m of enterprise value and 50% of the remainder.

The holder of the A-Ordinary shares subscribed for Pounds Sterling 1,000,000 of this agreement, and is considered by the company to be a related party. The transaction was recorded at exchange amount.

Other than the debt financing detailed above, further details of which are provided in the notes to the financial statements, the Company has had no transactions with related parties and there are no further proposed transactions to disclose.

The Critical Accounting Estimates included within these statements are assessed on an unchanged basis from the prior year and as disclosed in the Company's Financial Statements for the year ended 31 December 2008.

These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 December 2008 the Company had net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of Pounds Sterling 9.56 million in 2008 and has a cumulative deficit of Pounds Sterling 72.24 million as at 31 December 2008. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.

Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.

There can be no assurances that the Company's activities will be successful or sufficient and as a result there is doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.



Summary of quarterly results

The following table sets forth selected quarterly consolidated financial
information of the Company for the last eight quarters;


All amounts in Pound Sterling '000 Revenue Research and General and
product administrative
development

March 2007 2,033 1,015 841
June 2007 2,342 1,151 1,102
September 2007 2,700 1,736 1,083
December 2007 2,750 1,580 831

March 2008 1,962 1,591 1,059
June 2008 1,711 1,470 1,049
September 2008 1,246 1,363 1,025
December 2008 1,862 841 816

All amounts in Pound Net loss Loss per Net cash Net cash flow
Sterling '000 share flow from from capital
operating investment

March 2007 (1,403) (0.5) (805) (117)
June 2007 (1,768) (0.6) (1,632) (298)
September 2007 (1,666) (0.5) (2,024) (123)
December 2007 (1,578) (0.5) (1,379) (37)

March 2008 (2,287) (0.7) (1,844) (96)
June 2008 (2,276) (0.7) (2,479) (57)
September 2008 (1,849) (0.6) (1,527) (10)
December 2008 (3,151) (1.0) 195 (8)


Quarterly revenue decreased during 2008 reflecting the completion of several rail contracts and the reduction in demand from National Rail Equipment Company (NREC), but increased in the fourth quarter as volumes increased on the Industrial Motor and Drive contract. Research and development expenditure has decreased during the year reflecting the reduction in required development activities on the new Bombardier Chicago and Toronto rail programmes, together with the reduced development requirement as a result of the transition agreement on the Hamilton Sundstrand contract for the Boeing 787. General and administrative costs have decreased during the year as a result of cost reduction initiatives, following an increase in quarterly costs during 2007 when the Gateshead facility relocated to larger premises.

The net loss recorded for Quarter 4 was adversely impacted by the charges incurred for restructuring charges and reducing the carrying value of goodwill and obsolete stock at the year end. Underlying net loss for Quarter 4 excluding these charges would have been Pounds Sterling (1,463), an improvement of 21% on the previous quarter

Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis are available on www.sedar.com and full financial statements are expected to be mailed to shareholders during May 2009.

Copies of the quarterly and annual results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex, UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com.



TURBO POWER SYSTEMS INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

Quarter ended Year ended
31 December 31 December
2008 2007 2008 2007
Pound Pound Pound Pound
Sterling Sterling Sterling Sterling
Notes '000 '000 '000 '000

Revenue 3,4 1,862 2,750 6,781 9,825
Development income 3,4 71 159 1,003 1,176
---------------------------------------------
1,933 2,909 7,784 11,001
Expenses
Production costs 1,596 1,959 5,577 7,279
Research and product
development 841 1,580 5,265 5,482
General and
administrative 817 831 3,949 3,857
Amortisation 166 198 662 858
Goodwill impairment 820 - 820 -
Inventory impairment 652 - 652 -
---------------------------------------------
4,892 4,568 16,925 17,476

Loss before interest,
restructuring,
finance charges and
foreign exchange (2,959) (1,659) (9,141) (6,475)

Restructuring charges (101) - (101) -
Debt extinguishment
expense (115) - (115) -
Interest income 12 98 95 367
Interest expense (195) (99) (457) (248)
Finance
income/(charge) 92 52 (20) (66)
Foreign exchange gain 115 30 176 7
---------------------------------------------
(192) 81 (422) 60
---------------------------------------------
Net loss and
Comprehensive loss (3,151) (1,578) (9,563) (6,415)
---------------------------------------------
---------------------------------------------

Loss per share -
basic 5 (1.0) p (0.5) p (3.0) p (2.1) p
Loss per share -
diluted 5 (1.0) p (0.5) p (3.0) p (2.1) p

Weighted average
number of shares
outstanding 318,571,062 318,571,062 318,571,062 310,387,089


TURBO POWER SYSTEMS INC.

CONSOLIDATED BALANCE SHEETS


Notes As at 31 December As at 31 December
2008 2007
Pound Sterling '000 Pound Sterling '000
(restated Note 7)
Current assets

Cash and cash equivalents 1,054 4,235
Restricted cash 552 -
Trade and other receivables 1,255 2,871
Stock and work in progress 1,685 2,376
Investments - 25
Prepayments 372 422
R&D tax credits receivable 144 208
-----------------------------
5,062 10,137
-----------------------------
Long-term assets
Restricted cash 796 1,362
Intangible assets 13 47
Goodwill - 820
Property, plant and equipment 1,624 2,106
-----------------------------
7,495 14,472
-----------------------------
-----------------------------
Liabilities and shareholders
equity
Creditors: amounts falling due
within one year
Trade and other payables 3,406 3,700
Deferred income 166 555
-----------------------------
3,572 4,255
-----------------------------
Creditors: amounts falling due
after more than one year
Warranty provision 184 151
Convertible notes 4,512 1,661
-----------------------------
4,696 1,812
-----------------------------
Non controlling interest
Class A Ordinary share capital 7 13,310 13,310

Capital and reserves
Common share capital 6 55,804 55,804
Contributed surplus 2,349 1,964
Deficit (72,236) (62,673)
-----------------------------
Shareholders funds (14,083) (4,905)
-----------------------------
7,495 14,472
-----------------------------
-----------------------------

TURBO POWER SYSTEMS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND DEFICIT

Common
Share Contributed Total
capital surplus Deficit Equity
Pound Pound Pound Pound
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
(Restated
Note 7)
Balance at 1 January 2007 51,919 1,981 (53,704) 196
Net loss (6,415) (6,415)
Stock compensation 699 699
Conversion to shares (716) (2,414) (3,130)
Issue of shares 4,017 4,017
Share issue costs (132) (132)
Transitional adjustment (140) (140)
-----------------------------------------------
Balance at 31 December 2007 55,804 1,964 (62,673) (4,905)
Net loss (9,563) (9,563)
Stock compensation 123 123
Equity portion on issue of
convertible notes 262 262
-----------------------------------------------

Balance at 31 December 2008 55,804 2,349 (72,236) (14,083)
-----------------------------------------------
-----------------------------------------------

TURBO POWER SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Quarter ended 31 December Year ended 31 December
2008 2007 2008 2007
Pound Pound Pound Pound
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Net loss from
operations (3,151) (1,578) (9,563) (6,415)
Amortisation 166 53 662 858
Accretion of debt 92 (2) 137 60
Adjustment to fair
value of investment 12 6 25 6
Goodwill impairment 820 - 820 -
Equity adjustment on
fundraising (352) - (352) -
Stock compensation
charges 17 159 123 699
Foreign currency
instrument loss - 28 - 35
Unrealised foreign
exchange (gain)/loss (175) (23) (114) (7)
Movement in net
interest accrual 150 (100) 276 (440)
Debt extinguishment
expense 115 - 115 -
-----------------------------------------------
Cash outflow before
movements in
working capital (1,954) (1,457) (7,519) (5,204)
Decrease/(increase)
in debtors 1,012 (384) 1,730 (820)
Decrease/(increase)
in stock 1,123 (128) 691 (1,146)
Increase/(decrease)
in creditors (512) 977 (1,122) 1,018
-----------------------------------------------
Net cash outflow from
operating activities before
tax (331) (992) (6,220) (6,152)
-----------------------------------------------
Tax credits 526 - 565 312
-----------------------------------------------
Net cash outflow from
operating activities after
tax 195 (992) (5,655) (5,840)
-----------------------------------------------

Investing activities
Purchase of property,
plant and equipment (8) (131) (171) (569)
Purchase of
intangible assets - (6) - (6)
Grant income - (150) - 100
Movement in
restricted funds (57) (13) (14) 134
Financial instruments
- net option costs - (52) - (52)
-----------------------------------------------
Cash outflow from
investing activities (65) (352) (185) (393)
-----------------------------------------------
Financing activities
Net proceeds from
financing (341) - 2,659 3,799
-----------------------------------------------
Cash inflow/(outflow)
from financing activities (341) - 2,659 3,799
-----------------------------------------------
Increase/(decrease)
in cash in the period (211) (1,344) (3,181) (2,434)
-----------------------------------------------
-----------------------------------------------
Cash and cash
equivalents:
Beginning of period 1,265 5,579 4,235 6,669
-----------------------------------------------
End of period 1,054 4,235 1,054 4,235
-----------------------------------------------
-----------------------------------------------
Supplemental cash
flow information
Cash paid for
interest - - (47) (340)
Cash received as
interest 12 113 95 382


Year ended 31 December 2008

Notes to the Consolidated Financial Statements

1. Basis of preparation and going concern

The consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the significant accounting policies summarised in the Company's financial statements for the year ended 31 December 2008, and the subsequent changes in accounting policies as detailed below. Certain comparative amounts have been reclassified to conform to the financial statement presentation adopted for 2008.

The Company's interim financial statements do not conform in all respects to the requirements of Canadian GAAP for annual financial statements. The Company's interim statements should be read in conjunction with the consolidated financial statements of the Company for the year ended 31 December 2008.

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.

The Company's functional and reporting currency is Pound Sterling.

Going concern

These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 December 2008 the Company had net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of Pounds Sterling 9.54 million in 2008 and has a cumulative deficit of Pounds Sterling 72.24 million as at 31 December 2008. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.

Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.

There can be no assurances that the Company's activities will be successful or sufficient and as a result there is doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.

2. Changes in accounting policies and recent accounting pronouncements

Changes in accounting policies

General standards of financial statement presentation - section 1400

This section was amended and now requires companies to assess and disclose an entity's ability to continue as a going concern.

Capital disclosures - section 1535

This new handbook section establishes disclosure requirements about an entity's capital and how it is managed. It requires the disclosure of information about an entity's objectives, policies and processes for managing capital.

Financial instruments - disclosures -section 3862 and financial instruments - presentation section 3863 which replaces section 3861 financial instruments - disclosure and presentation

Section 3862 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial position and its performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, losses and gains, and circumstances in which financial assets and financial liabilities are offset. These new sections place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The adoption of these standards has resulted in increased note disclosures in the Company's consolidated financial statements.

Inventories -section 3031

These standards requires inventory to be measured at the lower of cost or net realisable value and provides guidance on the methodology used to assign costs to inventory, it disallows the use of the last-in first-out inventory costing methodology and requires that, when circumstances which previously caused inventories to be written down below cost no longer exist, the amount of the write down is to be reversed. The adoption of this standard has not affected the Company's existing policies.

Recent accounting pronouncements

New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company, are as follows:

Section 1582 Business combinations

This section replaces Section 1581 Business Combinations and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period of the Company beginning on or after 1 January 2011. Section 1582 is not expected to have a significant impact on the financial statements.

Section 3064 Goodwill and Intangible Assets

In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial statements relating to fiscal years beginning on or after 1 October 2008. Section 3064, which replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing 1 January 2009. The Company is currently assessing the impact of the new standard.

Harmonizing of Canadian and International Financial Reporting Standards (IFRS)

In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim financial statements commencing 1 January 2011. The Company is closely monitoring changes arising from this convergence.

3. Segmental analysis

The Company's two reportable segments are the power electronics segment, which is involved in the development and manufacture of electrical power supply and control systems and the electrical machines segment, which is involved in the development and commercialisation of high speed electrical machines.

Corporate charges relating to the financing of the Company and other related management activities are allocated between the two reportable segments.

The power electronics and electrical machines systems segments both operate in the United Kingdom. Except for the Investments held by the Company which are located in Canada, all of the Company's assets are located in the United Kingdom.



Power Electrical
electronics machines Total
2008 2007 2008 2007 2008 2007
Pound Pound Pound Pound Pound Pound
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000
Year ended 31 December
Revenue 6,112 9,581 669 244 6,781 9,825
Development income 375 1,176 628 - 1,003 1,176
Amortisation (174) (143) (478) (715) (662) (858)
Interest income 47 183 48 184 95 367
Interest expense (228) (99) (229) (149) (457) (248)
Loss for the period (5,945) (2,352) (3,618) (4,063) (9,563) (6,415)

Capital expenditure 134 525 37 50 171 575

Quarter ended 31 December
Revenue 1,689 2,726 173 24 1,862 2,750
Development income 71 159 - - 71 159
Amortisation (32) (39) (124) (159) (166) (198)
Interest income 5 49 7 49 12 98
Interest expense (97) (25) (98) (74) (195) (99)
Loss for the period (1,872) (1,162) (1,279) (416) (3,151) (1,578)

Capital expenditure (4) 115 12 22 8 137


Power Electrical
electronics machines Total
2008 2007 2008 2007 2008 2007
Pound Pound Pound Pound Pound Pound
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000
As at 31 December
Total assets 4,624 6,800 2,871 7,672 7,495 14,472
Capital assets 532 597 1,105 2,376 1,637 2,973
Total liabilities 4,596 3,523 3,672 2,544 8,268 6,067


Quarter ended Year ended
Total income 31 December 31 December

2008 2007 2008 2007
Pound Pound Pound Pound
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

UK (127) 441 750 1,980
USA 1,629 1,709 5,243 6,314
Canada 307 911 1,496 2,465
Rest of World 124 (152) 295 242
-----------------------------------------
1,933 2,909 7,784 11,001


4. Significant customers

In the year ended 31 December 2008, 48% of the Company's sales were derived from three customers (31 December 2007: 67% from three customers). In the quarter ended 31 December 2008, 43% of the Company's sales were derived from two customers (31 December 2007: 65% from two customers).

5. 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.



Quarter ended Year ended
31 December 31 December
2008 2007 2008 2007
Numerator for basic EPS
calculation:
Pound Pound Pound Pound
Sterling Sterling Sterling Sterling
Net loss 3,151,000 1,578,000 9,563,000 6,415,000

Denominator
For basic net loss - weighted
average shares outstanding 318,571,062 318,571,062 318,571,062 310,387,089


As the Company experienced a loss in both years all potential common shares outstanding from dilutive securities are considered anti-dilutive and are excluded from the calculation of loss per share.

Details of anti-dilutive potential securities outstanding not included in EPS calculations at December 31 are as follows:



Year ended
31 December

2008 2007

Common shares potentially issuable
-persuant to warrants 23,357,142 10,500,000
-under stock options 17,651,700 30,847,250
-persuant to loan note conversions 89,908,333 14,908,333
-persuant to A Ordinary stock conversion 115,000,000 115,000,000
----------------------------
245,917,175 171,255,583

6. Share capital - issued shares

Common
Pound
Number Sterling '000

At 1 January 2007 273,944,592 51,919
Share based compensation 176,470 17
Shares issued, net of share issue costs 44,450,000 3,868
----------------------------------
At 31 December 2007 318,571,062 55,804
----------------------------------

At 31 December 2008 318,571,062 55,804
----------------------------------


No options or warrants were exercised during the year ended 31 December 2008
or 31 December 2007.

7. A Ordinary equity
A Ordinary
Pound
Number Sterling '000

At 1 January 2007 56,250,000 6,123
Redemption of convertible notes 58,750,000 7,187
----------------------------------
At 31 December 2007 115,000,000 13,310
----------------------------------
At 31 December 2008 115,000,000 13,310
----------------------------------


On 28 December 2006 the Group issued 56,250,000 A Ordinary shares of Pounds Sterling 0.08 in Turbo Power Systems Limited, as part of an institutional placing.

On 6 January 2007 the Group issued a further 58,750,000 A Ordinary shares of Pounds Sterling 0.08 in Turbo Power Systems Limited in connection with the conversion of convertible notes.

Holders of A Ordinary Shares of Turbo Power Systems Limited carry no voting rights, cannot attend any shareholder meetings and, in the event of winding-up of the Limited Company are entitled to a maximum distribution of Pounds Sterling 500,000 in aggregate, to rank before the Common Shares. The A Ordinary shares are convertible into an equal number of Common Shares of Turbo Power Systems Inc. on request by the holder, having given 61 days notice. Under certain take over or change in control events, the Ordinary Shares are exchangeable under "super exchange" rights, converting for 3 common shares of Turbo Power Systems Inc. for every Ordinary Share held.

During the preparation of the consolidated financial statements for the year ended 31 December 2008, the Company determined that the Ordinary Shares, previously presented as a separate component of equity in the Company's balance sheet, should be recognized as non-controlling interests. The reclassification resulted in a decrease in Class A Ordinary share capital presented as part of capital and reserves, an increase in the total shareholders' (deficit) and an increase in non-controlling interests of Pounds Sterling 13,310,000 as at December 31, 2007. The Company has accounted for the change in accounting policy on a retroactive basis. As the A Ordinary Shares are non-participating interests in Turbo Power Systems Limited and are non-voting, no current year or cumulative net losses has been allocated to the A Ordinary Shares.

8. Subsequent event

On 19 June 2008 the Company completed a Pounds Sterling 3,000,000 (gross) financing agreement with institutional investors which was amended on 15 August 2008. A key original term of the loan notes, which was amended on 15 August 2008 was that if at any point during the time at which the loan notes are in issue the unrestricted cash balance of the Company falls below Pounds Sterling 750,000, the loan notes are repayable on demand at the request of the majority of the loan note holders.

On 24 March 2009 the Company agreed with the loan holders that for a three month period, commencing 25 March 2009, the loan note holders will not demand that the loan notes are repayable unless the restricted cash balance falls below Pounds Sterling 300,000.



9. Selected quarterly information

All amounts in Pound Sterling '000 Revenue Research and General and
product administrative
development

March 2007 2,033 1,015 841
June 2007 2,342 1,151 1,102
September 2007 2,700 1,736 1,083
December 2007 2,750 1,580 831

March 2008 1,962 1,591 1,059
June 2008 1,711 1,470 1,049
September 2008 1,246 1,363 1,025
December 2008 1,862 841 816


Earnings Net cash Net cash flow
All amounts in Pound per flow from from capital
Sterling '000 Net loss share operating investment

March 2007 (1,403) (0.5) (805) (117)
June 2007 (1,768) (0.6) (1,632) (298)
September 2007 (1,666) (0.5) (2,024) (123)
December 2007 (1,578) (0.5) (1,379) (37)

March 2008 (2,287) (0.7) (1,844) (96)
June 2008 (2,276) (0.7) (2,479) (57)
September 2008 (1,849) (0.6) (1,527) (10)
December 2008 (3,151) (1.0) 195 (8)


Contact Information

  • Turbo Power Systems
    Alan Baird
    Marketing Communications
    +44 (0)20 8564 4460
    Website: www.turbopowersystems.com
    or
    Kreab Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Kreab Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400
    or
    KBC Peel Hunt Ltd
    Oliver Scott
    +44 (0)20 7418 8900
    or
    KBC Peel Hunt Ltd
    Nicolas Marren
    +44 (0)20 7418 8900