Newsletter

February 1999 Profile

Engineering Power Systems Group, Inc.
OTC BB: EGPSF

February 19, 1998
Email : info@otcjournal.com
URL : http://www.otcjournal.com

Engineering Power Systems Limited (OTC BB: EGPDF)

Corporate Web Site Link: Engineering Power.
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This Company is launching one of the most exciting and potentially profitable business ventures we have ever reviewed.
They currently have a solid revenue stream, coming off over $33 million (CDN) in sales in fiscal 1998. The business as it exists today is probably worth considerably more than the current level of the stock (about $2 at the date of publication).   With 9.5 million shares issued and outstanding, the $2 level places a $19 million value on the Company. This is only 50% of current sales, suggesting much higher levels for this stock in the future.
If they are successful in launching their current project, the Company will skyrocket to over $200 million in high margin sales, beginning later in 1999. From a risk/reward perspective, this is one of the most exciting opportunities any of our editors have ever come across.
Later in 1999 Engineering Power Systems Limited intends to begin a project which will address the need to provide easily accessible electrical power for Third World Countries.
The demand for electrical power in Third World Countries is enormous. These countries simply cannot modernize until they can provide power for industry.
India has a population of nearly one billion people that require electrical power to build the country's infrastructure.
In July of 1997, Engineering Power Systems, through its subsidiaries, signed a contract to build, own, and operate two barge mounted power plants which will be built to provide electrical power in Kakinada, Andhra-Pradesh, India.
Simply put, the Electricity Board of the State of Andhra-Pradesh has contracted to "take or pay" for 80% of all the electrical power that can be generated by 2 x 106 Mega Watt "barge mounted" power plants. The Barges will be moored up a river very near the coastline. To read the original press release, link to Barge Press Release .
Once underway, the power barge project will take approximately 13 months to complete, and the cost of the project will be over $200 million. Nearly all those revenues will flow to Engineering Power Systems. This Company's 1998 fiscal year ended in June. Revenues came in at over $33 million(CDN). Click here to read financials.   In calendar 1999, the Company could do over $200 million in revenues. This is the type of growth, that when recognized by Wall Street, lends itself to huge price increases in stock values
The estimated Engineering Procurement and Construction cost of the Power Barges is $165 million. This is not new technology. There are currently two electric producing power barges located on the Hudson River owned by New York Edison, and numerous other power barges around the world. Enron (NYSE: ENE) has a power barge in Puerto Rico. On this page is a picture of a smaller Diesel Set Power Barge which was built by Van Der Horst Limited.   If you wish to see an artists' rendering depicting the barges and learn more about their specifications, link to their web site by clicking on Barge Pictures. Engineering Power is building a Combined Cycle Gas Turbine configuration which is larger, more efficient and more environmentally friendly.
Once completed and operational, Engineering Power Systems estimates that the two barges will generate approximately $60 million in annual revenues.
With the contract in hand, Engineering Power Systems then went out and raised $5 million in two private placements of its stock. The holders of these shares have a cost basis of over $20, which is 1/10th the current market for the stock. To read the original press release, link to Funding Press Release.
The next step for Engineering Power Systems was to find a strategic partner with long standing credibility and international contacts to joint venture the project.
To accomplish this goal, in September of 1997 they retained Everen Securities, the 12th largest brokerage firm in the US as their investment banker. Everen is considered one of the finest investment banking firms in the US securities market. It is extremely rare for an Investment Banking with the reputation of Everen to work with a bulletin board/Canadian Company. Everen has been instrumental in arranging some strategic alliances which position Engineering Power Systems to launch this project in 1999. The text of this press release can be found at Everen Press Release.
Engineering Power Systems then set out to find a construction partner with an international reputation to help supervise the design and construction of the barges. On February 17, 1998, Engineering Power Systems appointed SNC Lavalin, a multi billion dollar International engineering and construction firm with extensive experience in India to supervise the construction and installation of the power barges as their joint venture partner on the Engineering Procurement & Construction contract. To read the press release, link to SNC Lavalin Press Release.
The final piece of the puzzle was put in place on July 2, 1998. The press release was issued by CMS Energy Corporation (NYSE: CMS). CMS Energy (NYSE :CMS) announced the formation of a joint venture with Engineering Power Systems to develop, finance, construct, own, and operate barge mounted electrical generating units throughout the world. CMS Energy Corporation (NYSE: CMS) is the 4th largest utility in the US. They are the 7th largest independent power producer in the world. They have $10 billion in assets, and do $5 billion in sales. They operate in 21 countries, and own the largest independent power plants in North America, Australia, and Africa. They were the first independent power producer to generate electricity in India. To read the full text of this press release, link to CMS Press Release
Discussions with senior management at the Company reveal that Engineering Power Systems plans to begin construction of the power barges later in 1999. The final regulatory review and permitting by the Indian Government is underway.   The Company has already invested several million dollars in blue prints and design engineering through Merlin Engineering of Norway, one of its international subsidiaries.
Engineering Power Systems has several subsidiaries, each of whom will play a role in the construction of the barges. Merlin Engineering has done the blue prints and design engineering. Atlantic Seaboard Industries, another subsidiary, owns the shipyard where the power barges will be outfitted in Port aux Basques, Newfoundland. M & M Engineering, another subsidiary, will perform the installation of the power generating turbines. In short, nearly all the revenues that are generated by the construction of the power barges will flow to Engineering Power, and its subsidiaries.
Let's discuss what all this information means to shareholders.   Engineering Power Systems, through its four subsidiaries has a solid foundation of revenues today. Their fiscal year ends in June. They did over $33 million (CDN) in sales in fiscal 1998, which is up from $8.7 million the previous year.   Senior management tells us that as a whole, the company is operating profitably. However, net losses for the year are primarily attributable to the $3.1 million in development costs the Company invested in the formation, design, and development of the Power Barge project.
Now, let's take this one step further. Once the barges are completed and in place, Engineering Power Systems expects to own 50% of the joint venture which operates the plants. Once operational, 50% of the earnings are expected to flow to Engineering Power Systems. The Company estimates that each barge will generate approximately $30 million in annual revenues, for a total of $60 million per year.
Looking out further this story becomes even more exciting. The Joint Venture agreement between Engineering Power Systems and CMS Energy (NYSE: CMS) calls for each company to have the first right of refusal to jointly build, own, and operate additional barge mounted power plants internationally. If you, as a shareholder, can visualize Engineering Power (OTC BB: EGPDF) five years from now, owning 50% of ten or twenty of these barges, pumping power to third world countries around the Globe, the potential price of the stock goes in to $20 to $50 range, depending on any number of events that can occur between now and then.
Our mission at www.otcjournal.com is to find small, undiscovered companies with businesses that have the potential to provide enormous returns to shareholders. On a year-to-year basis, the Company we present you with today has gone from revenues of $7 million, to $30 million, to what could be over $200 million in just over three years. They have entered into a business in partnership with CMS Energy (NYSE: CMS), a Company that has nearly $10 billion in power generation assets. They have entered into a partnership with SNC Lavalin, a multi billion dollar construction and engineering firm. They have entered into a business that has billion dollar potential over the coming years.
If you are a trader, you might get a nice short-term return on this stock. However, if you are the type of investor that is prepared to take a small percentage of your risk capital, and invest in a Company that could provide you with a huge return over the next five to ten years, this is a stock that you should consider for your portfolio.
Now let's move on to our Big Six review:
As always, the ratings are :
Excellent *****
Very Good****
Good***
Average**
Poor*

Management****

The biographies of the senior management at the Company can be found by linking to Management Biographies.
John Brake, the President of the M&M subsidiary, has 32 years of experience in large scale engineering projects.
Their controller, Tom Warren, spent nearly two decades in senior management at the Canadian Imperial Bank of Commerce.
Roland Mauger serves as the President of Atlantic Seaboard Industries. His background is in civic government and industrial relations. He is an expert in complex inter governmental negotiations which are so critical to projects of this type.
The whole company is headed by CEO James Cassina, the architect of Engineering Power Systems. Cassina has been responsible for bringing together the team of subsidiaries that will execute the power barge project. He has worked directly with CMS Energy (NYSE: CMS), and his investment banker at Everen to put this project together.
We are impressed with the Management team because there are no rookies in this group. Every one of their senior managers has decades of experience and success in their particular field of expertise. We believe that this team can bring the power barge project to fruition.

John Brake
Tom Warren
Roland Mauger
David Myers

Financial Strength and Growth Potential****

Engineering Power's Systems 1998 audit showed $29 million is assets, and $5.6 million in shareholders' equity. Sales for fiscal 1998 came in at $33 million (CDN), with losses of $4.3 million. Of those losses, $3.1 million were directly attributable to pre-paid development costs for the Power Barge Project.
Because this is a Toronto, Ontario, Canada based company with a dual listing on both the OTC Bulletin Board and the Canadian version of the NASDAQ Market (Canadian Symbol: EPSL), the Company reports and does its financial filings with the Ontario Securities Commission.
To get to the financial filings of Engineering Power Systems Limited (OTC BB: EGPDF) click on Financial Filings.
The future of the Company revolves around the Power Barge Project.   Over $200 million needs to be invested to bring this project to completion. The project will be funded as follows:
50% of the project will be vendor financed. This means that suppliers who manufacture the components that go into the construction of the Power Barges will be providing loans.
Export Credit Agencies can provide capital and/or loan guarantees for about $100 million, which will require a down payment of 15%. These are government agencies designed to help promote commerce in their regions.
Management estimates that the Joint Venture between Engineering Power (OTC BB: EGPDF) and CMS Energy (NYSE: CMS) will provide somewhere between $30 to $40 million to complete the project. This should be easily accomplished when you consider that your partner has over $10 billion in assets.
Remember that once financed and started, most of the revenues generated by the cost of building the power barges flow to Engineering Power (OTC BB: EGPDF) and its subsidiaries. Management estimates that there will be a profit margin of about 15% on the $200 million project. Engineering Power's share could equate to $15 million in profits during the construction phase.

Market Capitalization*****

There are about 9.5 million shares issued and outstanding on Engineering Power Systems. At $2 per share, the stock market places a value on this Company of $19 million.
If Engineering Power can successfully put all the pieces of this project together, and begin building the power barges in early 1999, the Company could potentially earn $15 million during the construction phase of the power barges. This equates to approximately $1.50 per share in earnings. Most stocks with earnings this high will not trade below $10 per share even in a difficult market environment.
Once operational, Engineering Power Systems will own 50% of the profits generated by the power barges, with no further cost. At this point, earnings should increase very dramatically with very little associated cost increases.
If there are delays or Engineering Power Systems fails to launch this venture, you still have a company doing over $30 million in annual revenues, which is clearly worth more than $2 per share.

Corporate Exposure*****

For corporate exposure, Engineering Power Systems definitely gets five stars. The Company has relationships in place that virtually assure the attention of Wall Street if they are successful in the Power Barge venture. This profile is the first in a series of public awareness events upcoming to alert the investing community about this Company. The Management of the Company has a total commitment to have this stock trade above the $4 level in the near term in order to meet the requirements for a NASDAQ listing. They will be applying as soon as the stock trades above $4.
They have Everen Securities in place as their Investment Banker. That factor alone would assure them of institutional coverage once they meet Everen's criteria for a recommendation.
The joint venture with CMS Energy (NYSE: CMS) also assures them of a Wall Street following. There are probably 25 analysts covering CMS Energy (NYSE: CMS). Once the Power Barge project begins, all these analysts will be aware of Engineering Power's critical role, and we believe it is likely that someone will pick up coverage.

Sex Appeal****

There is an enormous need for electrical power in 3rd World countries. Funding will be available for projects that help 3rd world countries build infrastructure to create a favorable economic environment. This Company falls into a category that is recession proof, and therefore should do well when Wall Street recognizes its value.
The International recession that is now crippling many 3rd World countries creates a very favorable market for the Power Barge concept. Delivering electrical power through the Power Barge concept allows the Company to deliver electrical power into markets rapidly and easily. Their market is only limited to areas near coastlines. In order for international economies to come out of recession, power is required for expansion. Capital is being made available by an accommodating International Monetary Fund. The future for this business looks very strong.

Public Float*****

Of the 9.5 million shares that are issued and outstanding on Engineering Power Systems, about 3.1 million are eligible to trade publicly. We always look at the size of the public float, because that gives us some idea of how much supply might be available to fill excessive demand, should it materialize. 3.1 million shares is a very low public float for a stock at this level, so increasing buy side pressure should lead to an enhanced share price.   Moreover, this stock is trading near an all time low, and was hammered in year end tax selling at the end of 1998. In short, we believe that this stock is at rock bottom near the $2 level.

Conclusion

At todays level, investors can own this stock for 10% of the price sophisticated institutional investors paid over one year ago. It has taken Engineering Power (OTC BB: EGPDF) 1 1/2 years to get this close to launching the venture to build the power barges. Although most of the development work has been accomplished, there could be other delays . As a shareholder, this is out of your control.
However, as an investor, if you can see the potential this business has over the next five to ten years, and you can visualize a company which jointly owns five to ten of these power barges, you should be able to see a huge winner in your portfolio over the long term. With sophisticated and experienced partners like SNC Lavalin, and CMS Energy (NYSE: CMS), you have to like their chance of launching these power barges.
Note: References to the trailing financial information on Engineering Power Systems Limited (OTC BB: EGPDF) are in Canadian Dollars. References to the costs associated with the Power Barge project are in US Dollars.
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Disclaimer
The OTC Journal.com Newsletter is an independent electronic publication committed to providing our readers with factual information on selected publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible. All statements and expressions are the sole opinions of the editors and are subject to change without notice. This profile is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The editor, members of the editor's family, and/or entities with which they are affiliated, may own stock in and have other financial dealings with the companies who appear in the publication. 1st Net Technologies, the parent company of OTC Journal Management, which owns OTC Journal.com, has received the following compensation from Engineering Power Systems Limited: 75,000 options with an exercise price of $1.75. On the date of the release of this profile, 1st Net Technologies has perfomed Web Site Design Services and provided Internet Related Technologies to Engineering Power Systems Limited for fees totaling $43,750. These fees have been applied to the exercise of 25,000 options of Engineering Power stock. 1st Net may not exercise the remaining options until June 1st, 1999, when 1st Net has the right to exercise 25,000 options, and October 1st, 1999, when 1st Net can exercise the remaining 25,000 options. 1st Net retains the right to sell or buy shares of Engineering Power Systems Limited at any time at its sole discretion. The OTC Journal.com critiques may contain forward looking statements relating to the expected capabilities of the companies mentioned herein.
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