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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 33-19584
POWERCOLD CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2582701
(State of Incorporation) (IRS Employer
Identification No.)
103 Guadalupe Drive
Cibolo, Texas 78108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 210 659-8450
Securities registered pursuant to Sections 12(b) of the Act: NONE
Securities registered pursuant to Sections 12(g) of the Act: NONE
Common Stock, $0.001 Par Value OTC Electronic Bulletin Board
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO .
------ -----
As of March 31, 1999, 6,834,136 shares of Common Stock were
outstanding, and the aggregate market value of such shares held by
unaffiliated stockholders was approximately $2,562,800.
Documents incorporated herein by reference: NONE
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PART I
ITEM 1. BUSINESS
General Company Business
PowerCold is a solution provider of energy efficient products for the
refrigeration, air condition and power industries. The Company operates across
many market sectors from large industrial food processors to small commercial
air conditioning systems. The firm's focus is to give customers products and
systems that allow them to benefit from current changes occurring in the
natural gas and electrical utility marketplace. Refrigeration is the most
energy intensive operation most business operators face. PowerCold has the
opportunity to provide products and systems, that customers require taking
advantage of these changes, to improve profitability by reducing their
operating costs.
Deregulation of the gas and electric utilities will provide continuing
opportunities, creating new markets for more efficient refrigeration systems.
PowerCold has the products, experience and creative ability to package unique
refrigeration systems for the multi-billion dollar refrigeration market. To
enhance this market the Company is pursuing synergistic businesses, and
marketing alliances are being formed with major utility companies and
established refrigeration companies for these products and services.
The Company's mission is to be a solution provider of energy efficient products
for the multi-billion dollar refrigeration, air condition and power industry.
The Company's goal is to achieve profitable growth and increase shareholder
value by forming business alliances and providing superior technology, products
and services.
Management intends to continue to utilize and develop the remaining intangible
assets of the Company. It is Management's opinion that the Company's cash flow
generated from such intangible assets is not impaired, and that recovery of its
intangible assets, upon which profitable operations will be based, will occur.
The Company is currently live on the INTERNET, a worldwide information network.
The real time system will provide anyone, shareholder, investor or customer,
with Company news releases, financial data and product information. Access
PowerCold home web page on the INTERNET by addressing:
http://www.powercold.com. E-mail: PWCL@powercold.com.
Company History:
International Cryogenics Systems Corporation (ICSC) was established as a
private company in 1988 to fabricate and market freezer systems. The Company
developed and patented the most advanced, cost-effective and environmentally
safe "quick freeze" systems in the industry. In January l993 ICSC's assets were
merged into a public entity. The name was changed to PowerCold Corporation
(PowerCold) in April 1997, currently trading on the OTC Bulletin Board - symbol
(PWCL). In 1995 the Company acquired four companies - currently three operate
as wholly owned subsidiaries of PowerCold; RealCold Products, Inc., Technicold
Services, Inc. and Nauticon, Inc. RealCold Products designs and manufactures
refrigeration systems, Technicold Services provide consulting services for
commercial refrigeration and freezing systems for use worldwide, and Nauticon
manufactures and markets a unique product line of patented evaporative heat
exchange systems for the HVAC and refrigeration industry.
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Two of the Company's executives /directors, President and Treasurer, have been
affiliated with the public company since 1988 and were also affiliated with the
private company as directors prior to the merger.
At the Annual Meeting of Shareholders on July 30, 1992, the shareholders of the
Company approved the recapitalization of the Company Common Stock consisting of
a 100 to 1 reverse split.
Asset Acquisition - On December 28, 1992, the Board of Directors of the Company
agreed to issue 2,414,083 shares of common stock to six individuals for the
exclusive rights to U. S. Patent No. 4,928,492 (May 29, 1990); which provides a
method and apparatus for production treatment of a product through the usage of
a cryogenic liquid and in a manner such that minimum loss of the cryogenic
liquid is encountered. The products that will be processed by this method
includes, but not limited to, food products, computer chips, tires for
recycling, blood and plasma products, and medical utensils that require a high
degree of sterilization.
The total value of the transaction was $724,224.90. Two of the six individuals,
(Terrence J. Dunne and Francis L. Simola) receiving stock in this transaction
are Directors of the Company. Terrence J. Dunne received 850,000 and Francis
L. Simola received 340,041 shares of stock respectively. This represented 49.3%
of all the common stock issued for the transaction.
The structure and organization of PowerCold as a public entity through 1993 and
1994 was considered as a development stage company. The design, manufacture and
testing of two major freeze machine products, and the restructure from a
private company to a public company expended company time and capital. The
newly designed and manufactured Star Wheel freezer machine was completed and
operating consistently as of March 1994. This was a major undertaking and
technology breakthrough proving that the new immersion freezer design concept
worked. In June 1994 a marketing program was initiated for the freezer machine,
and the progress in business activity projected the company into a true
operating entity.
Subsidiaries
During 1995, PowerCold acquired four companies in the refrigeration business in
a stock exchange transaction. These entities, which compliment and secure
PowerCold's position in the industry, operated as wholly owned subsidiaries.
RealCold Systems, Inc., prior to its sale to Wittcold Systems, a Wittemann
Company, offered custom industrial refrigeration packages and merchant carbon
dioxide plants in a joint venture with The Wittemann Company. Nauticon, Ltd.
offers a product line of evaporative heat exchange systems for the HVAC and
refrigeration industry. Technicold Services, Inc. offers consulting engineering
services, including process safety management compliance and ammonia
refrigeration and carbon dioxide system design. Technicold also provides
operation, maintenance and safety seminars for ammonia refrigeration
technicians and supervisors. Jordan Vessel Corporation, which merged into
RealCold Systems, offered industrial refrigeration system components such as
liquid recirculating packages and refrigeration system vessels of all types.
RealCold Maintenance Systems, Inc. (renamed RealCold Products, Inc.) designs
and produces unique products for the refrigeration industry. Technicold
Services also publishes a quarterly newsletter, COLD TALK, which reaches over
(1800) refrigeration technicians in the industry.
RealCold Systems Inc. signed a Joint Cooperative Agreement in July 1995 with
The Wittemann Company, a wholly owned subsidiary of Dover Resources and Dover
Corp. (NYSE - DOV), for the manufacture and marketing of merchant carbon
dioxide plants and refrigeration products. The cooperation agreement combines
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the technical expertise and experience of RealCold with the marketing of
Wittemann. Wittemann is the world's leading manufacturer of carbon dioxide
systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. George Briley, President of RealCold Systems
with over 45 years experience, is a renown expert in the innovative design and
building of merchant carbon dioxide systems. This industry combination of
technology, sales and manufacturing experience is unsurpassed and provides an
effective and cost efficient entry for this worldwide market. Subsequently,
Wittcold Systems, Inc., a division of Wittemann Company, acquired RealCold
Systems in July 1997.
In August 1995, PowerCold acquired Nauticon Ltd., a company that manufactures
and markets a product line of innovative evaporative heat exchange systems for
the HVAC and refrigeration industry, representing over five years of
development. The new patented products are innovative and unique in design and
simple to manufacture. They use new material technology with high efficiency
copper tubing to give very high efficiency, low operating costs and minimal
maintenance. The evaporative heat exchangers are self-cleaning in most
applications thus eliminating chemical cleaning. The outstanding Nauticon
product features cannot be found in competitive products. Nauticon evaporative
heat exchangers serve the residential, commercial HVAC sector and the
commercial refrigeration industry. They have many applications, varying from
traditional commercial refrigeration to HVAC to industrial cooling. Customers
vary from supermarkets to ice rinks to walk-in coolers for refrigeration
systems. HVAC applications are in smaller commercial buildings, for traditional
air conditioning systems to highly efficient heat pumps. Industrial uses span
plastic molding and extrusion to conventional cooling of process water to
cooling of cutting oils. They are used for condensers, fluid coolers, booster
coolers, and cooling towers. The Company believes that the Nauticon products
may revolutionize the refrigeration industry; an industry that faces serious
changes for the first time in years due to energy and environmental concerns
worldwide. The Nauticon application should reduce these traditional concerns
and enhance the industry's growth.
The three operating subsidiaries, Technicold Services, Inc., RealCold Products,
Inc. and Nauticon Ltd., supported by the parent public entity, PowerCold,
supports all operating activities for the freezing systems, the refrigeration
systems and the evaporative heat exchange systems respectively. Technicold
provides consulting services to the refrigeration industry, and RealCold
Products, Inc. supports all refrigeration and freezer systems operating from
their corporate facility in Cibolo, Texas. Nauticon Ltd. supports all
evaporative heat exchange and refrigeration systems and operations from their
corporate facility in Cibolo, Texas. The corporate manufacturing facility
supports all technical and service product operations including; design and
engineering; assemble and fabrication; administration; marketing, sales support
and consulting services. Sales and marketing activities are supported by
represented agents, dealers and distributors.
Synergy of operations; people and product activity all related with respective
refrigeration product knowledge. People are cross-trained and knowledgeable
about all products. Sales agents and distributors may market related industry
products to the same customer. Products produced for the refrigeration business
are also needed to compliment the freezing system. Packaged refrigeration
systems are a longer sales cycle, higher sale price; refrigeration products and
components, such as Nauticon, have a shorter sales cycle, lower sale price
Affiliate - In December 1996 the Company agreed in principal to merge/acquire
Rotary Power International, Inc. The Company initially acquired a 30% equity
interest in RPI (2M shares of common stock for $1M), and proposed a merger of
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the companies in a stock for stock transaction, whereby RPI would become a
wholly owned subsidiary of the Company. A Plan of Agreement and Merger was
signed with Rotary Power International, Inc. ("RPI") on March 21, 1997 subject
to RPI shareholder approval. Each shareholder of RPI will receive .363 shares
of the Company's common stock (1.56M shares) upon shareholder approval.
There were two major reasons for the acquisition of RPI. - The refrigeration
industry desires packaged refrigeration systems and RPI'S engines add growth
value to our products along with packaging ability. Current deregulation of gas
and electric utilities is creating major competitive changes in energy use and
costs. RPI'S natural gas engines enhance the customers' economic benefits by
reducing energy costs while supporting the environment with a clean burning
energy source. Through associated markets overseas there is a complementary
demand and need for energy, (portable generators) and for refrigeration and CO2
systems in remote areas of the world. RPI primarily marketed engines to the US
government and has had multi-million dollar revenue years. The Company now had
the opportunity to commercialize a proven product that has tens of millions of
dollars and years of development experience behind it.
Packaging of refrigeration systems for supermarkets - RPI has an exclusive
alliance agreement with Hussmann Corporation, the world's largest supplier of
supermarket refrigeration equipment, for marketing RPI'S energy efficient 65
series natural gas engine to supermarkets. Currently 65 series natural gas
engines have been installed in seven supermarkets providing a minimum of 15%
energy savings per store. The estimated 30,000 supermarkets consume 4% energy
use in the US.
Because of the ongoing deregulation of the gas and electric utilities
competition will create new markets for more efficient energy use especially
for commercial refrigeration systems. The Company would have the products
(Nauticon condensers and RPI engines) and management has the experience and
creative ability to package refrigeration systems for the multi-million dollar
commercial refrigeration market. The Company was forming marketing alliances
with major utility companies and well established refrigeration companies in
the business.
Prior to the decline of RPI as set forth below, RPI was the world's only
manufacturer of stratified charge rotary engines and large rotary engines. RPI
was the internationally recognized leader in the development and
commercialization of rotary engines (15-3000 horsepower) for use in industrial,
marine and hybrid-electric vehicular markets. RPI was formed by Richard M.H.
Thompson, affiliates of Loeb Partners Corporation and management in October
1991 to buy the assets and business of the Rotary Engine Division of John Deere
Technologies International, Inc. In 1984, John Deere had bought the Rotary
Engine Division from Curtis-Wright Corporation, which had operated it since
1958.
On July 21, 1997, the Company and Rotary Power International, Inc. agreed to
amend Section 1.2 - The Closing by extending the Agreement an additional forty-
five (45) days. The First Amendment to the Plan and Agreement of Merger, the
extension on the Plan and Agreement of Merger between the Company and Rotary
Power International, Inc., expired on September 5, 1997, accordingly, the Plan
and Agreement of Merger is no longer in effect.
Since the Company initially entered into an Agreement to merge with Rotary
Power International, Inc., there was a continuing deterioration in Rotary
Power's negative cash flow from operations. Funding provided by the Company,
that initially invested $1,000,000 in equity and the $1,000,000 in proceeds
from bondholders, was not sufficient to support daily cash flow needs through
the first (5) months of 1997. The Company did not have any obligation to
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support Rotary Power with any additional financing. In early May the Company
voluntarily loaned Rotary Power $100,000 for back due rent on the building,
$75,000 for the May interest payment on bond debt, and on June 19, 1997 the
Company loaned Rotary Power an additional $41,767 due employees for payroll. In
June 1997 Management decided not to loan Rotary Power any additional funds for
two reasons; the uncertainty of Rotary Power's collateral for the Company's
financing and after receiving documentation from Company's General Counsel
based on his investigation of Rotary Power, which recently uncovered probable
misrepresentation of material financial information by RPI to PowerCold in
December 1996 and thereafter. Currently Rotary Power is in default on accounts
payable due vendors, payments to the landlord, and payments to the bondholders
Trustee. Consequently, Rotary Power International, Inc. requires additional
funding for its daily operations. Therefore, the economic viability and long-
term future of Rotary Power International, Inc. depends on its ability to
obtain additional sources of financing, and there can be no assurance that such
financing can be obtained on acceptable terms or at all. Due to the
uncertainties and risks of lack of financing, Rotary Power may not continue as
a "going concern" and creditors may force Rotary Power into a reorganization
under Federal Bankruptcy. Management of the Company continues to evaluate the
deteriorating condition of Rotary Power and the feasibility of additional
financing from investors. If the Plan and Agreement of Merger, extended an
additional (45) days, was approved by Rotary Power shareholders the Company
would have re-evaluated the feasibility of Rotary Power's products and
organization.
In November 1997, a new president took over operations of Rotary Power.
Subsequent events have led to the restructure of the bond debt and creditors.
And management of PowerCold has expressed a major interest is in acquiring the
Natural Gas Engine Business from Rotary Power.
New Acquisitions
Rotary Power Enterprise, Inc. - Recently formed as a new PowerCold entity to
acquire the Natural Gas Business from Rotary Power International. The
agreement includes: the business assets including intellectual property,
inventory and manufacturing capability; a marketing agreement with the Hussmann
Corporation, the world's largest supplier of supermarket refrigeration
equipment for marketing the natural gas engine screw compressor systems to
supermarkets; the North American rights to the small 65 series Mazda natural
gas engine block, subject to Mazda Agreement; and Distributor Agreement for the
580 and 40 series engines from Rotary Power International, Inc. The rotary
engine driven screw compressor refrigeration system significantly reduces
refrigeration electrical demand during the most expensive periods of the day
and year.
Deregulation of gas and electric utilities is creating major changes in energy
use and costs. The natural gas engines enhance the customers' economic benefits
by reducing energy costs while supporting the environment with a clean burning
energy source. Supermarkets, as the initial target market, have seven natural
gas engine screw compressor systems installed. The systems currently provide a
minimum of 15% energy savings with one engine per store. The market includes
over 30,000 supermarkets that consume 4% of the electrical energy used in the
US. Also, through associated overseas markets there is a complementary demand
and need for low cost energy for similar refrigeration systems in remote areas
of the world.
Other target markets for the rotary engines include: Large cold storage
facilities, food processing plants, ice rinks and natural gas wellhead,
pipeline and distribution network. Packaged industrial refrigeration systems
produced by RealCold Products will now use natural gas rotary engines instead
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of competitor engines. A packaged, commercial air conditioning system was
designed using natural gas rotary engine and the Nauticon evaporative condenser
for large building facilities.
Channel Freeze Technologies, Inc. - Recently formed as a new PowerCold entity
to acquire 80% of the assets of Channel Ice Technologies, a proprietary
patented and economical multi-purpose freezing system, suitable for virtually
any liquid or semi-liquid product, that is inherently more efficient than prior
technologies in a variety of industries including; block ice - for ice plants,
fish and produce industries; food and food byproducts - for food suppliers and
their leftover byproducts, fruit and juice products. The most notable new
application is for highly efficient management of liquid and semi-liquid
industrial waste products for municipal water, pulp and paper plants and
utilities. The freeze-thaw process; waste is frozen, the water in the frozen
sludge drains almost immediately during thaw, and the remaining materials are
than disposed of at greatly reduced cost, recycled or sold off. Very swift,
economical freezing of the products is much more cost effective, up to one-
third the cost, than with bulk, blast freezing or drum freezing.
Alturdyne Energy Systems, Inc. _ A Letter of Agreement has been signed by The
Company to acquire Alturdyne Energy Systems from Alturdyne. The formal
Agreement is in legal review and process and should be completed by April 30,
1999. Alturdyne Energy Systems as a wholly subsidiary of PowerCold will market
natural gas engine driven water chillers, pumps, air compressors and
generators. RealCold Products will manufacture the water chillers under the
name ALTURCHILL.
Strategic Alliance
Alturdyne - An innovative manufacturer of standby diesel generator sets,
turbine and rotary generator sets, pumps and natural gas engine-driven
chillers. Alturdyne is an approved vendor for all the "Baby Bells" telephone
companies that are regulated to maintain standby power. This regulation results
in the telephone companies purchasing a significant number of generator sets
every year. There are over 3600 units installed, and Alturdyne provides
service field support for these systems and other manufactured units. The
generator set market is a major new and replacement market for rotary engines
where Alturdyne has extensive manufacturing experience.
Alturdyne's strength lies in its power engineering personnel, who are
knowledgeable in the generator set business, telephone company applications,
small turbines, rotaries and chillers. Their capabilities and experience in
developing low cost, customer power packages that meet specific needs have
established Alturdyne's excellent reputation in the industry. Alturdyne's
added expertise is in the design and production of rotary engines.
Intermagnetics General Corporation (Amex: IMG) - Recently purchased for
$1,000,000 an aggregate of 1,250,000 shares of the Company's Series A Preferred
Stock, par value $0.001 per share; and PowerCold granted Intermagnetics General
Corporation a purchase option to acquire up to 50% of the fully diluted equity
of the Company. The purchase option is exercisable at a per share price of the
lesser of $3.00 or a market price calculation of the common stock, for an
option term no later than March 31, 1999.
Intermagnetics is the largest integrated developer and manufacturer in the
United States, of superconducting LTS and HTS magnets, wire and cable as well
as associated low-temperature refrigeration equipment, and radio-frequency (RF)
coils, the combination of which is essential to successful application of
superconductivity such as Magnetic Resonance Imaging (MRI). The Company is
dedicated to the development and commercialization of applied superconductivity
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and refrigeration systems. The Company also supplies permanent magnet systems,
materials separation equipment and FRIGC(R) refrigerants as replacements for
ozone-depleting refrigerants.
New innovative products include: A patented advanced subcooling system that
initially will be marketed to some 135,000 supermarkets and convenience stores.
The Precooled Vapor-Liquid Refrigeration Cycle could as much as double the
energy savings of traditional subcooling equipment. A state of the art
superconducting magnetic energy storage (SMES) system designed for both
industrial end-users and electric utilities, prime for an industry that is
entering a deregulation environment. The system protects critically important
electric equipment against voltage sags and/or power interruptions.
The refrigeration and power industries are currently representing a demanding,
new rapidly changing growth market worldwide. This new evolving market is
primarily driven by two major factors; the utility industries changing energy
and demand charges for the cost of energy use, and the demand for refrigeration
and power for use by third world countries. The request for lower cost "clean"
energy around the world introduces a new array of exciting opportunities and
markets, primarily emerging by the requirement for more efficient refrigeration
and power.
A strategic alliance with IGC compliments both companies and support each
other's desire and needs with their respective energy efficient products and
services. PowerCold has key personnel, industry contacts and unique products,
and Intermagnetics General has the management and financial strength and
complimenting products. This new emerging opportunity has all the necessary
ingredients for success --- jump-start a small emerging company and rapidly
expand a new venture of a large company. Both companies are positioned with
product technology and management services to provide supportive integrated
solutions for this multi-billion refrigeration and power industry.
Management:
PowerCold's management philosophy and structure supports decentralized
authority and operations, profit and loss accountability, incentive driven
performance and compensation, and total customer satisfaction. Management has
over 150 years business experience. Their extensive experience and background
is adequately related to the business. CEO - over 35 years experience in
marketing and management; COO - over 40 years experience in manufacturing and
marketing in the refrigeration and power industry; CFO - over 25 years
experience in finance, a CPA with a concentration on SEC audit and public
accounting; CTO - over (40) years technical experience in refrigeration
engineering and design; a well-known expert consultant in the refrigeration
industry. The subsidiary companies include experienced marketing and technical
management and support personnel.
The Company's management objective is to become a major force with niche
products in the multi-billion dollar refrigeration industry. The Company's goal
is to achieve profitable growth and increase shareholder value by increasing
its line of superior products and services, through acquisitions and joint
ventures of related products and companies.
The Company maintains corporate offices in San Antonio, Texas, and an executive
office in Philadelphia, Pennsylvania. Administrative, engineering and
manufacturing facilities are located in Cibolo, Texas.
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Products:
Industrial Refrigeration Packages - RealCold Products, Inc. a wholly owned
subsidiary of the Company, designs and packages commercial refrigeration and
freezer systems. RealCold Products was reorganized with its new name in March
1997, replacing RealCold Systems Inc. and RealCold Maintenance Systems, Inc.
RealCold Products supports all engineering and manufacturing of commercial
refrigeration packages and its freezer systems. Custom innovative refrigeration
products include the following: ammonia recovery and recycling system, non-
chemical water treating system, liquid recirculating packages, and
refrigeration system vessels.
Complimenting the various product lines, the Company intends to market other
various related industry products including automated ice systems, which
produce low cost block and sized ice.
Competition - varies from small industrial refrigeration manufactures to the
very large companies in the industry, all competing for this multi billion-
dollar industry. The Company envisions an enormous market demand for
refrigeration systems in third world countries. America is well entrenched with
refrigeration systems, but there is a great niche market for the Company's
unique and innovative refrigeration and freezer products. PowerCold and its
related entities have the refrigeration engineering expertise and new
innovative products that are needed and in demand today for an industry that
hasn't seen many changes in the last 30 - 40 years.
Evaporative Heat Exchange Systems - Nauticon Ltd., a wholly owned subsidiary of
PowerCold manufactures and markets a product line of evaporative heat exchange
systems for the HVAC and refrigeration industry. The new patented products are
innovative and unique in design, use new material technology, are simple to
manufacture, and have low operating costs. They are used for condensers, fluid
coolers, booster coolers, and cooling towers.
Condensers for both Refrigeration and HVAC - Capacities range from 60,000 to
525,000 BTU for refrigeration condensing. Refrigerants may be at different
incoming temperatures as would be normal for multi-circuit applications.
Copper coils are compatible with all refrigerants except ammonia.
Fluid Coolers - Water. oil, glycol - anything compatible with the copper
coils can be cooled according to each thermal characteristics. The separate
coils can handle different liquids at the same time, according to needs.
Booster Coolers - Applies to new or existing applications. Especially
advantageous in systems now short of capacity, as it can be inserted in the
existing cooling loop to circumvent the need for an entirely new system.
Gives low cost additional cooling to refrigerants or liquids plus the multi-
circuit ability.
Cooler Tower - Several important differences set this cooling tower apart
from others. Hot water is dispersed through Nauticon's unique "cyclone" water
heads - there are no sprinkler moving arms to break, stall or clog. No
bottom openings to attract debris, thus polluting the system.
Unique low cost manufacturing procedures are essentially for the same product,
which is offered in four varieties. This is attributed to communality of parts
and manufacturing. Manufacturing processes and techniques are both simple and
well worked out utilizing low cost labor.
Initially Nauticon's market was primarily mid-range systems (20- 50 ton units)
for mid size industrial and commercial applications. There has been a major
interest from refrigeration manufactures at the trade shows that the larger (80
- - 120 ton units) are more desired for their larger applications. The Company
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also envisions an enormous opportunity for the small market - a low end HVAC
system for the home and commercial uses. A related, but completely separate
opportunity exists in the small unit market for a self-contained evaporative
condenser (2.5 to 10 ton units).
Its primary advantage is energy savings, yielding extremely high EER ratings to
not only better, but to offset the regulated change to low efficiency
refrigerants. To be sold as a replacement or new applications and to also be
offered packaged with compressors.
Competition - Nauticon products could revolutionize the refrigeration
industry; an industry that faces serious changes for the first time in years
due to energy and environmental concerns worldwide. The Nauticon application
should reduce these traditional concerns and enhance the industry's growth. The
Company believes that it has a truly unique product concept that serves a very
wide arena of commercial applications for the national market as well as the
international market. Initial marketing of the Nauticon systems will be
primarily the mid-range systems because there is much less competition, a great
advantage to Nauticon and its unique patented product. The larger and smaller
size systems are marketed by some of the major competitors in the industry;
larger systems by Evapco and BAC, smaller systems by York and Carrier. These
competitors are well established and have substantially greater financial and
other resources than Nauticon.
Channel Freeze - patented Automated Bulk Freezing System has many applications.
Automated block ice production. Automated freezing of food and food by-products
in bulk, i.e., orange juice, offal, etc. Freeze/thaw (BiofreezeTM) applications
that reduces the cost to process residual sludge by up to 50%. This system
minimizes landfill costs and water treatment costs. This application is being
researched at this time. The technology has been proven many times usually in
areas where nature supplies the freezing during winter and thawing in summer.
BiofreezeTM automates this process. There are literally thousands of potential
users of this product. The Channel Ice System replaces the now obsolete can-ice
plants, many of which are over 50 years old. There are some 500 can-ice plants
still operating in the US. However the major market for Channel Ice is export.
Block ice is still in demand outside the US.
The Channel Freeze bulk freezing system, which has been tested freezing single
strength orange juice, can also be employed to freeze other food and non-food
products, such as red meat, gravies, seafood, fruit, eggs, etc. Channel Freeze
is working with a large chicken producer to replace their existing Vertical
Plate Freezers, which freeze chicken byproducts. Freezing time tests are being
performed now. This is a market that has considerable potential as the Channel
Freeze unit provides the following features:
Competition - Block Ice - Small packaged manual block ice plants manufactured
bv various people in the U.S. Up to five or ten tons of ice per day. A manual
block ice plant manufactured in Mexico with sizes up to 100 ton per day or ice.
Bulk Freezing - Vertical plate freezer manufacturers: York Food Systems -US
(manual), Gram - Denmark (manual), Technal - France (semi-automatic), APV-Baker
Ltd _ Jackstone, England (manual), Dole - U.S. (manual), Blast Freezers - US
(manual).
Freezer Systems - PowerCold's basic system (patented in May l990) quick-
freezes food products by immersing them in a bath of refrigerant, with special
advantages for fragile foods such as fruits and seafood. Quick freezing forms
a protective, ice-glazed shell around foods with little cellular damage. This
method retains freshness and flavor, and prevents clumping for processing and
packaging. Quick-freezing also reduces shrinkage, promotes faster thawing,
extends product quality and shelf life up to four times longer than other
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processes. This unique process provides the least cost to freeze per product
pound versus competition. It has environmental advantages over competitive
systems. PowerCold's cost-effective systems use less energy, less refrigerant,
save space, and require no periodic defrosting.
The Quick Freeze System, employing a recoverable liquid refrigerant, provides a
cost-effective method for freezing specialty products that are difficult to
freeze employing conventional systems. The Quick Freeze System has advantages
over all existing systems, designed to freeze "specialty" foods, which are
typically difficult to freeze, includes the following: peeled and deveined
shrimp (prawns), fish fillets, sauces (gravies) or other fragile food products.
This system may also be employed in "peeling" systems, sterilization of
surgical instruments, blood freezing and possibly others.
Rotary Drum System - The Company's newly designed Rotary Drum System (patent
pending) receives food product into rotating drum pockets. Refrigerant enters
each individual pocket from the top of the rotating drum. While rotating, the
sealed food product and refrigerant in the drum pockets are computer
controlled, cycled and timed for freezing specifications desired.
A small compact, low cost (42" in diameter) rotating drum, constructed of high
density (HMW polymer) plastic and stainless steel, which is insulated and
sealed maintaining a slight positive pressure to prevent air infiltration. Food
product, assembled on a conveyor system, enters sealed rotating drum "pockets".
Liquid refrigerant enters the top sealed rotating drum "pockets" and merges
with the food product. While rotating, the liquid refrigerant is drained off
and the food product remains in the "pockets" for "drying" (evaporation of
refrigerant). Rotation cycle is timed and synchronized to produce the level of
product freezing desired. Food product is discharged from the rotating drum
onto a conveyor system and container. The liquid freezant and vapor gas is
recaptured and recycled.
PowerCold Quick Freeze Process - The Quick Freeze process is based upon the
principles of the low boiling point of low temperature halocarbon refrigerants,
and the subsequent surface heat removal of processed product in an environment
of less than -20. F. This is, in this case, accomplished with liquid
halocarbon refrigerants, which provides for virtually instant surface freezing.
Upon introducing the product into the process chamber or "pockets", it is
immediately immersed in a liquid bath of refrigerant agent and crust-frozen.
This causes the crystal structure of the liquid in the crust to form a matrix
which interlocks to the firmness similar to that of an egg shell which protects
the delicate inner section which contains the meat, flavoring juices and
aromas.
Competition - Food Freezing:
Mechanical Systems - There are two types of in-line continuous freezing
systems. Each employs a mechanical refrigeration system, usually two staged or
economized. Most of the refrigeration systems employ ammonia as the
refrigerant. IQF fluidized freezers are employed to freeze loose (unpackaged)
vegetables and fruit on a continuous basis. The other mechanical freezing
system employs a spiral conveyor to transport product through the enclosure.
This type freezer is used to freeze both "open" and boxed products.
Liquid Nitrogen Freezers - Cryogenic freezing has been a factor in the food
freezing industry for many years. Its main selling point has been rapid
freezing that provides excellent quality. Its main disadvantage is cost to
freeze. Two types of nitrogen freezers are available. One is a spiral, the
other is an air in-line belt (conveyor) freezer.
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Carbon Dioxide Freezers - Another cryogen, carbon dioxide (CO2), is also used
for freezing many kinds of food products. The freezer configurations are
similar to liquid nitrogen freezers. CO2 freezers in general have an advantage
over liquid nitrogen that is difficult to overcome and that is cost to freeze.
At the current time management believes there is no substantial market in the
US for the ReelFrez food freezing system, (a RealCold product), because of the
ban on the use of certain refrigerants. Some countries continue to use these
refrigerants, and a recent market study projects a need for thousands of food
freezing systems in third world countries. Management is seeking overseas
alliances for the freezing system.
Engine Driven Chillers
In 1991 Alturdyne began manufacturing engine driven chillers as a new product
line. Chillers are cooling systems normally used for buildings, offices,
schools, hospitals or factories and provide 30 to 1100 tons of chilled water.
Currently 99% of the chillers manufactured are driven by electric motors.
However, there is a growing demand for natural gas engine driven chillers due
to deregulation of the electric and gas utilities. In some areas of the country
electric power is very expensive and operating on natural gas can save
thousands of dollars a year for user. Also in some areas gas companies provide
large rebates to natural gas users which helps reduce the higher capital cost
of the chiller. A natural gas engine is more expensive than a very high
production electrical motor and this difference makes engine driven chillers
more difficult to sell unless there is an early pay off through cost savings on
the users energy bill. Applications with co-fueled diesel engines are in
development by Alturdyne.
Since 1991, Alturdyne has developed 22 standard chiller models rated from 30 TO
300 tons that are certified by Environmental Test Labs which is comparable to
the UL listing. Designs have been made for units rated from 30 to 1100 tons and
several large units placed into service. Alturdyne has have sold over 140 units
to date and that places us in second place for this industry. Tecochill is the
industry leader, and while they enjoy sponsorship by Gas Research Institute
they utilize short life automotive derivative engines as opposed to long life
Caterpillar industrial engines used by Alturdyne.
While the Alturdyne chiller products have been a technical success, the
competitive marketplace has limited its financial success. Therefore,
Alturdyne has recently sold off the Chiller Business to PowerCold. PowerCold
has the refrigeration expertise and resources and the rotary power engine as a
solution integrator to economically produce the chillers. Alturdyne and
PowerCold have entered into is a strategic alliance for packaging PowerCold
rotary engines and Alturdyne generator sets for the power industry market.
A "hybrid" electric motor/gas engine driven chiller is in development with GRI
funding that will result in a product that can service as the backbone of this
business. It will be covered by several patents and feature a variable speed
constant frequency (VSCF) capability.
Rotary Power Engines
The Natural Gas Rotary Engine offers:
20,000 Hour engine reliability
Low fixed maintenance cost
Few moving parts
Low noise
Compact configuration
Wide horsepower range 20-1500HP
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2000 to 4200RPM variable speed capability (>100HP - 3600RPM maximum)
Internal gear drives shaft at three times rotor speed
No external gearing required
Light weight
Low vibration
No special or massive foundations required
Minimal structural bases required
Black start capability
Only control circuit power required
Eliminates new electrical feeders in many new installations
NGRE driven rotating equipment and Systems are applicable to a wide variety of
industrial uses, and offer customers large savings in electrical costs from
both energy and demand savings. A NGRE, providing on-site utilities, burns the
minimum annual gas flows required to allow sites to buy "transport" natural gas
rather than more expensive commercial gas. The combination of natural gas and
electrical energy allows the customer to balance its utility consumption on a
daily, weekly, monthly or annual basis. RPI feels that the unique
characteristics of natural gas powered engines allows them to successfully
compete in market sectors where low maintenance and high speed rotating
equipment is predominant or is rapidly taking over the market from older
reciprocating equipment.
Air conditioning - screw compressors
Refrigeration - screw compressors
Plant air compression systems - screw compressors
Natural Gas compression systems - screw compressors
Mobile power units - Permanent Magnet Generators
Stationary peaking power supplies _ generators
65 Series Natural Gas Engine
The 65 Series twin rotor Natural Gas Rotary Engine. Model RN-065x2-NA, is a
natural gas engine derived from Mazda Motor Corporations RX-7 automotive rotary
engine. The basic block incorporates unique internal parts and features for
meeting the 20,000 hour life demanded by the industrial market; i.e., ceramic
apex seals, strengthened stationary gears. More durable water pump and longer
life elastomers. The engine is rated at 8OHP on natural gas at 4200RPM. It
incorporates an IMPCO natural gas carburetor and specially tuned intake
manifold.
580 Series Natural Gas Engine
The 58Q Series family of twin rotor Natural Gas Rotary Engine power modules is
derived from the extensive military development of the 580 Series diesel/multi-
fuel engines since 1977. The initial 580 Series Natural Gas Rotary Engine
development has been for a twin rotor engine rated at 500HP at 36OORPM. This
will provide the power to generators for peak power shaving. The four rotor
(composed of two 5OOHP modules) rated at 1000HP and the six rotor (three 5OOHP
two rotor modules) rated at 1 5OOHP complete the family. The 580 natural gas
engine runs on low pressure natural gas and does not use expensive high
pressure fuel injection equipment and costly turbochargers found on diesel
engines, thus offering a very competitive natural gas power plant for
industrial applications.
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ITEM 2. PROPERTIES
The Company maintains its corporate office in Cibolo, Texas, and an executive
office in Philadelphia, Pennsylvania. The Cibolo facility is 32,000 sq. ft. and
houses administrative, engineering and manufacturing operations.
The Company owns and maintains no properties. Properties are leased on a short-
term basis. Management believes that the Company's facilities are adequate for
its operations and are maintained in good condition. The Company is aware of
the growth potential of its operating facilities and is currently reviewing
other plant facilities near their respective locations.
ITEM 3. LEGAL PROCEEDINGS
Management of the Company is seeking to recoup damages from the former
president and director of Nauticon, in connection with Nauticon's acquisition
by the Company. Related to this matter is the ownership of certain patents. It
is the opinion of management that this matter will not have any adverse effect
on the Company at this time, because the Company legally acquired all the
assets of Nauticon including the patents in exchange for stock. The former
president of Nauticon has filed a counter claim against the Company and two
Company Executives/Directors.
Because of the financial and managerial problems incurred by the previous
management, Nauticon has incurred bad debts and certain claims have been filed
against Nauticon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Company's shareholders voted majority consent in favor of issuing
Intermagnetics General preferred shares for their $1,000,000 investment in the
Company in 1998.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the OTC Electronic Bulletin Board under
the trading symbol PWCL. As of December 31, 1998, there were approximately 240
record holders of the Company's Common Stock.
The following table sets forth the high and low sale prices of the Company's
Common Stock as reported by one of the market makers for the periods indicated.
1998 High Low 1997 High Low
----------------------------------------------------------------
First Quarter 1 1/2 1/4 1 3/4 1 1/4
Second Quarter 1 7/8 1 1/4 1 3/8 3/4
Third Quarter 2 1 1 1/8 1/2
Fourth Quarter 1 1/4 7/8 1 3/8
The Company has paid no cash dividends to date, and it does not intend to pay
any cash dividends in the foreseeable future. The present policy of the Board
of Directors is to retain any future earnings and provide for the Company's
growth.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for PowerCold and its
subsidiaries. The financial data for fiscal years ending December 31, 1994
through December 31, 1998 have been derived from the Company's audited
Consolidated Financial Statements included elsewhere in this Report, and should
be read in conjunction with those Consolidated Financial Statements and related
notes.
SUMMARY STATEMENT OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, 1998 1997 1996 1995 1994
--------- ---------- -------- --------- ---------
Revenues $ 442 $ 393 $ 1,452 $ 2,244 $ 0
Operating (loss) $ (1,203) $ (1,713) $ (573) $ (1,060) $ (245)
Net Income (loss) $ (1,690) $ (2,720) $ 2,209 $ (1,089) $ (245)
Net Income (loss) per share$ (0.27) $ (0.46) $ 0.39 $ (0.23) $ (0.07)
Weighted average number of shares 6,377 5,893 5,662 4,776 3,504
SUMMARY BALANCE SHEET (In thousands, except per share data)
Year Ended December 31, 1998 1997 1996 1995 1994
------- -------- -------- ------- -------
Total assets $ 2,322 $ 2,229 $ 5,146 $ 2,298 $ 866
Total liabilities $ 1,164 $ 817 $ 1,076 $ 759 $ 99
Long term debt $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders' equity $ 1,158 $ 1,412 $ 4,070 $ 1,539 $ 767
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward looking statements made herein are based on current expectations of the
Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include;
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.
GENERAL FINANCIAL ACTIVITY
RealCold Products, Inc. - designs and manufactures unique energy efficient
packaged products for the refrigeration industry. RealCold Products also
supports Rotary Power Enterprise and Alturdyne Energy Systems by engineering
and packaging their products. RealCold Products will also support Channel
Freeze Technologies by designing and packaging their accompanying refrigeration
systems. Management believes that the recent acquisition of Channel Freeze and
Alturdyne Energy Systems should provide improved revenues and profits for
RealCold Products in 1999, based upon its expertise in custom manufacturing
systems. There are proposed alliances with other refrigeration companies,
whereas RealCold Products will package various components adding value for a
total turnkey refrigeration system.
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During 1998, RealCold Products was mostly inactive because the personnel
expertise involved in design, engineering and manufacturing refrigeration
systems concentrated on the joint venture that manufactured Merchant Carbon
Dioxide Plants and Refrigeration System Packages for WittCold Systems, Inc.
Since the initial joint venture over $8M in revenue was produce and booked by
WittCold Systems. Starting with the acquisition, PowerCold receives a royalty
payment of 2 1/2% _ 5% for ten years on the sales revenue.
Nauticon Inc. - manufactures and markets a product line of patented evaporative
heat exchange systems for the HVAC and refrigeration industry. The new
patented products are innovative and unique in design, use new material
technology, is simple to manufacture, and have a low operating cost. They are
used for condensers, fluid coolers, subcoolers, and cooling towers. Nauticon
products can produce power cost in the refrigeration industry by 20% to 30%
making these units contribute to the utilities' needs to reduce power demand.
There are over 100 systems installed in the US.
Management believes that Nauticon did not meet its sales and revenue
projections in 1998 due to lack of operating cash flow and limited marketing
support. PowerCold has funded Nauticon over $1.0M (cash and loans through a
bank secured by a CD) in operating capital, but the Company has been
continually hindered by major operating and legal expenses due to previous
inept management. Because of the major operating losses incurred by previous
management, Nauticon may not have sufficient resources to continue operations.
Plans for Nauticon; new management is concentrating on sales to industry OEM's
and large refrigeration manufacturers that could produce and distribute product
under their own private label.
New Acquisitions
Rotary Power Enterprise, Inc. - was formed (September 1998) as a new PowerCold
entity to acquire the Natural Gas Business from Rotary Power International. The
agreement includes: the business assets including intellectual property,
inventory and manufacturing capability; a marketing agreement with the Hussmann
Corporation, the world's largest supplier of supermarket refrigeration equipment
for marketing the natural gas engine screw compressor systems to supermarkets;
the North American rights to the small 65 series Mazda natural gas engine block,
subject to Mazda Agreement; and Distributor Agreements for the Rotary Power 580
and 40 series engines form Rotary Power International, Inc.
The Company recently announced a major sales agreement with Kem Equipment
Company, an engine packager for OEM applications for the oil and gas industry
in Western Canada, for (100 small 65 HP and 60 large 500 HP) natural gas
engines valued by management at over $5 million. The major application is for
oil and gas field systems. The initial (160) engines are scheduled for
delivery to a major Canadian oil and gas operation in Western Canada.
Channel Freeze Technologies, Inc. _ was recently formed (September 1998) as a
PowerCold subsidiary to acquire 80% of the assets of Channel Ice Technologies.
Channel Ice produces a proprietary patented and economical multi-purpose
freezing system, suitable for virtually any liquid or semi-liquid product, that
is inherently more efficient than prior technologies in a variety of industries
including; block ice - for ice plants, fish and produce industries; food and
food byproducts - for food suppliers and their leftover byproducts, fruit and
juice products. The most notable new application is for highly efficient
management of liquid and semi-liquid industrial waste products for municipal
water, pulp and paper plants and utilities. The freeze-thaw process; waste is
frozen, the water in the frozen sludge drains almost immediately during thaw,
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and the remaining materials are than disposed of at greatly reduced cost,
recycled or sold.
Since the acquisition, the Company has over $12 million in back log
quotes/proposals pending for systems in the US and Southeast Asia and Japan.
With the acquisition, included were a Channel Ice system sale to Haiti for
$155,000 and a down payment was received for two Channel Ice systems for
Vietnam.
Alturdyne Energy Systems _ PowerCold recently signed a Letter of Agreement
(December 1998), to acquire a division of Alturdyne that produces natural gas
engine driven water chillers. The Company also announced a Strategic Alliance
with Alturdyne for manufacturing and marketing of their respective products.
Alturdyne is an innovative manufacturer of standby diesel generator sets,
turbine and rotary generator sets, pumps and natural gas engine-driven
chillers. Alturdyne's strength lies in its power engineering personnel, who
are knowledgeable in the generator set business, telephone company
applications, small turbines, rotaries and chillers. Their capabilities and
experience in developing low cost, customer power packages that meet specific
needs have established Alturdyne's excellent reputation in the industry.
Alturdyne's added expertise is in the design and production of rotary engines.
Alturdyne Energy Systems, as an Alturdyne division installed over (140)
chillers systems. The manufacturing operations have been moved to the
Company's facility in Cibolo, Texas. The added expertise of RealCold Products
engineering and manufacturing should enhance the existing chiller business.
RESULTS OF OPERATIONS
The following table's sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
Year Ended December 31,
1998 1997 1996
--------- --------- --------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 89.7 83.3 62.8
Gross margin 10.3 16.7 37.2
Operating expenses (282.5) (453.9) 76.7
Operating income (loss) (272.1) (437.2) (39.5)
Other income (expense) (102.0) 22.0 200.2
Net income (loss) (382.2) (694.1) 152.2
Fiscal 1998 and 1997 Results - The Company's Consolidated Statements of
Operations for the fiscal year ended December 31, 1998 compared to fiscal year
ended December 31, 1997: Total revenue for 1998 was $ 442,172 compared to
$391,819 for 1997; operating loss of ($1,203,301) for 1998 compared to
($1,713,203) for 1997; and net loss of ($1,690,187) or ($0.27) per share for
1998 compared to a net loss of ($2,719,633) or ($0.46) per share for 1997. Net
income (loss) per share was based on weighted average number of shares of
6,376,647 for 1998 compared to 5,893,000 for 1997.
The Company's Consolidated Balance Sheets as of December 31, 1998 and December
31, 1997 respectively: Total current assets were $853,996 for 1998 and
$1,581,736 for 1997; total assets were $2,321,970 for 1998 and $2,229,357 for
1997; total liabilities were $1,164,377 for 1998 and $817,191 for 1997; total
stockholders' equity was $1,157,593 for 1998 and $1,412,166 for 1997.
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The company's revenues and expenses resulted in an operating loss ($1,203,301)
for 1998 compared to an operating loss of ($1,713,203) for 1997, these are both
operating losses. The Company's operating loss in 1998 was 30% less than the
operating loss in 1997, and the net loss for 1998 was 38% less than the net
loss in 1997. The decrease in operating losses was due to a reduction of some
$1 million in general and administrative expenses; and the decrease in the net
loss was due to the write-off of the failed merger with Rotary Power
International, Inc. in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company's working capital was ($310,381) compared
with $764,545 at December 31, 1997. The decrease was primarily attributable to
the Company's write-off of $557,145 as of December 31, 1998, in marketable
securities that were permanently impaired. The company's cash resources at
December 31, 1998 were $21,781 reflecting an increase in cash resources from
$2,274 at December 31, 1997.
Simco Group, Inc., a wholly owned affiliate of Francis L Simola, CEO of the
Company has financed the Company on several occasions since the Company's
inception. Simco Group has never received or requested payment of any interest
from the Company for providing said financing. Management believes that
without the continuos financial support of Simco Group, the Company would never
have remained in business.
The Board of Directors unanimously approved establishing Simco Group, Inc. with
fiduciary responsibility for the Company, effective December 27, 1994. On
April 15, 1996, the Board of Directors again voted unanimously to have Simco
group, Inc. continue to support the financial needs of the Company and its
subsidiaries whenever necessary; making loans and borrowing money for the
Companies, selling personal stock or assets of Francis Simola to support the
Company, or to make loans to support financial transactions of the Company.
Because of these financial transactions, Simco Group, Inc. knowingly knew that
it may be at financial risk, loosing personal interest money, and incurring
losses due in personal stock transactions.
At December 31, 1997, the Company had $597,300, ($607,960 in 1996) held by and
invested in an account in the name of Simco. These funds were invested in short
and long-term liquid marketable securities; these funds have been classified as
advances to affiliate. Simco has guaranteed the Company a minimum 8% return on
these funds. During 1998, Simco paid the Company interest of $49,284, ($48,000
in 1997 and $12,000 in 1996). Management believes these terms reflect an arms-
length transactions.
In early 1998, a major security investment decreased in value substantially and
quickly due to uncontrolled market conditions. Simco Group, at its own risk,
used its own money to support the investment during 1998, and continued to fund
and support the Company as needed. Simco also paid interest to the Company.
Management and a majority of the Directors decided to write _off, as of
December 31, 1998, the loss of $557,145.
During 1998, the Company issued 120,000 restricted shares of common stock to
Simco as compensation at an expense of $30,000. The Company also recorded
$60,000 related to payment for expenses and $120,000 for services and $75,000
for consulting services provided for the three new acquisitions of Rotary Power
Enterprise, Channel Freeze Technologies and Alturdyne Energy Systems. These
amounts were credited to the investment account funds to reduce the loss.
18 of 28
During 1997, the Company issued 120,000 restricted shares of common stock
(150,000 shares in 1996) to Simco in satisfaction of prior years' liabilities
related to expenses and consulting services provided. During 1997, the Company
recorded expense of $48,000 related to the issuance of 120,000 restricted
shares as payment for expenses and consulting services provided. The shares
were issued at 50% of the bid price on date of issuance varying from $.30 to
$.625 per share during 1997.
The Company received $1,000,000 through the sale of a redeemable, convertible,
preferred series A Preferred Stock, $0.001 par value, $0.80 stated value.
1,250,000 preferred shares are issued and outstanding.
The Company issued a total of 838,867 shares of new common restricted shares in
1998. 117,647 shares were issued at $0.85 per share for a private placement,
which raised $100,000. 100,000 shares were issued for an acquisition at $0.63
per share. 19,000 shares were issued to the Company Directors at $0.50 per
share. 285,000 shares were issued to key executives as compensation at an
average of $0.33 per share. 317,220 share were issued for satisfaction of
recorded liabilities for expenses and services rendered.
Status of Operations - Management intends to continue to utilize and develop
the intangible assets of the Company. It is Management's opinion that the
Company's cash flow generated from current intangible assets is not impaired,
and that recovery of its intangible assets, upon which profitable operations
will be based, will occur.
Company operating revenues and profit should increase because of the new
acquisitions. Management believes that its working capital may not be
sufficient to support its operations and growth plans, therefore to support the
Company's growth and goals, management is seeking additional funding for this
purpose.
YEAR 2000 ISSUES
The company has formed a committee to investigate any liabilities resulting
from the Y2K problem. The Company's internal computer systems and programs are
being reviewed to make sure they are up to date. If any are not in compliance,
steps are being taken to upgrade the programs from the manufacturers. Any new
computers and/or software programs to be purchased this year will be purchased
as Y2K complied. This same procedure will be addressed for all office equipment
as well. Questionnaires are being sent to the Company's vendors and materials
suppliers to determine their compliance and actions in place to do so. We are
targeting June 1, 1999 to be complete with all compliance actions.
PREVIOUS FINANCIAL ACTIVITY - 1997
Forward looking statements made herein are based on current expectations of the
Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include;
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.
RealCold Systems, Inc Sale - WittCold Systems, Inc., Palm Coast, Florida, a
Wittemann Company and wholly owned subsidiary of Dover Resources/Dover
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Corporation purchased all of the issued and outstanding capital stock of
RealCold Systems, a wholly owned subsidiary of the Company. RealCold Systems
Inc. and The Wittemann Company previously signed a Joint Cooperative Agreement
in June 1995 for the manufacture and marketing of merchant carbon dioxide
plants and refrigeration products.
RealCold System engineers, manufactures and markets custom industrial
refrigeration systems. Wittemann is the world's leading manufacturer of carbon
dioxide systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. The acquisition culminated after a
successful (50/50) cooperative joint venture between the two companies for the
manufacture and marketing of Merchant Carbon Dioxide Plants and Refrigeration
System Packages.
The effective closing date of all financial accounting transactions, between
the two companies, was as of June 30, 1996, the end of the Registrant's second
quarter reporting period. Closing date of the Acquisition Agreement was on July
23, 1996. Terms and conditions of the acquisition agreement between WittCold
Systems, Inc. and the Registrant are as follows:
The purchase price for the common shares was the aggregate sum of Three Million
Dollars ($3,000,000) plus five percent (5 %) of the Net Sales of Refrigeration
Systems for the ten (10) full calendar years 1996 through 2005 and two and one
half (2 1/2%) of Net Sales of Merchant C02 Systems for the nine (9) full
calendar years 1997 through 2005 (the "Percentage Amount").
If the aggregate Percentage Amount paid to Registrant, as set forth above,
through the year 2005 is not at least Two Million Dollars ($2,000,000), the
Purchaser agrees to pay to Registrant no later than April 30, 2006, the
difference between the aggregate Percentage Amount paid to Registrant and Two
Million Dollars ($2,000,000). Notwithstanding the foregoing, in the event that
George Briley, a Director and major shareholder of the Registrant, is not
employed by and actively engaged in the Company's business for a period of
three full years after the date of Closing, then the foregoing obligation to
pay a minimum Percentage Amount of Two Million Dollars ($2,000,000) is null and
void and Registrant shall be entitled only to the Percentage Amount based on
Actual Net Sales as set forth above.
"Net Sales", as used herein, means payments received from customers less
commissions to non-employee agents, export preparation, inland freight and
forwarding fees, ocean freight, insurance, discounts and all warranty work
performed during the relevant period. The Percentage Amount will be determined
each calendar quarter and any amount due Registrant shall be paid to the
Registrant within thirty days after the end of each calendar quarter starting
January 1, 1997.
RealCold Products Packaging - In March 1997 RealCold Maintenance Systems
changed its name to RealCold Products. RealCold Products is responsible for
custom packaging of commercial refrigeration systems. There are proposed
alliances with other refrigeration companies, whereas RealCold Products will
package various components adding value for a total turnkey refrigeration
system. Management believes the Company should improve income and profits as
this entity provides the industry expertise for its custom packaged products
during 1998.
Nauticon Reorganization - In March 1997, Nauticon hired Thomas F. Reece as the
new Sales Manager for its line of evaporative heat exchange systems, whereas he
has initiated new sales and marketing program. Subsequently, Mr. Thomas F.
Reece has been elected a Director and appointed President of Nauticon, Inc.,
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effective October 30, 1997. The evaporative condenser product line is now
operating to specifications after delays in product development. Management is
excited about the prospects for substantial growth in revenues from Nauticon's
operations under Mr. Reece, and projects favorable growth through 1998.
There are some 70 systems installed to date. Nauticon recently installed 35
condensers at a new shopping center in California. There is the potential for
additional systems for other shopping centers. The initial order was very
competitive, whereas the application test ran on site for four weeks. Todate
there are over $500K of proposals out for new system orders projected over the
next few months. Nauticon now has 16 distributors throughout the US, and is in
negotiations with some of the largest refrigeration manufacturers for product
manufacturing and marketing alliances. The prospects for these alliances, if
negotiated successfully, should support a revenue growth that will far exceed
current and future revenue projections. Primary sales targets are the large
refrigeration manufacturers that could produce and distribute product under
their own private label. Besides marketing direct through agents in the US,
other market outlets will be through major distributors worldwide.
Rotary Power International, Inc. Stock Purchase - Per an "Agreement" dated
December 24, 1996 International Cryogenic Systems Corporation (PowerCold")
agreed to invest in Rotary Power International, Inc. ("RPI") the sum of one
million dollars ($1,000,000) in exchange for two million shares (2,000,000) of
RPI common stock.
PowerCold and RPI agreed in principal to merge the two companies in a stock for
stock acquisition, whereby RPI would become a wholly owned subsidiary of
PowerCold. Upon completion of a definitive transaction agreement and approval
by the companies Board of Directors and stockholders, each shareholder of RPI
would receive (.363) shares of PowerCold common stock. The stock for stock
transaction would result in PowerCold issuing a fixed total number of
(1,516,196) shares of common stock for all the issued and outstanding shares of
RPI common stock at the time of closing and execution of the stock purchase and
merger agreement.
Since the Company initially entered into an Agreement to merge with Rotary
Power International, Inc., there was a continuing deterioration in Rotary
Power's negative cash flow from operations. Funding provided by the Company,
that initially invested $1,000,000 in equity and the $1,000,000 in proceeds
from bondholders, was not sufficient to support daily cash flow needs through
the first (5) months of 1997. The Company did not have any obligation to
support Rotary Power with any additional financing. In early May the Company
voluntarily loaned Rotary Power $100,000 for back due rent on the building,
$75,000 for the May interest payment on bond debt, and on June 19, 1997 the
Company loaned Rotary Power an additional $41,767 due employees for payroll. In
June 1997 Management decided not to loan Rotary Power any additional funds for
two reasons; the uncertainty of Rotary Power's collateral for the Company's
financing and after receiving documentation from Company's General Counsel
based on his investigation of Rotary Power, which recently uncovered probable
misrepresentation of material financial information by RPI to PowerCold in
December 1996 and thereafter. Rotary Power went into default on accounts
payable due vendors, payments to the landlord, and payments to the bondholders
Trustee. Consequently, Rotary Power International, Inc. required additional
funding for its daily operations. Therefore, the economic viability and long-
term future of Rotary Power International, Inc. depended on its ability to
obtain additional sources of financing, and there was no assurance that such
financing can be obtained on acceptable terms or at all.
On July 21, 1997, the Company and Rotary Power International, Inc. agreed to
amend The Closing by extending the Agreement an additional forty-five (45)
21 of 28
days. The extension on the Plan and Agreement of Merger between the Company and
Rotary Power International, Inc., expired on September 5, 1997, accordingly,
the Plan and Agreement of Merger is no longer in effect.
In November 1997, a new president took over operations of Rotary Power.
Subsequent events have led to the restructure of the bond debt and creditors.
And management of PowerCold expressed a major interest is in acquiring the
Natural Gas Engine Business from Rotary Power. The Company wrote-off the
$1,216,767 investment in Rotary Power in 1997.
RESULTS OF OPERATIONS - 1997
The following table's sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
Year Ended December 31,
1997 1996 1995
-------- -------- -------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 83.3 62.8 91.2
Gross margin 16.7 37.2 8.8
Operating expenses (453.9) 76.7 56.0
Operating income (loss) (437.2) (39.5) (47.2)
Other income (expense) 22.0 200.2 (1.3)
Net income (loss) (694.1) 152.2 (48.5)
Fiscal 1997 - The Company's Consolidated Statements of Operations for the
fiscal year ended December 31, 1997 compared to fiscal year ended December 31,
1996: Total revenue for 1997 was $ 391,819 compared to $1,451,521 for 1996;
operating loss of ($1,713,203) for 1997 compared to ($573,012) for 1996; and
net loss of ($2,719,633) or ($0.46) per share for 1997 compared to a net income
of $2,208,749 or $0.39 per share for 1996. Net income (loss) per share was
based on weighted average number of shares of 5,893,000 for 1997 compared to
5,662,000 for 1996.
The Company's Consolidated Balance Sheets as of December 31, 1997 and December
31, 1996 respectively: Total current assets were $1,581,736 for 1997 and
$1,502,208 for 1996; total assets were $2,229,357 for 1997 and $5,145,845 for
1996; total liabilities were 817,191 for 1997 and $1,076,319 for 1996; total
stockholders' equity was $1,412,166 for 1997 and $4,069,526 for 1996; and the
Company has no long term debt.
The Company's substantial loss in 1997 over 1996 in net income, total assets
and shareholders equity was due; to the failed merger of Rotary Power, the
additional costs of Nauticon product development and its start-up marketing
program, and the write-off of Goodwill and certain Patent Technology deemed to
be impaired.
The operating loss was due to the acquisition and reorganization of Rotary
Power, maintaining general Company operating overhead including additional
enhancements to the Nauticon product line and the move to new plant facilities
in Cibolo, Texas. Management wrote off its investment in and advances to
Rotary Power, an unconsolidated affiliate, totaling $1,216,767, and an
additional $867,807 for Goodwill and Patent Technology for a total write-off
of $2,084,574.
The Company issued a total of 157,00 shares of new common restricted shares in
1997 in satisfaction of recorded liabilities, for expenses and services
rendered in 1997.
22 of 28
Effective as of January 1, 1997, the Company received from WittCold Systems,
Inc., under the RealCold Systems sale agreement, a "percentage amount" payment
on product sales for the next ten years. The company received $58,975 in
royalty payments in 1997. The cooperative partnership with Wittcold Systems
over the past year has generated proven revenue including ten shipments of CO2
plants for installation in the Far East and Mainland China. Over forty
proposals have been submitted for carbon dioxide plants and refrigeration
systems worldwide. It is management's understanding that future revenue from
the royalty alliance with WittCold Systems may not be as high as previously
projected for 1998 because of the overseas exchange rate versus the US dollar.
Status of Operations - Management intends to continue to utilize and develop
the intangible assets of the Company. It is Management's opinion that the
Company's cash flow generated from current intangible assets is not impaired,
and that recovery of its intangible assets, upon which profitable operations
will be based, will occur.
Company revenues should continue to improve throughout 1998; because of the new
marketing and sales program, and the positive customer acceptance for Nauticon
condensers, and the new packaging program for RealCold Products.
Management believes that its working capital may not be sufficient to support
both its operations and growth plans for acquisitions and joint ventures for
the near future. Management is currently in negotiations with related
businesses. Therefore to support the Company's growth and goals, management is
seeking additional funding for this purpose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements appear on sequential pages F-1 to F-26 Index to
Consolidated Financial Statements of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the registrant's fiscal year ending December 31, 1998 and the subsequent
period up to the date of the former accountants release, there were no
disagreements with the former accountant nor with the current account on any
matter of accounting principles or practices, financial statement disclosures
or auditing scope of procedure.
23 of 28
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
Name Age Position Period Served
------------------ ----- ---------------------------- -----------------
Francis L. Simola 59 Chairman of the Board January 1, 1993
President and CEO
Terrence J. Dunne 50 Director January 1, 1993
Treasurer and CFO
George C. Briley 73 Director, Secretary and CTO September 1, 1994
President:
Technicold Services, Inc. September 1, 1994
RealCold Products, Inc September 1, 1994
Nauticon, Inc. October 1, 1998
Channel Freeze Technologies, October 1, 1998
Inc.
H. Jack Kazmar 63 Director and COO October 1, 1998
President:
Rotary Power Enterprise, Inc. October 1, 1998
Carl H, Rosner 69 Chairman and CEO September 1, 1998
Intermagnetics General Corp.
A summary of the business experience and background of the Company's officers
and directors is set forth below.
Francis L. Simola Mr. Simola has been Chairman, CEO and President of
PowerCold since the Company's inception in January 1993. Mr. Simola's
background and experience includes; over 28 years in the computer industry with
positions in various marketing and management operations with Unisys
Corporation, formerly Burroughs Corporation; over 15 years as a consultant and
principal in various high-tech companies. Mr. Simola is the founder and
president of Simco Group Inc., a private investment company that controls a
major interest in PowerCold. Simco provides services consisting of financing,
marketing and management consulting for small technical start-up companies that
have proven specialized niche products. Mr. Simola is a graduate of Peirce
Business College with a degree in Marketing and Management, and attended
Villanova University and Drexel University Evening College for additional
course studies in Finance and Business Administration.
Terrence J. Dunne Mr. Dunne has been CFO and Treasurer of PowerCold since
the Company's inception in January 1993. Mr. Dunne is a Certified Public
Accountant, and a member of the SEC Practice Section of the American Institute
of CPA's. Mr. Dunne has over 25 years of experience in public accounting, with
a concentration of work in the SEC area of auditing and public accounting. Mr.
Dunne has extensive experience providing financial consulting to a variety of
businesses. Mr. Dunne is a graduate of Gonzaga University in Accounting, and
has a MBA from Gonzaga University with a Masters in Taxation.
24 of 28
George C. Briley Mr. Briley has been a director of the PowerCold since
September 1994, and is President of RealCold Products, Inc., and President of
Technicold Services, Inc., PowerCold subsidiary companies. Mr. Briley has over
forty-seven years experience in engineering and marketing in the refrigeration
industry. After receiving his BSEE at Louisiana Polytechnic University, Summa
Cum Laude, Mr. Briley was employed by York Corp. for twelve years, where he
attended the York Engineering Training Program. At York he served as a Project
Engineer and Sales Manager prior to management positions as a Branch Manager
and Regional Manager. He then served with Frick Company for two years as Field
Sales Manager. Mr. Briley was employed for thirteen years with Lewis
Refrigeration Company, as Vice President and Board Member; and fifteen years
with Refrigeration Engineering Corp. (RECO), as Vice President, Marketing and
Research and Board Member. While serving Lewis and RECO, he helped build the
companies into multi million dollar organizations, where they designed,
engineered, manufactured, installed and serviced industrial refrigeration
systems. Mr. Briley holds four US patents, and is a Registered Professional
Engineer in five states. He is the author of many articles and papers regarding
all aspects of industrial refrigeration. His services on professional
organizations include; Founding President of the International Institute of
Ammonia Refrigeration (IIAR); Fellow in American Society of Heating
Refrigeration and Air Conditioning Engineers (ASHRAE), fellow and life member;
Chairman and member of many committees, and a member at present of the ANSI-
ASHRAE 15-1993 "Safety Code for Air Conditioning and Refrigeration".
H. Jack Kazmar - Marketing Consultant with Rotary Power International, Inc. -
1993 - 1997.
Mr. Kazmar is also a representative for several specialty heating and air
conditioning products. Previously he worked at ICC as Vice President of Sales
and Marketing. Mr. Kasmar has had more than 30 years experience in the
commercial heating, ventilation and air conditioning equipment industry. From
1981 till 1969, Jack Kasmar was President and co-founder of Skil-Aire
Corporation, a manufacturer of standardized commercial heating, ventilation and
air conditioning products. From 1971 to 1981, Mr. Kasmar served in a number of
positions of increasing responsibility at Fedders Corporation, including
General Manager of Residential and Commercial Products Division and Airtemp
Applied. Prior to joining Fedders, he held various positions with Worthington
Corporation in direct sales and field management in NYC, Washington D. C.,
Baltimore and Philadelphia areas. Jack Kasmar holds a Bachelor of Science -
Mechanical Engineering from Lafayette College in Easton, Pennsylvania.
Carl H, Rosner - A principal founder of the Company, Mr. Rosner has been
Chairman of the Board of Directors of Intermagnetics General Corporation since
the Company's formation in 1971 and before that headed the Superconductive
Products Operation of the General Electric Company. Mr. Rosner also serves as
Intermagnetics General Corporation's Chief Executive Officer.
Directors of the Company are elected every three years. Officers of the
Company, elected by the Board of Directors, serve annually. There are no family
relationships among the Directors and Officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
No Officer or Director of the parent company, PowerCold, received any cash
wages as compensation during the year ended 1998. All Directors received a
total of 19,000 shares of common restricted stock based on months served as
Director's for 1998.
25 of 28
Mr. Simola/Simco Group received 120,000 shares of common restricted stock for
services rendered the Company for 1998. Simco Group received $60,000 related to
payment for expenses, $120,000 for services rendered and $75,000 for consulting
services provided for the three new acquisitions. These amounts were credited
to the Company's investment account to reduce debt. Mr. Simola worked 100% of
his time for PowerCold.
Mr. Dunne received 15,000 shares of common restrictive stock for accounting
services for 1998. Mr. Dunne's accounting services include consulting services
on related accounting matters during the year.
Mr. Briley received 100,000 shares of common restricted stock for services
rendered the Company for 1998. Mr. Briley worked 100% of his time for
PowerCold.
Mr. Kazmar received 50,000 shares of common restricted stock for services
rendered the Company for 1998. Mr. Kazmar worked 100% of his time for
PowerCold since October 1, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of December 31, 1998, regarding
the number of shares of the Company's common stock beneficially owned by (i)
all beneficial owners of five percent (5%) or more of common stock, and (ii)
each director. (iii) beneficial owner of outstanding preferred stock.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)
-------------------------- --------------------------- -------------
George C. Briley 652,602 9.55%
17 Pembroke Lane
San Antonio, TX. 78240
Terrence J. Dunne 394,135 5.77%
West 717 Sprague Ave. No. 1100
Spokane, Washington 99204
Robert E. Jenkins 403,728 5.91%
2903 Hillview Road
Austin, Texas 78703
H. Jack Kazmar 162,000 2.37%
36 West Beechcroft Road
Short Hills, NJ 07078
Carl H. Rosner 2,000 0%
450 Old Niskayuna Road
Latham, NY 12110
Francis L. Simola and (3) 1,058,596 15.49%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118
26 of 28
Simco Group, Inc. (4) 1,026,500 15.02%
650 Sentry Parkway, Ste.1
Blue Bell, PA. 19422
Total Common Stock 3,699,561 54.13%
----------- -----------
Intermagnetics General 1,250,000 100.00%
Corporation
450 Old Niskayuna Road
Latham, NY 12110
Total Preferred Stock 1,250,000 100.00%
----------- -----------
(1) The nature of beneficial ownership for all shares is sole voting and
investment power.
(2) The per cent of class is all common stock and preferred stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(3) Includes minor children
(4) Simco Group Inc., a privately held Nevada Corporation, (100%) owned by
Francis L. Simola and Veronica M. Simola.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
1.Financial Statements: PowerCold Corporation and Subsidiaries financial
statements and other information appear on pages F-1 to F-26 and Channel
freeze Technologies, Inc. financial statements appear on pages 1 to 11
of the Annual Report on Form 10-K and are filed as a part hereof.
2.Schedules: The schedules are not filed with this Annual Report on Form
10-K because the schedules are either inapplicable or the required
information is presented in the Financial Statements or Notes hereto.
3.Exhibits: None
(b) Reports on Form 8-K:
8-K September 17, 1998 - Agreement - Intermagnetics General Corporation
8-K October 08, 1997 - Agreement - Channel Ice Technologies
8-K October 13, 1997 - Agreement - Rotary Power Enterprise
8-K October 14, 1997 - Agreement - Intermagnetics General Corporation
27 of 28
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
POWERCOLD CORPORATION
Dated: March 31, 1998
By: /s/Francis L. Simola
----------------------------------------
Francis L. Simola
President and (Chief Executive Officer)
By: /s/Terrence J. Dunne
-----------------------------------------
Terrence J. Dunne
Treasurer and (Chief Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Dated: March 31, 1997
By: /s/Francis L. Simola
------------------------------
Francis L. Simola
Director and President
By: /s/Terrence J. Dunne
------------------------------
Terrence J. Dunne
Director and Treasurer
By: /s/George C. Briley
------------------------------
George C. Briley
Director and Secretary
28 of 28
POWERCOLD CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997, and 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 F-7
Notes to Consolidated Financial Statements F-8
PADGETT, STRATEMANN & CO., L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
AND BUSINESS ADVISORS
1635 N.E. Loop410, Suite 700 - San Antonio, Texas 78209-1684
Telephone (210) 828-6281 - Fax (210) 826-8606
An Independently Owned Member of The McGladrey Network
Worldwide Services through RSM International
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
PowerCold Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of
PowerCold Corporation (formerly International Cryogenic Systems
Corporation) and Subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits. The financial statements of the Company for 1996 were
audited by other auditors, whose report, dated March 7, 1997,
included an explanatory paragraph describing the uncertainty of the
recovery of the Company's primary assets, comprising patent rights and
related technology of $1,155,986 and goodwill of $491,892.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
As shown in the consolidated financial statements, the Company
incurred a net loss of $1,690,187 for 1998 and has incurred
substantial net losses for each of the past two years. At December
31, 1998, current liabilities exceed current assets by $310,381.
These factors, and the others discussed in Note 18, raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
Intangible assets, which comprise a material portion of the Company's
assets, include patent rights and related technology of $441,078 and
goodwill of $125,925, as of December 31, 1998. The recovery of these
intangible assets is dependent upon achieving profitable operations
and favorable resolution of the matter discussed in Note 14. The
ultimate outcome of these uncertainties cannot presently be
determined. Accordingly, the consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
/s/PADGETT, STRATEMANN & CO.
Certified Public Accountants
March 5, 1999
San Antonio, Texas
F-3
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
------------ ---------------
Current assets:
Cash and cash equivalents $ 21,781 $ 2,274
Restricted cash (notes 4 and 7) 400,000 600,000
Advances to affiliate (note 12) - 597,300
Trade accounts receivable, net of allowance for doubtful
accounts of $84,533 and $7,718, respectively 6,313 117,680
Related party receivables 72,618 -
Interest receivable 9,918 58,082
Refundable income taxes 124,156 124,156
Inventories 156,699 69,082
Prepaid expenses and other current assets 62,511 13,162
------------ ---------------
Total current assets 853,996 1,581,736
Investment in securities available for sale (note 6) 32,500 206
Investment in affiliate (note 3) 825,988 -
Property and equipment, net (note 8) 42,483 65,574
Patent rights and related technology, net (note 2) 441,078 508,153
Goodwill, net (note 2) 125,925 73,688
------------ ---------------
Total assets 2,321,970 $ 2,229,357
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (note 3) 300,000 $ -
Short-term borrowings (note 11) 424,203 411,108
Accounts payable and accrued expenses 397,934 331,927
Commissions payable 42,240 -
Income taxes payable - 74,156
------------ ---------------
Total current liabilities 1,164,377 817,191
------------ ---------------
Commitments and contingencies (notes 11, 12, 13, and 14)
Stockholders' equity: (notes 3 and 12)
Convertible, preferred stock series A, $0.001 par value,
$1,000,000 in liquidation, 1,250,000 shares authorized,
issued, and outstanding 1,250 -
Common stock, $0.001 par value, 200,000,000 shares
authorized, 6,834,136 and 5,995,269 shares issued and
outstanding at December 31, 1998 and 1997, respectively 6,834 5,995
Additional paid-in capital 5,534,274 4,099,799
Amounts due from stockholders (8,500) (7,500)
Accumulated other comprehensive income - (50)
Accumulated deficit (4,376,265) (2,686,078)
------------ ---------------
Total stockholders' equity 1,157,593 1,412,166
------------ ---------------
Total liabilities and stockholders' equity 2,321,970 $ 2,229,357
============ ===============
The accompanying notes are an integral part of the consolidated
financial statements
F-4
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996
------------- -------------- ------------
Revenue:
Product sales $ 148,659 $ 229,445 $ 1,299,735
Services 293,513 162,374 151,786
------------- -------------- ------------
Total revenues 442,172 391,819 1,451,521
------------- -------------- ------------
Cost of revenue:
Product sales 119,532 271,640 731,042
Services 276,923 54,769 180,340
------------- -------------- ------------
Total cost of revenue 396,455 326,409 911,382
------------- -------------- ------------
Gross margin 45,717 65,410 540,139
------------- -------------- ------------
Operating expenses:
Sales and marketing 509,464 252,292 447,174
General and administrative 602,547 1,452,489 556,671
Allowance for doubtful accounts 81,778 7,718 9,737
Research and development 55,229 66,114 99,569
------------- -------------- ------------
Total operating expenses 1,249,018 1,778,613 1,113,151
------------- -------------- ------------
Operating loss (1,203,301) (1,713,203) (573,012)
------------- -------------- ------------
Other income (expense):
Interest and other income 137,393 146,057 80,759
Interest and other expense (31,289) (59,875) (63,355)
Write-off of advances to affiliate (note 12) (557,145) - -
Gain on sale of subsidiary (note 4) - - 2,888,513
------------- -------------- ------------
Total other income (expense) (451,041) 86,182 2,905,917
------------- -------------- ------------
Income (loss) before provision for income taxes (1,654,342) (1,627,021) 2,332,905
------------- -------------- ------------
Provision (benefit) for income taxes: (note 10)
Federal current provision - (124,156) 793,188
Federal deferred benefit - - (669,032)
------------- -------------- ------------
- (124,156) 124,156
------------- -------------- ------------
Income (loss) before losses of unconsolidated (1,654,342) (1,502,865) 2,208,749
affiliates
Equity in loss of unconsolidated affiliates (note 3) (35,845) (427,593) -
Write-off of investment in unconsolidated affiliate - (789,175) -
(note 3)
------------- -------------- ------------
Net income (loss) $(1,690,187) $ (2,719,633) $ 2,208,749
============= ============== ============
Basic earnings per common share:
Loss from operations $ (0.19) $ (0.29) $ (0.10)
------------- -------------- ------------
Net income (loss) $ (0.27) $ (0.46) $ 0.39
============= ============== ============
Weighted average shares 6,376,647 5,893,000 5,662,000
============= ============== ============
The accompanying notes are an integral part of the consolidated
financial statements
F-5
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Preferred Stock Common Stock Amounts Accumulated
Additional Due Other
Paid From Compre- Retained
In Stock- hensive Earnings
Shares Amount Shares Amount Capital Holders Income (Deficit) Total
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Balance at December 31, 1995 - $ - 5,371,234 $ 5,371 $3,717,063 $ (7,500) $(2,175,194) $ 1,539,740
Issuance of common stock for - - 467,035 467 319,570 - - - 320,037
services
Comprehensive income:
Net income - year ended - - - - - - - 2,208,749 2,208,749
December 31, 1996
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - 1,000 - 1,000
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Total comprehensive - - - - - - 1,000 2,208,749 2,209,749
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
income
Balance at December 31, 1996 - - 5,838,269 5,838 4,036,633 (7,500) 1,000 33,555 4,069,526
Issuance of common stock for - - 157,000 157 63,166 - - - 63,323
services
Comprehensive income:
Net income - year ended - - - - - - - (2,719,633) (2,719,633)
December 31, 1997
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - (1,050) - (1,050)
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Total comprehensive - - - - - - (1,050) (2,719,633) (2,720,683)
income
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Balance at December 31, 1997 - - 5,995,269 5,995 4,099,799 (7,500) (50) (2,686,078) 1,412,166
Issuance of preferred stock, 1,250,000 1,250 - - 978,246 - - - 979,496
Series A
Issuance of common stock for - - 117,647 118 99,882 - - - 100,000
cash
Issuance of common stock for - - 621,220 621 293,447 - - - 294,068
services
Issuance of common stock for - - 100,000 100 62,900 - - - 63,000
purchase of subsidiary
Amounts due from stockholders - - - - - (1,000) - - (1,000)
Comprehensive income:
Net income - year ended - - - - - - - (1,690,187) (1,690,187)
December 31, 1998
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - 50 - 50
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Total comprehensive - - - - - - 50 (1,690,187) (1,690,137)
income
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------
Balance at December 31, 1998 1,250,000 $ 1,250 6,834,136 6,834 $5,534,274 $(8,500) - $(4,376,265) $ 1,157,593
========= ========= ========= ========= =========== ========== ========== ============= ==============
The accompanying notes are an integral part of the consolidated
financial statements
F-6
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996
-------------- ------------- --------------
Cash flows from operating activities:
Net loss $ (1,690,187) $(2,719,633) $ 2,208,749
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 99,937 218,322 216,356
Net (gain) loss realized on available-for-sale - 24,493 (7,892)
securities
Gain on sale of investment in unconsolidated (37,121) - -
affiliate
Loss realized on disposition of property and 6,028 - -
equipment
Gain on sale of subsidiary - - (2,888,513)
Loss on disposition of subsidiary - - 53,529
Equity in loss of unconsolidated affiliate 35,845 427,593 -
Write-off of advances to affiliate 557,145 - -
Provision (credit) for doubtful accounts 76,815 5,638 (28,980)
Write-off of investment in unconsolidated affiliate - 789,175 -
Write-off of intangible assets - 867,807 -
Issuance of common stock for services 294,068 63,323 320,037
Changes in assets and liabilities, net of
effects from acquisitions and disposition:
Receivables 10,098 (132,812) (253,052)
Refundable income taxes - (124,156) -
Inventories (87,617) 14 (905,400)
Prepaid expenses and other current assets (49,349) 5,850 2,376
Accounts payable and accrued expenses 66,007 194,266 (281,936)
Commissions payable 42,240 - -
Income taxes payable (74,156) (50,000) 124,156
Deferred revenue - - 917,438
-------------- ------------- --------------
Net cash used in operating activities (750,247) (430,120) (523,132)
-------------- ------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (3,637) (14,219) (22,456)
Investment in affiliate (572,095) - (1,000,000)
Proceeds from sale of investment in unconsolidated 44,984 - -
affiliate
Advances to affiliate - (216,768) -
Purchase of certificate of deposit - (100,000) (300,000)
Proceeds from sale of subsidiary, net of cash - - 2,783,226
disposed
Cash released from escrow related to sale of 200,000 - -
subsidiary
Proceeds from sale of securities available for sale 81,716 1,308,727 581,093
Purchase of securities available for sale (234,152) (610,164) (1,296,513)
(Increase) decrease in advances to affiliate 160,347 10,660 (607,960)
-------------- ------------- --------------
Net cash provided by (used in) investing (322,837) 378,236 137,390
activities
-------------- ------------- --------------
The accompanying notes are an integral part of the consolidated
financial statements
F-6
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(CONTINUED)
1998 1997 1996
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings, related parties - $ - $ 142,997
Proceeds from short-term borrowings 25,061 169,315 799,502<