POWERCOLD CORP, 10-K, 1998-03-31

POWERCOLD CORP
10-K, 1998-03-31
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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, 1997

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 20, 1998, 6,143,149 shares of Common Stock were
outstanding, and the aggregate market value of such shares held by
unaffiliated stockholders was approximately $4,625,000.

Documents incorporated herein by reference: NONE

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PART I

ITEM 1. BUSINESS

General Company Business

PowerCold Corporation and its related companies design, engineer, manufacture,
market and support industrial refrigeration and freezing systems for use world-
wide. Innovative and unique industrial refrigeration products and packages
include evaporative heat exchange systems, ammonia recovery and recycling
systems, non-chemical water treating systems, liquid recirculating packages,
and merchant carbon dioxide plants. The most advanced, cost-effective and
environmentally safe "quick freeze" system has been developed for the food
freezing industry.

The current structure of PowerCold is organized like a holding company with
independent and self sufficient subsidiaries related to the same industry. As
of year end there are three subsidiaries: RealCold Products, Inc., formally
RealCold Maintenance Systems, packaged refrigeration and freezer systems;
Nauticon Inc., refrigeration and evaporative heat exchange systems; Technicold
Services Inc., provides industry consulting and educational services. Related
to the sale of RealCold Systems, Inc., a previous PowerCold subsidiary, to
Wittcold Systems, Inc., the Company receives a long term royalty payment. The
two combined companies provide world wide market support for industrial
refrigeration systems and merchant CO2 plants.

The Company is forming alliances and distribution centers with agents,
distributors and synergistic companies world wide, building a comprehensive
industrial refrigeration and freezer business. PowerCold is continually seeking
related acquisitions and joint venture partners that will compliment its
business and support its growth and goals. The Company is establishing a
relationship for a leasing program, leasing total turn key systems including
products, services, maintenance and supplies.

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'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 - providing superior products and services through related acquisitions
and joint ventures.

The Company is currently live on the INTERNET, a world wide 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.

Company History:

The Company was originally established in 1988 as a private company, Immersion
Cryogenic Systems Corporation, to fabricate and market its original freezer
systems.

In January l993 the Company's assets were merged into a public entity formerly
known as Marco Ventures, and is currently trading on the Nasdaq Electronic
Bulletin Board with the symbol ICRY. The public Nevada corporation, Marco
Ventures, was originally organized on October 7, 1987 for the purpose of
engaging in the acquisition of any and all types of assets, properties and
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businesses. 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 represents 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. The Company started generating revenue after establishing
RealCold Systems, Inc. and its first acquisition in January 1995.

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 Wittmann 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. designs and produces
unique products for the refrigeration industry. RealCold Systems 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
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
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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 Wittmann 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
world wide. The Nauticon application should reduce these traditional concerns
and enhance the industry's growth.

Currently three major 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
(compressors, condensers, vessels, parts etc.) 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 providing constant cash flow.
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
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.
4 of 21<PAGE>

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 Curtiss-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.

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.

Management:

The Company's business operations are supported by an executive management team
with over 130 years business experience. Their extensive experience and
background is adequately related to the business. CEO - over (30) years
experience in marketing and management; CFO - over (25) years experience in
finance, a CPA with a concentration on SEC audit and public accounting;
Marketing Executive - over (40) years experience in the refrigeration business;
Technical Executive - over (40) years experience in engineering and design, and
a well-known expert consultant in the refrigeration industry. The Company's
organization and management includes marketing and management executives and
sales and support engineers with over (75) years of experience and background
supporting the business.

PowerCold's management philosophy and structure supports decentralized
authority and operations, profit and loss accountability, incentive driven
performance and compensation, and total customer satisfaction. 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.

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.

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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
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.

The product is now operating to specifications and Nauticon management is
excited about the prospects for substantial growth in revenues. 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 an 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
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$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 manufactures 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.

Nauticon hired a new Sales Manager in March 1997 for its line of evaporative
heat exchange systems. After a few short months as Nauticon's Sales Manager,
Mr. Reece's sales and marketing skills attributed to significant orders and
revenue for Nauticon. Mr. Reece was appointed Vice president of Marketing for
Nauticon in September 1997. Subsequently, Mr. Thomas F. Reece has been elected
a Director and appointed President of Nauticon, Inc., effective October 30,
1997. Mr. Reece came to Nauticon with a very credible background in sales,
marketing and administration of industrial related products. Prior to accepting
the position of Sales Manager for Nauticon, Mr. Reece held successful positions
over the last ten years as a Product Manager, Director of Sales and most
recently Vice President of Sales, Marketing and Administration for Conservatrol
Sales, Greensboro, NC. Mr. Reece's background and experience will support and
enhance Nauticon's position in the industry.

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 world wide. 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.

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
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.

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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.

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.

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. WittCold
Systems, Inc. subleased 50% of the facility from the Company for their
engineering and manufacturing operations during 1997.

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
9 of 21<PAGE>

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 and
the amount of compensation owned to the former Nauticon shareholder. It is the
opinion of management that this matter will not have any adverse effect on the
Company.

No other legal proceedings are pending by or against the Company, and nor are
the Directors or Management aware of any claims which could give rise to any
litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders during 1997.

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, 1997, there were approximately 200
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.

1996 High Low 1997 High Low
------------------------------------------------
First Quarter 2 1/8 1 1/2 1 3/4 1 1/4
Second Quarter 1 3/4 1 1/4 1 3/8 3/4
Third Quarter 1 1/2 1 1 1/8 1/2
Fourth Quarter 1 1/2 1 1/8 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.

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, 1993
through December 31, 1997 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.

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SUMMARY STATEMENT OF OPERATIONS (In thousands, except per share data)

Year Ended December 31, 1997 1996 1995 1994 1993
Revenues $ 393 $ 1,452 $ 2,244 $ 0 $ 0
Operating loss $ 1,713 $ (573) $(1,060) $ (245) $ (268)
Net Income (loss) $(2,720) $ 2,209 $ (1,089) $ (245) $ (268)
Net Income (loss) per
share $ (0.46) $ 0.39 $ (0.23) $ (0.07) $ (0.08)
Weighted average number of
shares 5,893 5,662 4,776 3,504 3,059

SUMMARY BALANCE SHEET (In thousands, except per share data)

Year Ended December 31, 1997 1996 1995 1994 1993
- ------------------------- --------- --------- --------- ---------- --------
Total assets $2,229 $5,146 $2,298 $ 866 $ 764
Total liabilities $ 817 $1,076 $ 759 $ 99 $ 11
Long term debt $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders' equity $1,412 $4,070 $1,539 $ 767 $ 753

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL FINANCIAL ACTIVITY

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
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

11 of 21<PAGE>

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 a new sales and marketing program. Subsequently, Mr. Thomas F.
Reece has been elected a Director and appointed President of Nauticon, Inc.,
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
an 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 world wide.

12 of 21<PAGE>

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)
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.

The Company wrote-off the $1,216,767 investment in Rotary Power in 1997.

13 of 21<PAGE>

RESULTS OF OPERATIONS - 1997

The following tables 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 $1,381,736 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.

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 world wide. 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 strong US
dollar.

14 of 21<PAGE>

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.

PREVIOUS FINANCIAL ACTIVITY - 1996

The following tables sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:

Year Ended December 31,
1996 1995 1994
------- ------- -------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 62.8 91.2 0.0
Gross margin 37.2 8.8 0.0
Operating expenses 76.7 56.0 0.0
Operating income (loss) (39.5) (47.2) 0.0
Other income (expense) 200.2 (1.3) 0.0
Net income (loss) 152.2 (48.5) 0.0

Fiscal 1996 - The Company's Consolidated Statements of Operations for the
fiscal year ended December 31, 1996 compared to fiscal year ended December 31,
1995: Total revenue for 1996 was $1,451,521 compared to $2,243,752 for 1995;
operating loss of ($573,012) for 1996 compared to ($1.060,002) for 1995; and
net income of $2,208,749 or $0.39 per share for 1996 compared to a net loss of
($1,088,949) or ($0.23) per share for 1995. Net income (loss) per share was
based on weighted average number of shares of 5,662,000 for 1996 compared to
4,776,000 for 1995.

The Company's Consolidated Balance Sheets as of December 31, 1996 and December
31, 1995 respectively: Total current assets were $1,502,208 for 1996 and
$293,075 for 1995; total assets were $5,145,845 for 1996 and $2,298,761 for
1995; total liabilities were $1,076,319 for 1996 and $759,021 for 1995; total
stockholders' equity was $4,069,526 for 1996 and $1,539,740 for 1995; and the
Company has no long term debt.

The Company's substantial gain in 1996 over 1995 in net income, total assets
and shareholders equity was due to the sale of RealCold Systems, Inc.

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. The acquisition of
RealCold Systems, Inc. by Wittcold Systems, Inc., a Wittemann Company,
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 Company's second quarter reporting period. Effective July 1,
1996 all shipped and billed revenue and all other recorder accounting for
RealCold Systems, Inc. was recorded by Wittcold Systems, Inc. Sales revenue
15 of 21<PAGE>

booked and shipped by Wittcold Systems, Inc. for 1996, the first year of the
joint operation, was $6,560,013 and order backlog was over $1,000,000, which is
scheduled for delivery throughout the first and second quarter 1996. Effective
January 1, 1997, the Company will receive from Wittcold Systems, Inc., under
the sale agreement, a "percentage amount" payment on product sales for the next
ten years, as previously stated.

The Company issued a total of 467,035 shares of common stock in 1996: 173,035
restricted shares at $1.00 per share were issued in satisfaction of recorded
liabilities, for expenses and services rendered in 1995 and prior years;
169,000 restricted shares at $0.50 per share for expenses and services rendered
in 1996; 125,000 restricted shares at $0.50 per share for financial
services/working capital for the Company (replaced a Company Director shares).

In March 1997 RealCold Maintenance Systems changed its name to RealCold
Products. RealCold Products will be responsible for the manufacturing and sale
of commercial refrigeration systems which will include Nauticon condensers and
the Rotary Power engines. Management believes the Company should improve income
and profits as this entity improves its operations and sales increase during
the next year.

Nauticon, as a relatively new operating subsidiary continues to see favorable
results from its operations. Some twenty-five systems have been shipped and
installed todate. Nauticon, after initiating their sales and marketing program,
has been successful promoting their evaporative condenser system at various
trade shows. They have hosted a number of interested visitors, (both from the
United States and foreign countries), who represent very significant markets
for their products. 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 world wide. Besides the US, Nauticon has
shipped systems to Israel and Mexico, and to a prospective distributor in
Costra Rica, where the Company anticipates additional orders for Central and
South America. In March 1997, Nauticon hired a Sales Manager to oversee all
sales and marketing activity.
Company executives representing Nauticon and executives from two major
manufacturers of refrigeration equipment have exchanged facility visits, the
result being that one major Company has successfully tested a Nauticon system
at their testing facility. A joint manufacturing and market program is being
proposed by both parties for implementation this year. Other major
refrigeration companies have expressed great interest in pursuing a joint
cooperative manufacturing and marketing venture with Nauticon. Management also
believes that there are many opportunities for licensing the Nauticon
technology to major manufactures in the US and foreign countries.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements appear on sequential pages F-1 to F-20 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, 1997 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.

16 of 21<PAGE>

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 to Present

Terrence J. Dunne 49 Director January 1, 1993
Treasurer and CFO to Present

George C. Briley 73 Director and CTO September 1, 1994
President to Present
Technicold Services, Inc. and
RealCold Products, Inc.

Thomas F. Reece 47 President October 30, 1997
Nauticon, Inc. to Present

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.

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
17 of 21<PAGE>

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".

Thomas F. Reece Mr. Thomas F. Reece was elected a Director and appointed
President of Nauticon, Inc., effective October 30, 1997. Mr. Reece was recently
appointed Vice president of Marketing for Nauticon after a few short months as
Nauticon's Sales Manager. Mr. Reece came to Nauticon with a very credible
background in sales, marketing and administration of industrial related
products. Prior to accepting the position of Sales Manager for Nauticon, Mr.
Reece held successful positions over the last ten years as a Product Manager,
Director of Sales and most recently Vice President of Sales, Marketing and
Administration for Conservatrol Sales, Greensboro, NC. Mr. Reece's background
and experience will support and enhance Nauticon's position in the industry.

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
compensation during the year ended 1997. Directors received 2,500 shares each
of restricted common stock for director's fees in 1997.

Mr. Simola/Simco Group received 120,000 shares of common restricted stock for
services rendered the Company for 1997. Mr. Simola worked 100% of his time for
PowerCold.

Mr. Dunne received 15,000 shares of common restrictive stock for accounting
services for 1997. Mr. Dunne's accounting services include the Form 10Q
quarterly filings and the Form 10K Annual Report, and consulting services on
related accounting matters during the year.

Mr. Briley worked 50% of his time for RealCold Products and Technicold Services
and 50% of his time for WittCold Systems. Wittcold Systems pays Mr. Briley
$8,000 per month for consulting services.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information as of December 31, 1997, 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, (ii) each
director and (iii) directors and officers as a group.

18 of 21<PAGE>

SECURITY OWNERSHIP:

Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)

George C. Briley 547,602 9.13%
17 Pembroke Lane
San Antonio, TX. 78240

Terrence J. Dunne 374,135 6.24%
West 717 Sprague Ave. No. 1100
Spokane, Washington 99204

Robert E. Jenkins 403,728 6.73%
2903 Hillview Road
Austin, Texas 78703

Francis L. Simola and (3) 842,032 14.05%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118

Simco Group, Inc. (4) 1,304,000 21.75%
611 Bethlehem Pike, Ste. B
Montgomeryville, PA. 18936

All Directors and Executive
Officers 3,471,497 57.90%

(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.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(3) includes (3) minor children
(4) Simco Group Inc., a privately held Nevada Corporation, (100%) owned by
Francis L. Simola
and Veronica M. Simola, his wife.

Part IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a) Financial Statements and Schedules

1.Financial Statements: The financial statements and other information
appear on pages F-1 to F-20 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 January 6, 1997 - Acquisition or Disposition of Assets - Rotary Power
Int. Inc.
19 of 21<PAGE>

8-K April 7, 1997 - Acquisition or Disposition of Assets - Rotary Power
Int. Inc.
8-K April 7, 19 97 - Company Name Change to PowerCold Corporation
8-K June 12, 1997 - Acquisition or Disposition of Assets - Rotary Power
Int. Inc.
8-K July 23, 1997 - Acquisition or Disposition of Assets - Rotary Power
Int. Inc.
8-K August 2, 1997 - Acquisition or Disposition of Assets - RealCold
Systems, Inc
8-K September 30, 1997 - Acquisition or Disposition of Assets - Rotary
Power Int. Inc.
8-K October 20, 1997 - Changes in Registrant's Certifying Accounting -
Coopers & Lybrand
8-K November 7, 1997 - Resignation of Directors - Klages and Jenkins
8-K November 14, 1997 - Changes in Registrant's Certifying Accounting,
Amended - Cooper & Lybrand

20 of 21<PAGE>

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 20, 1997

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 20, 1997

By: /s/Francis L. Simola
-----------------------------------
Francis L. Simola
Director

By: /s/Terrence J. Dunne
-----------------------------------
Terrence J. Dunne
Director

By: /s/George C. Briley
-----------------------------------
George C. Briley
Director

21 of 21<PAGE>

POWERCOLDCORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Accountants F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3

Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 F-4

Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996, and 1995 F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 F-6

Notes to Consolidated Financial Statements F-7

F-1<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
PowerCold Corporation

We have audited the accompanying consolidated balance sheet of
PowerCold Corporation (formerly International Cryogenic Systems
Corporation) and Subsidiaries (the "Company") as of December 31, 1997
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. 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 audit. The financial
statements of the Company for 1996 and 1995 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
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 audit provides 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, 1997, and the
consolidated results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting
principles.

Intangible assets, which comprise a material portion of the Company's
assets, include patent rights and related technology of $508,153 and
goodwill of $73,688, as of December 31, 1997. The recovery of these
intangible assets is dependent upon achieving profitable operations
and favorable resolution of the matter discussed in note 13. The
ultimate outcome of these uncertainties cannot presently be
determined. Accordingly, the financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

/s/Padgett, Stratemann & Co.

Certified Public Accountants
March 17, 1998
San Antonio, Texas

F-2<PAGE>

<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

<S> <C> <C>
ASSETS 1997 1996
---------------- ---------------
Current assets:
Cash and cash equivalents $ 2,274 $ 457,552
Restricted cash (note 7) 600,000 300,000

Advances to affiliate (note 11) 597,300 607,960
Trade accounts receivable, net of allowance for doubtful
accounts of $7,718 and $2,080, respectively 117,680 48,588
Interest receivable 58,082 -
Refundable income taxes 124,156 -
Inventories 69,082 69,096
Prepaid expenses and other current assets 13,162 19,012
---------------- ---------------

Total current assets 1,581,736 1,502,208

Investment insecurities available for sale (note 6) 206 724,312
Investment in affiliate (note 3) - 1,000,000
Restricted cash (note 7) - 200,000
Property and equipment, net (note 8) 65,574 71,447
Patent rights and related technology, net (note 2) 508,153 1,155,986

Goodwill, net (note 2) 73,688 491,892
---------------- ---------------

Total assets $ 2,229,357 $ 5,145,845
================ ===============
LIABILITIES ANDSTOCKHOLDERS' EQUITY

Current liabilities:
Short-term borrowings, related parties $ - $ 15,000

Short-term borrowings (note 10) 411,108 799,502
Accounts payable and accrued expenses 31,927 137,661
Income taxes payable 74,156 124,156
---------------- ---------------

Total current liabilities 817,191 1,076,319
---------------- ---------------

Commitments and contingencies (notes 11, 12, and 13)

Stockholders' equity: (notes 3, 11, and 13)
Common stock,$0.001 par value, 200,000,000 shares
authorized, 5,995,269 and 5,838,269 shares issued and
outstanding at December 31, 1997 and 1996, respectively 5,995 5,838
Additional paid-in capital 4,099,799 4,036,633
Amounts due from stockholders (7,500) (7,500)
Unrealized (loss) gain on securities available for sale (50) 1,000

Retained earnings (accumulated deficit) (2,686,078) 33,555
---------------- ---------------

Total stockholders' equity 1,412,166 4,069,526
---------------- ---------------

Total liabilities and stockholders' equity
$ 2,229,357 $ 5,145,845
================ ===============
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-3<PAGE>
<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<S> <C> <C> <C>
1997 1996 1995
Revenue: ---------------- --------------- ----------------
Product sales $ 229,445 $ 1,299,735 $ 2,069,588
Services 162,374 151,786 174,164
---------------- --------------- ----------------

Total revenues 391,819 1,451,521 2,243,752
---------------- --------------- ----------------

Cost of revenue:
Product sales 271,640 731,042 1,879,639
Services 54,769 180,340 167,739
---------------- --------------- ----------------

Total cost of revenue 326,409 911,382 2,047,378
---------------- --------------- ----------------

Gross margin 65,410 540,139 196,374
---------------- --------------- ----------------

Operating expenses:
Sales and marketing 252,292 456,911 559,027
General and administrative (note 2) 1,460,207 556,671 486,228
Research and development 66,114 99,569 211,121
---------------- --------------- ----------------

Total operating expenses 1,778,613 1,113,151 1,256,376
---------------- --------------- ----------------

Operating loss (1,713,203) (573,012) (1,060,002)
---------------- --------------- ----------------

Other income (expense):
Interest and other income 146,057 80,759 5,498
Interest and other expense (59,875) (63,355) (34,445)
Gain on sale of subsidiary (note 4) - 2,888,513 -
---------------- --------------- ----------------

Total other income (expense) 86,182 2,905,917 (28,947)
---------------- --------------- ----------------
Income (loss)before provision for income taxes (1,627,021) 2,332,905 (1,088,949)
---------------- --------------- ----------------
Provision (benefit) for income taxes: (note 9)
Federal current provision (124,156) 793,188 -
Federal deferred benefit - (669,032) -
---------------- --------------- ----------------

(124,156) 124,156 -
---------------- --------------- ----------------

Income (loss) before losses of unconsolidated affiliate (1,502,865) 2,208,749 (1,088,949)
---------------- --------------- ----------------

Equity in loss of unconsolidated affiliate (note 3) (427,593) - -
Write-off of investment in unconsolidated affiliate (note 3) (789,175) - -
---------------- --------------- ----------------

Net income(loss) $ (2,719,633) 2,208,749 (1,088,949)
================ =============== ================

Basic net income (loss) per share $ (0.46) $ 0.39 $ (0.23)
================ =============== ================

Weighted average number of shares 5,893,000 5,662,000 4,776,000
================ =============== ================
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized
Gain On Retained
Common Stock Additional Amounts Securities Earnings
Paid-In Due From Available Accumulated
Shares Amount Capital Stockholders For Sale (Deficit) Total
----------- ---------- ------------ ------------- ---------- ------------- ------------
Balance at January 1,
1995 3,682,234 $ 3,682 $ 1,849,752 $ (140,000) $ - $ (1,086,245) $ 627,189

Issuance of common
stock for services 101,500 102 101,398 - - - 101,500
Issuance for common
stock and options
for acquisitions 1,387,500 1,387 1,486,113 - - - 1,487,500
Payments of amounts
due from stock-
holders - - - 140,000 - - 140,000
Issuance of common
stock for amounts
due from stock-
holders - - - (7,500) - - (7,500)
Issuance of common
stock for cash 200,000 200 279,800 - - - 280,000
Net loss - - - - - (1,088,949) (1,088,949)
----------- ---------- ------------ ------------- ---------- ------------- ------------
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 services 467,035 467 319,570 - - - 320,037
Unrealized gain on
securities available
for sale - - - - 1,000 - 1,000
Net income - - - - - 2,208,749 2,208,749
----------- ---------- ------------ ------------- ---------- ------------- ------------

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 services 157,000 157 63,166 - - - 63,323

Unrealized loss on
securities available
for sale - - - - (1,050) - (1,050)
Net loss - - - - - (2,719,633) (2,719,633)
----------- ---------- ------------ ------------- ---------- ------------- -------------

Balance at
December 31, 1997 5,995,269 $ 5,995 $ 4,099,799 $ (7,500) $ (50) $ (2,686,078) $ 1,412,166
=========== ========== ============ ============= ========== ============== =============

<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(2,719,633) $ 2,208,749 $(1,088,949)

Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 218,322 216,356 152,744
Net (gain) loss realized on available-for-sale securities 24,493 (7,892) -
Gain on sale of subsidiary - (2,888,513) -
Loss on disposition of subsidiary - 53,529 -
Provision for doubtful accounts 5,638 (28,980) 31,060
Equity in loss of unconsolidated affiliate 427,593 - -

Write-off of investment in unconsolidated affiliate 789,175 - -
Write-off of intangible assets 867,807 - -
Common stock issued for services 63,323 320,037 101,500
Changes in assets and liabilities, net of
effects from acquisitions and disposition:
Receivables (132,812) (253,052) 170,602
Inventories 14 (905,400) (17,532)

Refundable income taxes (124,156) - -
Prepaid expenses and other current assets 5,850 2,376 (20,130)
Accounts payable and accrued expenses 194,266 (281,936) 283,317
Income taxes payable (50,000) 124,156 -
Deferred revenue - 917,438 61,148
------------ ------------ ------------
Net cash used in operating activities (430,120) (523,132) (326,240)
------------ ------------ ------------

Cash flows from investing activities:

Purchase of property and equipment (14,219) (22,456) (40,985)
Cash purchased in acquisition - - 13,869
Equity investment in unconsolidated affiliate - (1,000,000) -
Advances to unconsolidated affiliate (216,768) - -
Purchase of certificate of deposit (100,000) (300,000) -
Proceeds from sale of subsidiary, net of cash disposed - 2,783,226 -
Proceeds from sale of securities available for sale 1,308,727 581,093 -

Purchase of securities available for sale (610,164) (1,296,513) -
Decrease (increase) in advances to affiliate 10,660 (607,960) -
------------ ------------ ------------
Net cash provided by (used in) investing activities 378,236 137,390 (27,116)
------------ ------------ ------------

Cash flows from financing activities:
Proceeds from short-term borrowings, related parties - 142,997 345,000
Proceeds from short-term borrowings 169,315 799,502 100,000
Proceeds from issuance of common stock - - 420,000

Repayment of short-term borrowings, related parties,
net of effects from disposition (15,000) (153,102) (345,000)
Repayment of short-term borrowings (557,709) (100,000) -
Principal payment on capital lease obligations,
net of effects from disposition - (4,719) (8,054)
------------ ------------ ------------
Net cash provided by(used in) financing activities (403,394) 684,678 511,946
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents

and cash - related party (455,278) 298,936 158,590

Cash and cash equivalents and cash - related party at beginning of year 457,552 158,616 26
------------ ------------ ------------

Cash and cash equivalents and cash - related party at end of year $ 2,274 $ 457,552 $ 158,616
============ ============ ============

Interest paid $ 35,382 $ 15,732 $ 12,176
============ ============ ============

Noncash investing activities:
Restricted cash held in escrow related to sale of subsidiary $ - $ 200,000 $ -
============ ============ ============

Unrealized gain (loss) on securities available for sale $ (1,050) $ 1,000 $ -
============ ============ ============
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Background and Basis of Presentation

Background

PowerCold Corporation, formerly International Cryogenic Systems Corporation,
(the "Company") was incorporated on October 7, 1987 in the State of Nevada, and
operates in one business segment, the development, design, manufacture,
distribution, and servicing of refrigeration systems. The Company changed to
its current name in 1997.

On December 28, 1992, the Company acquired the patent rights (U.S. Patent No.
4,928,492) and related engineering and technology to a process of quick
freezing food products, and cleaning and treating various nonfood products by
using a circulating cryogenic liquid in a closed pressurized vessel system, in
exchange for 2,414,083 shares of common stock. The common stock was valued at
$.30 per share, which was determined by management to be the fair market value.
Two directors of the Company were also directors of the company selling such
patent rights.

Basis of Presentation

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, and that recovery of its
intangible assets, primarily patent rights and related technology and goodwill,
will occur. The Company's ability to continue as a going concern, and recover
the value of its intangible assets is dependent upon achieving profitable
operations and the favorable resolution of the matter discussed in note 13.
The ultimate outcome of these uncertainties cannot be presently determined.
Accordingly, the financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, after elimination of intercompany accounts and
transactions. Wholly-owned subsidiaries of the Company in 1997, after
dispositions (note 4), include Technicold Services, Inc., RealCold Products,
Inc., and Nauticon Ltd. Wholly-owned subsidiaries of the Company in 1996
include Technicold Services, Inc., RealCold Products, Inc., Jordan Vessel
Corporation, RealCold Systems, Inc., and Nauticon Ltd. Investments in
affiliates, representing 20% to 50% of the ownership of such companies, are
accounted for using the equity method.

Cash and Cash Equivalents

All highly liquid investments with original maturities at purchase date of
three months or less are considered cash equivalents.

F-7<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Investment in Securities

Investments in debt and marketable equity securities are designated as trading,
held to maturity, or available for sale in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Trading securities are reported at
fair value, with changes in fair value included in earnings. Available-for-
sale securities are reported at fair value, with net unrealized gains and
losses included as a component of equity. Held-to-maturity securities are
reported at amortized cost. Gains and losses on the sale of securities are
determined using the specific identification method. For all investment
securities, unrealized losses that are other than temporary are recognized as a
charge against earnings in the period incurred. Market value is determined
based on quoted market prices. At December 31, 1997 and 1996, all of the
Company's investment securities were classified as available for sale.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to seven years. Expenditures that increase the value or extend the life
of an asset are capitalized, while cost of maintenance and repairs are expensed
as incurred. Gains or losses upon disposal of assets are recognized in income.

Research and Development

Research and development expenses are charged to operations as incurred. The
cost of intellectual property purchased from others that are immediately
marketable or that have an alternative future use are capitalized and amortized
as intangible assets. Capitalized costs are amortized using the straight-line
method over the estimated economic life of the related asset, typically 10
years. At December 31, 1997 and 1996, capitalized patent development costs,
net of amortization, were $508,153, and $1,155,986, respectively. Amortization
expense was $139,732 for the years ended December 31, 1997 and 1996 and
$101,606 for the year ended December 31, 1995. The Company periodically reviews
its capitalized patent costs to assess recoverability based on the projected
undiscounted cash flows from operations. Impairments are recognized in
operating results when a permanent diminution in value occurs. During 1997,
patents, net of amortization of $508,100 were deemed to be impaired, and were
charged to general and administrative operating expenses.

Revenue Recognition

The Company recognizes revenue from product sales upon shipment to the
customer. Service revenue is recognized when services are performed and
billable.

F-8<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Goodwill

Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill is amortized on a straight-line basis over 10 years. Amortization of
goodwill amounted to $58,497, $56,971, and $40,687 for the years ended December
31,1997, 1996, and 1995, respectively. Accumulated amortization amounted to
$151,575 and $93,078 at December 31, 1997 and 1996, respectively. The Company
periodically reviews its goodwill to assess recoverability based on projected
undiscounted cash flows from operations. Impairments are recognized in
operating results when a permanent diminution in value occurs. During 1997,
goodwill, net of amortization, of $359,707 was deemed to be impaired, and was
charged to general and administrative operating expenses.

Net Income (Loss) Per Common Share

On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APB No. 15, "Earnings Per
Share." SFAS No. 128 provides for calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of an entity similar to fully diluted earnings per share. The Company
adopted SFAS No. 128 in 1998 and its implementation did not have a material
effect on the financial statements.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Reclassifications

Certain amounts within the 1996 consolidated financial statements have been
reclassified to conform to current year presentation.

Advertising Expenses

Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were approximately $1,060, $16,908, and $2,062 for the
years ended December 31, 1997, 1996, and 1995, respectively.

F-9<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Inventories

Inventories are stated at the lower of cost or market on a first-in, first-out
basis.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts or revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined in Statement of Financial Accounting Standards No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk," consists
primarily of cash and cash equivalents, cash invested through related party,
trade accounts receivable, investments in securities available for sale, and
restricted cash. Cash and cash equivalents exceeded FDIC insurance coverage
limits by $348,215 at December 31, 1996. The Company maintains its cash and
cash equivalents in major, creditworthy financial institutions and has not
experienced any losses on its deposits. The Company's receivables do not
represent a significant concentration of credit risk at December 31, 1997 and
1996.

Fair Value of Financial Instruments

The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash and cash equivalents, cash invested through related
party, trade accounts receivable, investment in securities available for sale,
restricted cash, accounts payable, accrued expenses, and short-term borrowings.
All instruments other than the investment in securities available for sale are
accounted for on a historical cost basis which, due to the short maturity of
these financial instruments, approximates fair value at December 31, 1997 and
1996. Investments insecurities available for sale are recorded at fair value
at December 31,1997 and 1996.

Recently Issued Accounting Standards

Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129") effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt, and participation rights) including dividend
and liquidation preferences, participant rights, call prices and dates,
conversion or exercise prices, and redemption requirements. The Company
adopted SFAS 129 during 1997 and its implementation had no effect on the
Company.

F-10<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Standards (continued)

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components, and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.

SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosure regarding products and services,
geographic areas, and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.

SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.

3. Acquisitions and Investment in Affiliate

Acquisition of RealCold Systems Group

On January 30, 1995, the Board of Directors approved the acquisitions of
Technicold Services, Inc., RealCold Maintenance Systems, Inc., and Jordan
Vessel Corporation (RealCold Systems Group).

F-11<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Acquisitions and Investment in Affiliate (continued)

Pursuant to the terms of the RealCold Systems Group acquisition agreement on
January 30, 1995, effective January 1, 1995, the Company issued 487,500 shares
of its common stock to RealCold Systems Group in exchange for 100% of the
outstanding common shares of Technicold Services, Inc., RealCold Maintenance
Systems, Inc., and Jordan Vessel Corporation. The RealCold Systems Group
acquisition has been accounted for under the purchase method and, accordingly,
the operating results of the Company include the operations since the date of
acquisition. The acquisition resulted in goodwill of $305,701 which is being
amortized over 10 years:

Purchase price $ 487,500
-------------
Fair value of assets acquired and liabilities assumed:
Accounts receivable 233,133
Inventories 17,774
Prepaid expenses 1,470
Property and equipment 5,000
Liabilities assumed (75,578)
-------------
181,799
-------------

Excess of purchase price over fair value of
net assets acquired $ 305,701
=============

Acquisition of Nauticon Ltd.

On August 4, 1995, the Board of Directors approved the acquisition of the
assets and liabilities of Nauticon Ltd.

Pursuant to the terms of the Nauticon Ltd. acquisition agreement on August 29,
1995, effective July 25, 1995, the Company issued 900,000 of the Company's
common stock and options to purchase 300,000 shares of the Company's common
stock at a price from $1.00 to $2.00, expiring in the year 2000 to Nauticon
Ltd.'s owners in exchange for all of Nauticon Ltd.'s assets and liabilities.

F-12<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Acquisitions and Investment in Affiliate (continued)

The Nauticon Ltd.'s acquisition has been accounted for as a purchase and,
accordingly, the operating results of the Company include the results of
operations of Nauticon Ltd. since the date of acquisition. The acquisition
resulted in goodwill of $342,818 which is being amortized over 10 years:

Purchase price $ 1,000,000
---------------

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents 13,869
Accounts receivable 7,543
Inventories 23,688
Prepaid expenses 22,351
Property and equipment 48,000
Patent costs 670,726
Liabilities assumed (128,995)
---------------

657,182
---------------
Excess of purchase price over fair value of
net assets acquired $ 342,818
===============

The following unaudited pro forma summary presents the unaudited consolidated
results of operations as if the acquisition of RealCold Systems Group and
Nauticon Ltd. had occurred at the beginning of 1995. The pro forma
presentation reflects the impact of adjustment relating to the amortization of
goodwill. It does not purport to be indicative of the financial results which
actually would have occurred had the acquisition been made at the beginning of
1995, or of the results which may occur in the future.

Unaudited Pro Forma Consolidated Results of Operations

1995
----------------

Total revenue $ 2,243,752
Net loss (1,235,949)
Net loss per share (0.23)

Investment in Affiliate

On December 24, 1996, the Company agreed to invest in Rotary Power
International, Inc. ("RPI") the sum of $1,000,000 in exchange for two million
shares of RPI common stock. As the Company's investment in RPI represents less
than a 50% interest in RPI, the equity method was used to account for the
Company's interest in RPI. The Company advanced additional funds of $216,768
to RPI during 1997. Because of RPI's deteriorate financial condition and
increasing losses, management of the Company wrote off its outstanding
investment and advances to RPI during 1997.

F-13<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Dispositions

RealCold Systems, Inc.

On May 1, 1996, the Company sold the common stock of RealCold Systems, Inc. to
Wittcold Systems, Inc. ("Wittcold"), formerly Wittemann Company, Inc., a party
to the Joint Cooperation Agreement entered into by the Company in June 1995.
In consideration for the common stock of RealCold Systems, Inc., the Company
received from Wittcold the sum of $2,800,000 in cash, $200,000 in cash held in
escrow, which is to be released to the Company on the second anniversary of the
sale's closing, pursuant to the terms of the Escrow Agreement, and the ability
to earn additional consideration("earnout") as determined by a percentage of
future net sales. The earnout is structured to provide additional
consideration in the amount of five (5%) percent of the net sales of
refrigeration systems for ten full calendar years beginning in 1996 and ending
in 2005, and two and one-half (2 1/2%) of net sales of merchant systems for
nine full calendar years beginning in 1997 and ending in 2005. For purposes of
calculating the earnout, net sales is defined as payments received from
customers less commissions to nonemployee agents, export preparation, inland
freight and forwarding fees, ocean freight, insurance, discounts, and all
warranty work performed during the relevant period. The sales agreement
further provides a minimum guaranteed royalty from Wittcold, contingent upon
the continued employment by the Company of a certain employee for three full
years after the date of closing, whereupon the Company will receive $2,000,000
("minimum earnout") no later than April 30, 2006 in the event the earnout
consideration, as calculated on a percentage of net sales, does not exceed the
minimum earnout. The Company began recording revenues on the earnout during
1997.

As a result of the sale of RealCold Systems, Inc., the Company has recorded a
gain in the amount of $2,888,513:

Sales proceeds $ 3,000,000
Carrying value of assets and liabilities sold:
Cash 16,774
Accounts receivable 264,958
Inventories 895,298
Prepaid expenses and other current assets 22,563
Property and equipment, net 38,932
Accounts payable and accrued liabilities (98,637)
Deferred revenue (978,586)
Capital lease obligation (5,815)
Short-term borrowings, related parties (44,000)
---------------

Gain on sale $ 2,888,513
===============

The operating results for the disposed subsidiary, RealCold Systems, Inc., are
included in net income/loss through the date of sale. The following pro forma
summary presents the 1996 unaudited consolidated results of operations as if
the sale had occurred at the beginning of 1996. There would not have been a
material effect on the 1995 consolidated results of operations if the sale had
occurred at the beginning of 1995. The pro forma results give effect to normal
adjustments and the exclusion of gain resulting from the sale of RealCold
Systems, Inc., including related tax effects.

F-14<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Dispositions (continued)

It does not purport to be indicative of the financial results which actually
would have occurred had the sale been made at the beginning of 1996 or of the
results which may occur in the future.

Unaudited Pro Forma Consolidated Results of Operations

1996
---------------
Total revenue $ 383,557
Net loss (729,784)
Net loss per share (0.13)

Jordan Vessel Corporation

During 1996, operations of Jordan Vessel Corporation, a subsidiary of the
Company, ceased operations. The assets were disposed of resulting in a loss on
disposition of $53,529 related primarily to goodwill.

5. Inventories

The major components of inventories are as follows:

December 31,
1997 1996
--------------------------------

Parts inventory $ 53,064 $ 56,996
Product inventory 16,018 12,100
------------ ------------
$ 69,082 $ 69,096
============ ============

6. Available-For-Sale Investments

Investments include the following securities available for sale at December 31,
1997:

Years Gross Gross
to Fair Unrealized Unrealized
Maturity Value Cost Gains Losses
--------- --------- --------- -------------- -----------
Corporate equity
securities -
common stock $ 206 $ 256 $ - $ (50)
========= ========= ============== ===========

Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1997 were $1,308,727, $0, and $24,493, respectively.

F-15<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Available-For-Sale Investments (continued)

Investments include the following securities available for sale at December 31,
1996:

Years Gross Gross
to Fair Unrealized Unrealized
Maturity Value Cost Gains Losses
-------- ---------- ---------- ----------- ----------
Corporate equity
securities -
common stock $ 145,501 $ 138,538 $ 6,963 $ -

U.S. government
securities 1-5 69,868 70,296 - (428)
5-10 49,735 50,000 - (265)
> 10 459,208 464,478 4,310 (9,580)
---------- ---------- ----------- ----------

$ 724,312 $ 723,312 $ 11,273 $(10,273)
========== ========== =========== ==========

Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1996 were $581,093, $15,736, and $7,844, respectively.

7. Restricted Cash

Current restricted cash at December 31, 1997 consists of a $400,000 ($300,000
in 1996) certificate of deposit which collateralizes the short-term
borrowings (note 10). Noncurrent restricted cash consists of $200,000 of cash
held in escrow relating to the sale of the common stock of RealCold Systems,
Inc. (note 4).

8. Property and Equipment

Property and equipment consists of the following:

December 31,
1997 1996
------------- ------------

Machinery and equipment $ 23,659 $ 21,277
Prototypes and molds 75,104 63,767
Furniture and fixtures 4,515 4,015
------------- ------------

103,278 89,059
Less accumulated depreciation 37,704 17,612
------------- ------------

$ 65,574 $ 71,447
============= ============

Depreciation expense was $20,092, $19,653, and $7,953 in 1997, 1996, and 1995,
respectively.

F-16<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Income Taxes

The provision for taxes on income consists of and represents the tax effect of
the following:

Years Ended
December 31,
1997 1996 1995
-------------- -------------- -------------
Current:
Federal $ - $ 793,188 $ -
Carry back of current year
net operating loss (124,156) - -
Deferred:
Federal - (669,032) -
-------------- -------------- -------------

$ (124,156) $ 124,156 $ -
============== ============== =============

Income tax expense from continuing operations differs from the amount which
would be provided by applying the statutory federal income tax rates because of
the following:
Years Ended
December 31,
1997 1996 1995
-------------- -------------- --------------
Computed at the expected statutory
rate $ (553,187) $ 793,188 $ 370,243
Nondeductible items and other
permanent differences 475 - -
Change in valuation allowance 436,715 (669,032) (370,243)
Prior year unrecognized deferred
tax asset (8,159) - -
-------------- -------------- --------------

$ (124,156) $ 124,156 $ -
============== ============== ==============

The temporary differences that result in deferred tax assets are as follows:

Years Ended
December 31,
1997 1996 1995
-------------- -------------- --------------
Deferred tax assets:
Accrued wages payable to
shareholder $ 13,600 $ - $ -
Write-off of intangible assets 295,055 - -
Losses related to unconsolidated
affiliate 413,700 - -
Net operating loss carryforward 128,060 - 669,032
-------------- -------------- --------------

Gross deferred tax assets 850,415 - 669,032
Valuation allowance (850,415) - (669,032)
-------------- -------------- --------------

Net deferred tax assets $ - $ - $ -
============== ============== ==============

F-17<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Income Tax and Deferred Income Tax (continued)

A $742,000 tax net operating loss was incurred for the year ended December 31,
1997. The Company utilized approximately $365,000 as a carry back to 1996 to
reduce the federal tax provision in that year. The Company's net operating
loss carry forwards for income tax purposes is approximately $377,000, which
expires 2012. During the year ended December 31, 1996, the Company utilized
all of its NOL carry forwards. Cash paid for income taxes was $50,000 in 1997
and $0 in 1996 and 1995.

10. Short-Term Borrowings

Short-term borrowings at December 31, 1997 consisted of $399,142 in borrowings
under a $400,000 line of credit agreement entered into with a commercial bank
to provide temporary working capital to the Company. The interest rate is
fixed at 7% per annum and matures January 21, 1998. The note is collateralized
by a certificate of deposit in the amount of $300,000, dated July 26, 1997,
bearing interest at a rate of 5%. Subsequent to December 31, 1997, the line of
credit was renewed bearing the same terms as noted above, maturing July 21,
1998.

The remaining $11,966 in short-term borrowings consisted of a liability to a
broker for repayment of funds borrowed for the purpose of investment in
available-for-sale securities.

11. Related Party Transactions

The Company has received funding on several occasions from Simco Group, Inc.
("Simco"), a separate legal entity wholly-owned by the Company's Chairman and
Chief Executive Officer.

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 are invested in
short- and long-term liquid marketable securities; these funds have been
classified as advances to affiliate. Cost exceeded fair value by $8,221 at
December 31, 1997 for these securities. (As of December 31, 1996, cost
approximated fair value). Simco has guaranteed the Company a minimum 8% return
on these funds. During 1997, Simco paid the Company approximately $48,000
($12,000 in 1996) in interest.

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. During 1996, the Company recorded expense of
$273,750 related to the issuance of 122,500 restricted shares as payment for
expenses and consulting services provided, and 125,000 restricted shares as
payment for promotional services provided by Simco. The shares were issued at
$.50 per share.

F-18<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Related Party Transactions (continued)

On September 30, 1994, the Board of Directors approved agreements with three
key executives. The agreements provide that compensation for services rendered
be paid through cash payments or through a stock option plan, determined
annually by the Board. Sale of stock is subject to approval by the Treasurer
and President of the Company. During 1997, the Company issued a total
of 135,000 restricted shares of common stock to two of these executives,
including the 120,000 shares noted above, for a total expense of $54,500.
Shares are issued at 50% of the current bid price of the Company's stock. No
cash was paid to these three executives during 1997.

In addition, the three executives receive an annual payment of $2,500 for
directors fees. The agreements further provide that two of the individuals
receive a 2% commission not to exceed 5% on any direct sales of the Company.

The third individual receives the higher of 3% commission on gross revenues and
5% on gross operating profits or $10,000 per month. These employees also have
the option to purchase shares of common restrictive stock of the Company at 50%
of bid price 30 days after receiving payments for their services In order to
obtain these benefits, the employees must perform services for a period of
three years effective on date of agreement or receive a pro rata share based on
years of service. No commissions were accrued related to the agreements at
December 31, 1997 and 1996.

Included in accounts payable and accrued liabilities as of December 31, 1997 is
$94,800 ($100,400 in 1996) for amounts owed to the president of Technicold and
to the former President of Nauticon.

12. Commitments

Operating Leases

The Company leases certain sales offices, plant space, and equipment under
operating lease agreements which expire at various times through1999. Total
rent expense was $108,676, $82,219, and 36,708 in 1997, 1996, and 1995,
respectively.

Future minimum rental commitments as of December 31, 1997 were as follows:

Year ending December 31,
1998 94,782
1999 58,368
Thereafter 1,579
------------
$ 154,729
============

The Company subleases a sales office and plant space under a lease agreement
which expires in 1999. Total rental income from the sublease agreements was
$66,528 ($23,402 and $36,708 in 1996 and 1995, respectively).

F-19<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Litigation

Management of the Company is seeking to recoup damages from the former
president and shareholder of Nauticon, in connection with Nauticon's
acquisition by the Company. Related to this matter is the ownership of certain
patents ($508,153 carrying value at December 31, 1997) and the amount of
compensation owed to the former Nauticon shareholder ($88,600 accrued and
included in accounts payable and accrued liabilities at December 31, 1997). The
former Nauticon shareholder was granted options to purchase 133,763 shares of
common stock of the Company at $1.50 per share (increasing to $2.00 per share
before expiring in July, 2000). It is the opinion of management that this
matter will not have a material adverse effect on the Company's financial
position or results of operations.

F-20<PAGE>

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<PERIOD-END> DEC-31-1997
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<ALLOWANCES> 9798
<INVENTORY> 69082
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0
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