POWERCOLD CORP, 10-K, 1999-05-03

POWERCOLD CORP
10-K, 1999-05-03
BLANK CHECKS

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

Commission File Number 33-19584

POWERCOLD CORPORATION
(Exact name of registrant as specified in its charter)

Nevada 23-2582701
(State of Incorporation) (IRS Employer
Identification No.)

103 Guadalupe Drive
Cibolo, Texas 78108
(Address of principal executive offices) (Zip Code)

Registrant's telephone number: 210 659-8450

Securities registered pursuant to Sections 12(b) of the Act: NONE

Securities registered pursuant to Sections 12(g) of the Act: NONE

Common Stock, $0.001 Par Value OTC Electronic Bulletin Board

Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO .
------ -----

As of March 31, 1999, 6,834,136 shares of Common Stock were
outstanding, and the aggregate market value of such shares held by
unaffiliated stockholders was approximately $2,562,800.

Documents incorporated herein by reference: NONE

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PART I

ITEM 1. BUSINESS

General Company Business

PowerCold is a solution provider of energy efficient products for the
refrigeration, air condition and power industries. The Company operates across
many market sectors from large industrial food processors to small commercial
air conditioning systems. The firm's focus is to give customers products and
systems that allow them to benefit from current changes occurring in the
natural gas and electrical utility marketplace. Refrigeration is the most
energy intensive operation most business operators face. PowerCold has the
opportunity to provide products and systems, that customers require taking
advantage of these changes, to improve profitability by reducing their
operating costs.

Deregulation of the gas and electric utilities will provide continuing
opportunities, creating new markets for more efficient refrigeration systems.
PowerCold has the products, experience and creative ability to package unique
refrigeration systems for the multi-billion dollar refrigeration market. To
enhance this market the Company is pursuing synergistic businesses, and
marketing alliances are being formed with major utility companies and
established refrigeration companies for these products and services.

The Company's mission is to be a solution provider of energy efficient products
for the multi-billion dollar refrigeration, air condition and power industry.
The Company's goal is to achieve profitable growth and increase shareholder
value by forming business alliances and providing superior technology, products
and services.

Management intends to continue to utilize and develop the remaining intangible
assets of the Company. It is Management's opinion that the Company's cash flow
generated from such intangible assets is not impaired, and that recovery of its
intangible assets, upon which profitable operations will be based, will occur.

The Company is currently live on the INTERNET, a worldwide information network.
The real time system will provide anyone, shareholder, investor or customer,
with Company news releases, financial data and product information. Access
PowerCold home web page on the INTERNET by addressing:
http://www.powercold.com. E-mail: [email protected].

Company History:

International Cryogenics Systems Corporation (ICSC) was established as a
private company in 1988 to fabricate and market freezer systems. The Company
developed and patented the most advanced, cost-effective and environmentally
safe "quick freeze" systems in the industry. In January l993 ICSC's assets were
merged into a public entity. The name was changed to PowerCold Corporation
(PowerCold) in April 1997, currently trading on the OTC Bulletin Board - symbol
(PWCL). In 1995 the Company acquired four companies - currently three operate
as wholly owned subsidiaries of PowerCold; RealCold Products, Inc., Technicold
Services, Inc. and Nauticon, Inc. RealCold Products designs and manufactures
refrigeration systems, Technicold Services provide consulting services for
commercial refrigeration and freezing systems for use worldwide, and Nauticon
manufactures and markets a unique product line of patented evaporative heat
exchange systems for the HVAC and refrigeration industry.

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Two of the Company's executives /directors, President and Treasurer, have been
affiliated with the public company since 1988 and were also affiliated with the
private company as directors prior to the merger.

At the Annual Meeting of Shareholders on July 30, 1992, the shareholders of the
Company approved the recapitalization of the Company Common Stock consisting of
a 100 to 1 reverse split.

Asset Acquisition - On December 28, 1992, the Board of Directors of the Company
agreed to issue 2,414,083 shares of common stock to six individuals for the
exclusive rights to U. S. Patent No. 4,928,492 (May 29, 1990); which provides a
method and apparatus for production treatment of a product through the usage of
a cryogenic liquid and in a manner such that minimum loss of the cryogenic
liquid is encountered. The products that will be processed by this method
includes, but not limited to, food products, computer chips, tires for
recycling, blood and plasma products, and medical utensils that require a high
degree of sterilization.

The total value of the transaction was $724,224.90. Two of the six individuals,
(Terrence J. Dunne and Francis L. Simola) receiving stock in this transaction
are Directors of the Company. Terrence J. Dunne received 850,000 and Francis
L. Simola received 340,041 shares of stock respectively. This represented 49.3%
of all the common stock issued for the transaction.

The structure and organization of PowerCold as a public entity through 1993 and
1994 was considered as a development stage company. The design, manufacture and
testing of two major freeze machine products, and the restructure from a
private company to a public company expended company time and capital. The
newly designed and manufactured Star Wheel freezer machine was completed and
operating consistently as of March 1994. This was a major undertaking and
technology breakthrough proving that the new immersion freezer design concept
worked. In June 1994 a marketing program was initiated for the freezer machine,
and the progress in business activity projected the company into a true
operating entity.

Subsidiaries

During 1995, PowerCold acquired four companies in the refrigeration business in
a stock exchange transaction. These entities, which compliment and secure
PowerCold's position in the industry, operated as wholly owned subsidiaries.
RealCold Systems, Inc., prior to its sale to Wittcold Systems, a Wittemann
Company, offered custom industrial refrigeration packages and merchant carbon
dioxide plants in a joint venture with The Wittemann Company. Nauticon, Ltd.
offers a product line of evaporative heat exchange systems for the HVAC and
refrigeration industry. Technicold Services, Inc. offers consulting engineering
services, including process safety management compliance and ammonia
refrigeration and carbon dioxide system design. Technicold also provides
operation, maintenance and safety seminars for ammonia refrigeration
technicians and supervisors. Jordan Vessel Corporation, which merged into
RealCold Systems, offered industrial refrigeration system components such as
liquid recirculating packages and refrigeration system vessels of all types.
RealCold Maintenance Systems, Inc. (renamed RealCold Products, Inc.) designs
and produces unique products for the refrigeration industry. Technicold
Services also publishes a quarterly newsletter, COLD TALK, which reaches over
(1800) refrigeration technicians in the industry.

RealCold Systems Inc. signed a Joint Cooperative Agreement in July 1995 with
The Wittemann Company, a wholly owned subsidiary of Dover Resources and Dover
Corp. (NYSE - DOV), for the manufacture and marketing of merchant carbon
dioxide plants and refrigeration products. The cooperation agreement combines

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the technical expertise and experience of RealCold with the marketing of
Wittemann. Wittemann is the world's leading manufacturer of carbon dioxide
systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. George Briley, President of RealCold Systems
with over 45 years experience, is a renown expert in the innovative design and
building of merchant carbon dioxide systems. This industry combination of
technology, sales and manufacturing experience is unsurpassed and provides an
effective and cost efficient entry for this worldwide market. Subsequently,
Wittcold Systems, Inc., a division of Wittemann Company, acquired RealCold
Systems in July 1997.

In August 1995, PowerCold acquired Nauticon Ltd., a company that manufactures
and markets a product line of innovative evaporative heat exchange systems for
the HVAC and refrigeration industry, representing over five years of
development. The new patented products are innovative and unique in design and
simple to manufacture. They use new material technology with high efficiency
copper tubing to give very high efficiency, low operating costs and minimal
maintenance. The evaporative heat exchangers are self-cleaning in most
applications thus eliminating chemical cleaning. The outstanding Nauticon
product features cannot be found in competitive products. Nauticon evaporative
heat exchangers serve the residential, commercial HVAC sector and the
commercial refrigeration industry. They have many applications, varying from
traditional commercial refrigeration to HVAC to industrial cooling. Customers
vary from supermarkets to ice rinks to walk-in coolers for refrigeration
systems. HVAC applications are in smaller commercial buildings, for traditional
air conditioning systems to highly efficient heat pumps. Industrial uses span
plastic molding and extrusion to conventional cooling of process water to
cooling of cutting oils. They are used for condensers, fluid coolers, booster
coolers, and cooling towers. The Company believes that the Nauticon products
may revolutionize the refrigeration industry; an industry that faces serious
changes for the first time in years due to energy and environmental concerns
worldwide. The Nauticon application should reduce these traditional concerns
and enhance the industry's growth.

The three operating subsidiaries, Technicold Services, Inc., RealCold Products,
Inc. and Nauticon Ltd., supported by the parent public entity, PowerCold,
supports all operating activities for the freezing systems, the refrigeration
systems and the evaporative heat exchange systems respectively. Technicold
provides consulting services to the refrigeration industry, and RealCold
Products, Inc. supports all refrigeration and freezer systems operating from
their corporate facility in Cibolo, Texas. Nauticon Ltd. supports all
evaporative heat exchange and refrigeration systems and operations from their
corporate facility in Cibolo, Texas. The corporate manufacturing facility
supports all technical and service product operations including; design and
engineering; assemble and fabrication; administration; marketing, sales support
and consulting services. Sales and marketing activities are supported by
represented agents, dealers and distributors.

Synergy of operations; people and product activity all related with respective
refrigeration product knowledge. People are cross-trained and knowledgeable
about all products. Sales agents and distributors may market related industry
products to the same customer. Products produced for the refrigeration business
are also needed to compliment the freezing system. Packaged refrigeration
systems are a longer sales cycle, higher sale price; refrigeration products and
components, such as Nauticon, have a shorter sales cycle, lower sale price

Affiliate - In December 1996 the Company agreed in principal to merge/acquire
Rotary Power International, Inc. The Company initially acquired a 30% equity
interest in RPI (2M shares of common stock for $1M), and proposed a merger of

4 of 28<PAGE>

the companies in a stock for stock transaction, whereby RPI would become a
wholly owned subsidiary of the Company. A Plan of Agreement and Merger was
signed with Rotary Power International, Inc. ("RPI") on March 21, 1997 subject
to RPI shareholder approval. Each shareholder of RPI will receive .363 shares
of the Company's common stock (1.56M shares) upon shareholder approval.

There were two major reasons for the acquisition of RPI. - The refrigeration
industry desires packaged refrigeration systems and RPI'S engines add growth
value to our products along with packaging ability. Current deregulation of gas
and electric utilities is creating major competitive changes in energy use and
costs. RPI'S natural gas engines enhance the customers' economic benefits by
reducing energy costs while supporting the environment with a clean burning
energy source. Through associated markets overseas there is a complementary
demand and need for energy, (portable generators) and for refrigeration and CO2
systems in remote areas of the world. RPI primarily marketed engines to the US
government and has had multi-million dollar revenue years. The Company now had
the opportunity to commercialize a proven product that has tens of millions of
dollars and years of development experience behind it.

Packaging of refrigeration systems for supermarkets - RPI has an exclusive
alliance agreement with Hussmann Corporation, the world's largest supplier of
supermarket refrigeration equipment, for marketing RPI'S energy efficient 65
series natural gas engine to supermarkets. Currently 65 series natural gas
engines have been installed in seven supermarkets providing a minimum of 15%
energy savings per store. The estimated 30,000 supermarkets consume 4% energy
use in the US.

Because of the ongoing deregulation of the gas and electric utilities
competition will create new markets for more efficient energy use especially
for commercial refrigeration systems. The Company would have the products
(Nauticon condensers and RPI engines) and management has the experience and
creative ability to package refrigeration systems for the multi-million dollar
commercial refrigeration market. The Company was forming marketing alliances
with major utility companies and well established refrigeration companies in
the business.

Prior to the decline of RPI as set forth below, RPI was the world's only
manufacturer of stratified charge rotary engines and large rotary engines. RPI
was the internationally recognized leader in the development and
commercialization of rotary engines (15-3000 horsepower) for use in industrial,
marine and hybrid-electric vehicular markets. RPI was formed by Richard M.H.
Thompson, affiliates of Loeb Partners Corporation and management in October
1991 to buy the assets and business of the Rotary Engine Division of John Deere
Technologies International, Inc. In 1984, John Deere had bought the Rotary
Engine Division from Curtis-Wright Corporation, which had operated it since
1958.

On July 21, 1997, the Company and Rotary Power International, Inc. agreed to
amend Section 1.2 - The Closing by extending the Agreement an additional forty-
five (45) days. The First Amendment to the Plan and Agreement of Merger, the
extension on the Plan and Agreement of Merger between the Company and Rotary
Power International, Inc., expired on September 5, 1997, accordingly, the Plan
and Agreement of Merger is no longer in effect.

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support Rotary Power with any additional financing. In early May the Company
voluntarily loaned Rotary Power $100,000 for back due rent on the building,
$75,000 for the May interest payment on bond debt, and on June 19, 1997 the
Company loaned Rotary Power an additional $41,767 due employees for payroll. In
June 1997 Management decided not to loan Rotary Power any additional funds for
two reasons; the uncertainty of Rotary Power's collateral for the Company's
financing and after receiving documentation from Company's General Counsel
based on his investigation of Rotary Power, which recently uncovered probable
misrepresentation of material financial information by RPI to PowerCold in
December 1996 and thereafter. Currently Rotary Power is in default on accounts
payable due vendors, payments to the landlord, and payments to the bondholders
Trustee. Consequently, Rotary Power International, Inc. requires additional
funding for its daily operations. Therefore, the economic viability and long-
term future of Rotary Power International, Inc. depends on its ability to
obtain additional sources of financing, and there can be no assurance that such
financing can be obtained on acceptable terms or at all. Due to the
uncertainties and risks of lack of financing, Rotary Power may not continue as
a "going concern" and creditors may force Rotary Power into a reorganization
under Federal Bankruptcy. Management of the Company continues to evaluate the
deteriorating condition of Rotary Power and the feasibility of additional
financing from investors. If the Plan and Agreement of Merger, extended an
additional (45) days, was approved by Rotary Power shareholders the Company
would have re-evaluated the feasibility of Rotary Power's products and
organization.

In November 1997, a new president took over operations of Rotary Power.
Subsequent events have led to the restructure of the bond debt and creditors.
And management of PowerCold has expressed a major interest is in acquiring the
Natural Gas Engine Business from Rotary Power.

New Acquisitions

Rotary Power Enterprise, Inc. - Recently formed as a new PowerCold entity to
acquire the Natural Gas Business from Rotary Power International. The
agreement includes: the business assets including intellectual property,
inventory and manufacturing capability; a marketing agreement with the Hussmann
Corporation, the world's largest supplier of supermarket refrigeration
equipment for marketing the natural gas engine screw compressor systems to
supermarkets; the North American rights to the small 65 series Mazda natural
gas engine block, subject to Mazda Agreement; and Distributor Agreement for the
580 and 40 series engines from Rotary Power International, Inc. The rotary
engine driven screw compressor refrigeration system significantly reduces
refrigeration electrical demand during the most expensive periods of the day
and year.

Deregulation of gas and electric utilities is creating major changes in energy
use and costs. The natural gas engines enhance the customers' economic benefits
by reducing energy costs while supporting the environment with a clean burning
energy source. Supermarkets, as the initial target market, have seven natural
gas engine screw compressor systems installed. The systems currently provide a
minimum of 15% energy savings with one engine per store. The market includes
over 30,000 supermarkets that consume 4% of the electrical energy used in the
US. Also, through associated overseas markets there is a complementary demand
and need for low cost energy for similar refrigeration systems in remote areas
of the world.

Other target markets for the rotary engines include: Large cold storage
facilities, food processing plants, ice rinks and natural gas wellhead,
pipeline and distribution network. Packaged industrial refrigeration systems
produced by RealCold Products will now use natural gas rotary engines instead

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of competitor engines. A packaged, commercial air conditioning system was
designed using natural gas rotary engine and the Nauticon evaporative condenser
for large building facilities.

Channel Freeze Technologies, Inc. - Recently formed as a new PowerCold entity
to acquire 80% of the assets of Channel Ice Technologies, a proprietary
patented and economical multi-purpose freezing system, suitable for virtually
any liquid or semi-liquid product, that is inherently more efficient than prior
technologies in a variety of industries including; block ice - for ice plants,
fish and produce industries; food and food byproducts - for food suppliers and
their leftover byproducts, fruit and juice products. The most notable new
application is for highly efficient management of liquid and semi-liquid
industrial waste products for municipal water, pulp and paper plants and
utilities. The freeze-thaw process; waste is frozen, the water in the frozen
sludge drains almost immediately during thaw, and the remaining materials are
than disposed of at greatly reduced cost, recycled or sold off. Very swift,
economical freezing of the products is much more cost effective, up to one-
third the cost, than with bulk, blast freezing or drum freezing.

Alturdyne Energy Systems, Inc. _ A Letter of Agreement has been signed by The
Company to acquire Alturdyne Energy Systems from Alturdyne. The formal
Agreement is in legal review and process and should be completed by April 30,
1999. Alturdyne Energy Systems as a wholly subsidiary of PowerCold will market
natural gas engine driven water chillers, pumps, air compressors and
generators. RealCold Products will manufacture the water chillers under the
name ALTURCHILL.

Strategic Alliance

Alturdyne - An innovative manufacturer of standby diesel generator sets,
turbine and rotary generator sets, pumps and natural gas engine-driven
chillers. Alturdyne is an approved vendor for all the "Baby Bells" telephone
companies that are regulated to maintain standby power. This regulation results
in the telephone companies purchasing a significant number of generator sets
every year. There are over 3600 units installed, and Alturdyne provides
service field support for these systems and other manufactured units. The
generator set market is a major new and replacement market for rotary engines
where Alturdyne has extensive manufacturing experience.

Alturdyne's strength lies in its power engineering personnel, who are
knowledgeable in the generator set business, telephone company applications,
small turbines, rotaries and chillers. Their capabilities and experience in
developing low cost, customer power packages that meet specific needs have
established Alturdyne's excellent reputation in the industry. Alturdyne's
added expertise is in the design and production of rotary engines.

Intermagnetics General Corporation (Amex: IMG) - Recently purchased for
$1,000,000 an aggregate of 1,250,000 shares of the Company's Series A Preferred
Stock, par value $0.001 per share; and PowerCold granted Intermagnetics General
Corporation a purchase option to acquire up to 50% of the fully diluted equity
of the Company. The purchase option is exercisable at a per share price of the
lesser of $3.00 or a market price calculation of the common stock, for an
option term no later than March 31, 1999.

Intermagnetics is the largest integrated developer and manufacturer in the
United States, of superconducting LTS and HTS magnets, wire and cable as well
as associated low-temperature refrigeration equipment, and radio-frequency (RF)
coils, the combination of which is essential to successful application of
superconductivity such as Magnetic Resonance Imaging (MRI). The Company is
dedicated to the development and commercialization of applied superconductivity

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and refrigeration systems. The Company also supplies permanent magnet systems,
materials separation equipment and FRIGC(R) refrigerants as replacements for
ozone-depleting refrigerants.

New innovative products include: A patented advanced subcooling system that
initially will be marketed to some 135,000 supermarkets and convenience stores.
The Precooled Vapor-Liquid Refrigeration Cycle could as much as double the
energy savings of traditional subcooling equipment. A state of the art
superconducting magnetic energy storage (SMES) system designed for both
industrial end-users and electric utilities, prime for an industry that is
entering a deregulation environment. The system protects critically important
electric equipment against voltage sags and/or power interruptions.

The refrigeration and power industries are currently representing a demanding,
new rapidly changing growth market worldwide. This new evolving market is
primarily driven by two major factors; the utility industries changing energy
and demand charges for the cost of energy use, and the demand for refrigeration
and power for use by third world countries. The request for lower cost "clean"
energy around the world introduces a new array of exciting opportunities and
markets, primarily emerging by the requirement for more efficient refrigeration
and power.

A strategic alliance with IGC compliments both companies and support each
other's desire and needs with their respective energy efficient products and
services. PowerCold has key personnel, industry contacts and unique products,
and Intermagnetics General has the management and financial strength and
complimenting products. This new emerging opportunity has all the necessary
ingredients for success --- jump-start a small emerging company and rapidly
expand a new venture of a large company. Both companies are positioned with
product technology and management services to provide supportive integrated
solutions for this multi-billion refrigeration and power industry.

Management:

PowerCold's management philosophy and structure supports decentralized
authority and operations, profit and loss accountability, incentive driven
performance and compensation, and total customer satisfaction. Management has
over 150 years business experience. Their extensive experience and background
is adequately related to the business. CEO - over 35 years experience in
marketing and management; COO - over 40 years experience in manufacturing and
marketing in the refrigeration and power industry; CFO - over 25 years
experience in finance, a CPA with a concentration on SEC audit and public
accounting; CTO - over (40) years technical experience in refrigeration
engineering and design; a well-known expert consultant in the refrigeration
industry. The subsidiary companies include experienced marketing and technical
management and support personnel.

The Company's management objective is to become a major force with niche
products in the multi-billion dollar refrigeration industry. The Company's goal
is to achieve profitable growth and increase shareholder value by increasing
its line of superior products and services, through acquisitions and joint
ventures of related products and companies.

The Company maintains corporate offices in San Antonio, Texas, and an executive
office in Philadelphia, Pennsylvania. Administrative, engineering and
manufacturing facilities are located in Cibolo, Texas.

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Products:

Industrial Refrigeration Packages - RealCold Products, Inc. a wholly owned
subsidiary of the Company, designs and packages commercial refrigeration and
freezer systems. RealCold Products was reorganized with its new name in March
1997, replacing RealCold Systems Inc. and RealCold Maintenance Systems, Inc.
RealCold Products supports all engineering and manufacturing of commercial
refrigeration packages and its freezer systems. Custom innovative refrigeration
products include the following: ammonia recovery and recycling system, non-
chemical water treating system, liquid recirculating packages, and
refrigeration system vessels.

Complimenting the various product lines, the Company intends to market other
various related industry products including automated ice systems, which
produce low cost block and sized ice.

Competition - varies from small industrial refrigeration manufactures to the
very large companies in the industry, all competing for this multi billion-
dollar industry. The Company envisions an enormous market demand for
refrigeration systems in third world countries. America is well entrenched with
refrigeration systems, but there is a great niche market for the Company's
unique and innovative refrigeration and freezer products. PowerCold and its
related entities have the refrigeration engineering expertise and new
innovative products that are needed and in demand today for an industry that
hasn't seen many changes in the last 30 - 40 years.

Evaporative Heat Exchange Systems - Nauticon Ltd., a wholly owned subsidiary of
PowerCold manufactures and markets a product line of evaporative heat exchange
systems for the HVAC and refrigeration industry. The new patented products are
innovative and unique in design, use new material technology, are simple to
manufacture, and have low operating costs. They are used for condensers, fluid
coolers, booster coolers, and cooling towers.

Condensers for both Refrigeration and HVAC - Capacities range from 60,000 to
525,000 BTU for refrigeration condensing. Refrigerants may be at different
incoming temperatures as would be normal for multi-circuit applications.
Copper coils are compatible with all refrigerants except ammonia.

Fluid Coolers - Water. oil, glycol - anything compatible with the copper
coils can be cooled according to each thermal characteristics. The separate
coils can handle different liquids at the same time, according to needs.

Booster Coolers - Applies to new or existing applications. Especially
advantageous in systems now short of capacity, as it can be inserted in the
existing cooling loop to circumvent the need for an entirely new system.
Gives low cost additional cooling to refrigerants or liquids plus the multi-
circuit ability.

Cooler Tower - Several important differences set this cooling tower apart
from others. Hot water is dispersed through Nauticon's unique "cyclone" water
heads - there are no sprinkler moving arms to break, stall or clog. No
bottom openings to attract debris, thus polluting the system.

Unique low cost manufacturing procedures are essentially for the same product,
which is offered in four varieties. This is attributed to communality of parts
and manufacturing. Manufacturing processes and techniques are both simple and
well worked out utilizing low cost labor.

Initially Nauticon's market was primarily mid-range systems (20- 50 ton units)
for mid size industrial and commercial applications. There has been a major
interest from refrigeration manufactures at the trade shows that the larger (80
- - 120 ton units) are more desired for their larger applications. The Company

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also envisions an enormous opportunity for the small market - a low end HVAC
system for the home and commercial uses. A related, but completely separate
opportunity exists in the small unit market for a self-contained evaporative
condenser (2.5 to 10 ton units).

Its primary advantage is energy savings, yielding extremely high EER ratings to
not only better, but to offset the regulated change to low efficiency
refrigerants. To be sold as a replacement or new applications and to also be
offered packaged with compressors.

Competition - Nauticon products could revolutionize the refrigeration
industry; an industry that faces serious changes for the first time in years
due to energy and environmental concerns worldwide. The Nauticon application
should reduce these traditional concerns and enhance the industry's growth. The
Company believes that it has a truly unique product concept that serves a very
wide arena of commercial applications for the national market as well as the
international market. Initial marketing of the Nauticon systems will be
primarily the mid-range systems because there is much less competition, a great
advantage to Nauticon and its unique patented product. The larger and smaller
size systems are marketed by some of the major competitors in the industry;
larger systems by Evapco and BAC, smaller systems by York and Carrier. These
competitors are well established and have substantially greater financial and
other resources than Nauticon.

Channel Freeze - patented Automated Bulk Freezing System has many applications.
Automated block ice production. Automated freezing of food and food by-products
in bulk, i.e., orange juice, offal, etc. Freeze/thaw (BiofreezeTM) applications
that reduces the cost to process residual sludge by up to 50%. This system
minimizes landfill costs and water treatment costs. This application is being
researched at this time. The technology has been proven many times usually in
areas where nature supplies the freezing during winter and thawing in summer.
BiofreezeTM automates this process. There are literally thousands of potential
users of this product. The Channel Ice System replaces the now obsolete can-ice
plants, many of which are over 50 years old. There are some 500 can-ice plants
still operating in the US. However the major market for Channel Ice is export.
Block ice is still in demand outside the US.

The Channel Freeze bulk freezing system, which has been tested freezing single
strength orange juice, can also be employed to freeze other food and non-food
products, such as red meat, gravies, seafood, fruit, eggs, etc. Channel Freeze
is working with a large chicken producer to replace their existing Vertical
Plate Freezers, which freeze chicken byproducts. Freezing time tests are being
performed now. This is a market that has considerable potential as the Channel
Freeze unit provides the following features:

Competition - Block Ice - Small packaged manual block ice plants manufactured
bv various people in the U.S. Up to five or ten tons of ice per day. A manual
block ice plant manufactured in Mexico with sizes up to 100 ton per day or ice.
Bulk Freezing - Vertical plate freezer manufacturers: York Food Systems -US
(manual), Gram - Denmark (manual), Technal - France (semi-automatic), APV-Baker
Ltd _ Jackstone, England (manual), Dole - U.S. (manual), Blast Freezers - US
(manual).

Freezer Systems - PowerCold's basic system (patented in May l990) quick-
freezes food products by immersing them in a bath of refrigerant, with special
advantages for fragile foods such as fruits and seafood. Quick freezing forms
a protective, ice-glazed shell around foods with little cellular damage. This
method retains freshness and flavor, and prevents clumping for processing and
packaging. Quick-freezing also reduces shrinkage, promotes faster thawing,
extends product quality and shelf life up to four times longer than other

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processes. This unique process provides the least cost to freeze per product
pound versus competition. It has environmental advantages over competitive
systems. PowerCold's cost-effective systems use less energy, less refrigerant,
save space, and require no periodic defrosting.

The Quick Freeze System, employing a recoverable liquid refrigerant, provides a
cost-effective method for freezing specialty products that are difficult to
freeze employing conventional systems. The Quick Freeze System has advantages
over all existing systems, designed to freeze "specialty" foods, which are
typically difficult to freeze, includes the following: peeled and deveined
shrimp (prawns), fish fillets, sauces (gravies) or other fragile food products.
This system may also be employed in "peeling" systems, sterilization of
surgical instruments, blood freezing and possibly others.

Rotary Drum System - The Company's newly designed Rotary Drum System (patent
pending) receives food product into rotating drum pockets. Refrigerant enters
each individual pocket from the top of the rotating drum. While rotating, the
sealed food product and refrigerant in the drum pockets are computer
controlled, cycled and timed for freezing specifications desired.

A small compact, low cost (42" in diameter) rotating drum, constructed of high
density (HMW polymer) plastic and stainless steel, which is insulated and
sealed maintaining a slight positive pressure to prevent air infiltration. Food
product, assembled on a conveyor system, enters sealed rotating drum "pockets".
Liquid refrigerant enters the top sealed rotating drum "pockets" and merges
with the food product. While rotating, the liquid refrigerant is drained off
and the food product remains in the "pockets" for "drying" (evaporation of
refrigerant). Rotation cycle is timed and synchronized to produce the level of
product freezing desired. Food product is discharged from the rotating drum
onto a conveyor system and container. The liquid freezant and vapor gas is
recaptured and recycled.

PowerCold Quick Freeze Process - The Quick Freeze process is based upon the
principles of the low boiling point of low temperature halocarbon refrigerants,
and the subsequent surface heat removal of processed product in an environment
of less than -20. F. This is, in this case, accomplished with liquid
halocarbon refrigerants, which provides for virtually instant surface freezing.
Upon introducing the product into the process chamber or "pockets", it is
immediately immersed in a liquid bath of refrigerant agent and crust-frozen.
This causes the crystal structure of the liquid in the crust to form a matrix
which interlocks to the firmness similar to that of an egg shell which protects
the delicate inner section which contains the meat, flavoring juices and
aromas.

Competition - Food Freezing:

Mechanical Systems - There are two types of in-line continuous freezing
systems. Each employs a mechanical refrigeration system, usually two staged or
economized. Most of the refrigeration systems employ ammonia as the
refrigerant. IQF fluidized freezers are employed to freeze loose (unpackaged)
vegetables and fruit on a continuous basis. The other mechanical freezing
system employs a spiral conveyor to transport product through the enclosure.
This type freezer is used to freeze both "open" and boxed products.

Liquid Nitrogen Freezers - Cryogenic freezing has been a factor in the food
freezing industry for many years. Its main selling point has been rapid
freezing that provides excellent quality. Its main disadvantage is cost to
freeze. Two types of nitrogen freezers are available. One is a spiral, the
other is an air in-line belt (conveyor) freezer.

11 of 28<PAGE>

Carbon Dioxide Freezers - Another cryogen, carbon dioxide (CO2), is also used
for freezing many kinds of food products. The freezer configurations are
similar to liquid nitrogen freezers. CO2 freezers in general have an advantage
over liquid nitrogen that is difficult to overcome and that is cost to freeze.

At the current time management believes there is no substantial market in the
US for the ReelFrez food freezing system, (a RealCold product), because of the
ban on the use of certain refrigerants. Some countries continue to use these
refrigerants, and a recent market study projects a need for thousands of food
freezing systems in third world countries. Management is seeking overseas
alliances for the freezing system.

Engine Driven Chillers

In 1991 Alturdyne began manufacturing engine driven chillers as a new product
line. Chillers are cooling systems normally used for buildings, offices,
schools, hospitals or factories and provide 30 to 1100 tons of chilled water.
Currently 99% of the chillers manufactured are driven by electric motors.
However, there is a growing demand for natural gas engine driven chillers due
to deregulation of the electric and gas utilities. In some areas of the country
electric power is very expensive and operating on natural gas can save
thousands of dollars a year for user. Also in some areas gas companies provide
large rebates to natural gas users which helps reduce the higher capital cost
of the chiller. A natural gas engine is more expensive than a very high
production electrical motor and this difference makes engine driven chillers
more difficult to sell unless there is an early pay off through cost savings on
the users energy bill. Applications with co-fueled diesel engines are in
development by Alturdyne.

Since 1991, Alturdyne has developed 22 standard chiller models rated from 30 TO
300 tons that are certified by Environmental Test Labs which is comparable to
the UL listing. Designs have been made for units rated from 30 to 1100 tons and
several large units placed into service. Alturdyne has have sold over 140 units
to date and that places us in second place for this industry. Tecochill is the
industry leader, and while they enjoy sponsorship by Gas Research Institute
they utilize short life automotive derivative engines as opposed to long life
Caterpillar industrial engines used by Alturdyne.

While the Alturdyne chiller products have been a technical success, the
competitive marketplace has limited its financial success. Therefore,
Alturdyne has recently sold off the Chiller Business to PowerCold. PowerCold
has the refrigeration expertise and resources and the rotary power engine as a
solution integrator to economically produce the chillers. Alturdyne and
PowerCold have entered into is a strategic alliance for packaging PowerCold
rotary engines and Alturdyne generator sets for the power industry market.

A "hybrid" electric motor/gas engine driven chiller is in development with GRI
funding that will result in a product that can service as the backbone of this
business. It will be covered by several patents and feature a variable speed
constant frequency (VSCF) capability.

Rotary Power Engines
The Natural Gas Rotary Engine offers:
20,000 Hour engine reliability
Low fixed maintenance cost
Few moving parts
Low noise
Compact configuration
Wide horsepower range 20-1500HP
12 of 28<PAGE>

2000 to 4200RPM variable speed capability (>100HP - 3600RPM maximum)
Internal gear drives shaft at three times rotor speed
No external gearing required
Light weight
Low vibration
No special or massive foundations required
Minimal structural bases required
Black start capability
Only control circuit power required
Eliminates new electrical feeders in many new installations

NGRE driven rotating equipment and Systems are applicable to a wide variety of
industrial uses, and offer customers large savings in electrical costs from
both energy and demand savings. A NGRE, providing on-site utilities, burns the
minimum annual gas flows required to allow sites to buy "transport" natural gas
rather than more expensive commercial gas. The combination of natural gas and
electrical energy allows the customer to balance its utility consumption on a
daily, weekly, monthly or annual basis. RPI feels that the unique
characteristics of natural gas powered engines allows them to successfully
compete in market sectors where low maintenance and high speed rotating
equipment is predominant or is rapidly taking over the market from older
reciprocating equipment.

Air conditioning - screw compressors
Refrigeration - screw compressors
Plant air compression systems - screw compressors
Natural Gas compression systems - screw compressors
Mobile power units - Permanent Magnet Generators
Stationary peaking power supplies _ generators

65 Series Natural Gas Engine

The 65 Series twin rotor Natural Gas Rotary Engine. Model RN-065x2-NA, is a
natural gas engine derived from Mazda Motor Corporations RX-7 automotive rotary
engine. The basic block incorporates unique internal parts and features for
meeting the 20,000 hour life demanded by the industrial market; i.e., ceramic
apex seals, strengthened stationary gears. More durable water pump and longer
life elastomers. The engine is rated at 8OHP on natural gas at 4200RPM. It
incorporates an IMPCO natural gas carburetor and specially tuned intake
manifold.

580 Series Natural Gas Engine

The 58Q Series family of twin rotor Natural Gas Rotary Engine power modules is
derived from the extensive military development of the 580 Series diesel/multi-
fuel engines since 1977. The initial 580 Series Natural Gas Rotary Engine
development has been for a twin rotor engine rated at 500HP at 36OORPM. This
will provide the power to generators for peak power shaving. The four rotor
(composed of two 5OOHP modules) rated at 1000HP and the six rotor (three 5OOHP
two rotor modules) rated at 1 5OOHP complete the family. The 580 natural gas
engine runs on low pressure natural gas and does not use expensive high
pressure fuel injection equipment and costly turbochargers found on diesel
engines, thus offering a very competitive natural gas power plant for
industrial applications.

13 of 28<PAGE>

ITEM 2. PROPERTIES

The Company maintains its corporate office in Cibolo, Texas, and an executive
office in Philadelphia, Pennsylvania. The Cibolo facility is 32,000 sq. ft. and
houses administrative, engineering and manufacturing operations.

The Company owns and maintains no properties. Properties are leased on a short-
term basis. Management believes that the Company's facilities are adequate for
its operations and are maintained in good condition. The Company is aware of
the growth potential of its operating facilities and is currently reviewing
other plant facilities near their respective locations.

ITEM 3. LEGAL PROCEEDINGS

Management of the Company is seeking to recoup damages from the former
president and director of Nauticon, in connection with Nauticon's acquisition
by the Company. Related to this matter is the ownership of certain patents. It
is the opinion of management that this matter will not have any adverse effect
on the Company at this time, because the Company legally acquired all the
assets of Nauticon including the patents in exchange for stock. The former
president of Nauticon has filed a counter claim against the Company and two
Company Executives/Directors.

Because of the financial and managerial problems incurred by the previous
management, Nauticon has incurred bad debts and certain claims have been filed
against Nauticon.

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

Company's shareholders voted majority consent in favor of issuing
Intermagnetics General preferred shares for their $1,000,000 investment in the
Company in 1998.

Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS

The Company's Common Stock is traded on the OTC Electronic Bulletin Board under
the trading symbol PWCL. As of December 31, 1998, there were approximately 240
record holders of the Company's Common Stock.

The following table sets forth the high and low sale prices of the Company's
Common Stock as reported by one of the market makers for the periods indicated.

1998 High Low 1997 High Low
----------------------------------------------------------------

First Quarter 1 1/2 1/4 1 3/4 1 1/4

Second Quarter 1 7/8 1 1/4 1 3/8 3/4

Third Quarter 2 1 1 1/8 1/2

Fourth Quarter 1 1/4 7/8 1 3/8

The Company has paid no cash dividends to date, and it does not intend to pay
any cash dividends in the foreseeable future. The present policy of the Board
of Directors is to retain any future earnings and provide for the Company's
growth.

14 of 28<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for PowerCold and its
subsidiaries. The financial data for fiscal years ending December 31, 1994
through December 31, 1998 have been derived from the Company's audited
Consolidated Financial Statements included elsewhere in this Report, and should
be read in conjunction with those Consolidated Financial Statements and related
notes.

<TABLE>
<CAPTION>
SUMMARY STATEMENT OF OPERATIONS (In thousands, except per share data)

<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998 1997 1996 1995 1994
--------- ---------- -------- --------- ---------
Revenues $ 442 $ 393 $ 1,452 $ 2,244 $ 0
Operating (loss) $ (1,203) $ (1,713) $ (573) $ (1,060) $ (245)
Net Income (loss) $ (1,690) $ (2,720) $ 2,209 $ (1,089) $ (245)
Net Income (loss) per share$ (0.27) $ (0.46) $ 0.39 $ (0.23) $ (0.07)
Weighted average number of shares 6,377 5,893 5,662 4,776 3,504

</TABLE>

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

Year Ended December 31, 1998 1997 1996 1995 1994
------- -------- -------- ------- -------
Total assets $ 2,322 $ 2,229 $ 5,146 $ 2,298 $ 866
Total liabilities $ 1,164 $ 817 $ 1,076 $ 759 $ 99
Long term debt $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders' equity $ 1,158 $ 1,412 $ 4,070 $ 1,539 $ 767

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

Forward looking statements made herein are based on current expectations of the
Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include;
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.

GENERAL FINANCIAL ACTIVITY

RealCold Products, Inc. - designs and manufactures unique energy efficient
packaged products for the refrigeration industry. RealCold Products also
supports Rotary Power Enterprise and Alturdyne Energy Systems by engineering
and packaging their products. RealCold Products will also support Channel
Freeze Technologies by designing and packaging their accompanying refrigeration
systems. Management believes that the recent acquisition of Channel Freeze and
Alturdyne Energy Systems should provide improved revenues and profits for
RealCold Products in 1999, based upon its expertise in custom manufacturing
systems. There are proposed alliances with other refrigeration companies,
whereas RealCold Products will package various components adding value for a
total turnkey refrigeration system.

15 of 28<PAGE>

During 1998, RealCold Products was mostly inactive because the personnel
expertise involved in design, engineering and manufacturing refrigeration
systems concentrated on the joint venture that manufactured Merchant Carbon
Dioxide Plants and Refrigeration System Packages for WittCold Systems, Inc.
Since the initial joint venture over $8M in revenue was produce and booked by
WittCold Systems. Starting with the acquisition, PowerCold receives a royalty
payment of 2 1/2% _ 5% for ten years on the sales revenue.

Nauticon Inc. - manufactures and markets a product line of patented evaporative
heat exchange systems for the HVAC and refrigeration industry. The new
patented products are innovative and unique in design, use new material
technology, is simple to manufacture, and have a low operating cost. They are
used for condensers, fluid coolers, subcoolers, and cooling towers. Nauticon
products can produce power cost in the refrigeration industry by 20% to 30%
making these units contribute to the utilities' needs to reduce power demand.
There are over 100 systems installed in the US.

Management believes that Nauticon did not meet its sales and revenue
projections in 1998 due to lack of operating cash flow and limited marketing
support. PowerCold has funded Nauticon over $1.0M (cash and loans through a
bank secured by a CD) in operating capital, but the Company has been
continually hindered by major operating and legal expenses due to previous
inept management. Because of the major operating losses incurred by previous
management, Nauticon may not have sufficient resources to continue operations.
Plans for Nauticon; new management is concentrating on sales to industry OEM's
and large refrigeration manufacturers that could produce and distribute product
under their own private label.

New Acquisitions

Rotary Power Enterprise, Inc. - was formed (September 1998) as a new PowerCold
entity to acquire the Natural Gas Business from Rotary Power International. The
agreement includes: the business assets including intellectual property,
inventory and manufacturing capability; a marketing agreement with the Hussmann
Corporation, the world's largest supplier of supermarket refrigeration equipment
for marketing the natural gas engine screw compressor systems to supermarkets;
the North American rights to the small 65 series Mazda natural gas engine block,
subject to Mazda Agreement; and Distributor Agreements for the Rotary Power 580
and 40 series engines form Rotary Power International, Inc.

The Company recently announced a major sales agreement with Kem Equipment
Company, an engine packager for OEM applications for the oil and gas industry
in Western Canada, for (100 small 65 HP and 60 large 500 HP) natural gas
engines valued by management at over $5 million. The major application is for
oil and gas field systems. The initial (160) engines are scheduled for
delivery to a major Canadian oil and gas operation in Western Canada.

Channel Freeze Technologies, Inc. _ was recently formed (September 1998) as a
PowerCold subsidiary to acquire 80% of the assets of Channel Ice Technologies.
Channel Ice produces a proprietary patented and economical multi-purpose
freezing system, suitable for virtually any liquid or semi-liquid product, that
is inherently more efficient than prior technologies in a variety of industries
including; block ice - for ice plants, fish and produce industries; food and
food byproducts - for food suppliers and their leftover byproducts, fruit and
juice products. The most notable new application is for highly efficient
management of liquid and semi-liquid industrial waste products for municipal
water, pulp and paper plants and utilities. The freeze-thaw process; waste is
frozen, the water in the frozen sludge drains almost immediately during thaw,

16 of 28<PAGE>

and the remaining materials are than disposed of at greatly reduced cost,
recycled or sold.

Since the acquisition, the Company has over $12 million in back log
quotes/proposals pending for systems in the US and Southeast Asia and Japan.
With the acquisition, included were a Channel Ice system sale to Haiti for
$155,000 and a down payment was received for two Channel Ice systems for
Vietnam.

Alturdyne Energy Systems _ PowerCold recently signed a Letter of Agreement
(December 1998), to acquire a division of Alturdyne that produces natural gas
engine driven water chillers. The Company also announced a Strategic Alliance
with Alturdyne for manufacturing and marketing of their respective products.

Alturdyne is an innovative manufacturer of standby diesel generator sets,
turbine and rotary generator sets, pumps and natural gas engine-driven
chillers. Alturdyne's strength lies in its power engineering personnel, who
are knowledgeable in the generator set business, telephone company
applications, small turbines, rotaries and chillers. Their capabilities and
experience in developing low cost, customer power packages that meet specific
needs have established Alturdyne's excellent reputation in the industry.
Alturdyne's added expertise is in the design and production of rotary engines.

Alturdyne Energy Systems, as an Alturdyne division installed over (140)
chillers systems. The manufacturing operations have been moved to the
Company's facility in Cibolo, Texas. The added expertise of RealCold Products
engineering and manufacturing should enhance the existing chiller business.

RESULTS OF OPERATIONS

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

Year Ended December 31,
1998 1997 1996
--------- --------- --------

Revenue 100.0% 100.0% 100.0%
Cost of revenue 89.7 83.3 62.8
Gross margin 10.3 16.7 37.2
Operating expenses (282.5) (453.9) 76.7
Operating income (loss) (272.1) (437.2) (39.5)
Other income (expense) (102.0) 22.0 200.2
Net income (loss) (382.2) (694.1) 152.2

Fiscal 1998 and 1997 Results - The Company's Consolidated Statements of
Operations for the fiscal year ended December 31, 1998 compared to fiscal year
ended December 31, 1997: Total revenue for 1998 was $ 442,172 compared to
$391,819 for 1997; operating loss of ($1,203,301) for 1998 compared to
($1,713,203) for 1997; and net loss of ($1,690,187) or ($0.27) per share for
1998 compared to a net loss of ($2,719,633) or ($0.46) per share for 1997. Net
income (loss) per share was based on weighted average number of shares of
6,376,647 for 1998 compared to 5,893,000 for 1997.

The Company's Consolidated Balance Sheets as of December 31, 1998 and December
31, 1997 respectively: Total current assets were $853,996 for 1998 and
$1,581,736 for 1997; total assets were $2,321,970 for 1998 and $2,229,357 for
1997; total liabilities were $1,164,377 for 1998 and $817,191 for 1997; total
stockholders' equity was $1,157,593 for 1998 and $1,412,166 for 1997.

17 of 28<PAGE>

The company's revenues and expenses resulted in an operating loss ($1,203,301)
for 1998 compared to an operating loss of ($1,713,203) for 1997, these are both
operating losses. The Company's operating loss in 1998 was 30% less than the
operating loss in 1997, and the net loss for 1998 was 38% less than the net
loss in 1997. The decrease in operating losses was due to a reduction of some
$1 million in general and administrative expenses; and the decrease in the net
loss was due to the write-off of the failed merger with Rotary Power
International, Inc. in 1997.

Liquidity and Capital Resources

At December 31, 1998, the Company's working capital was ($310,381) compared
with $764,545 at December 31, 1997. The decrease was primarily attributable to
the Company's write-off of $557,145 as of December 31, 1998, in marketable
securities that were permanently impaired. The company's cash resources at
December 31, 1998 were $21,781 reflecting an increase in cash resources from
$2,274 at December 31, 1997.

Simco Group, Inc., a wholly owned affiliate of Francis L Simola, CEO of the
Company has financed the Company on several occasions since the Company's
inception. Simco Group has never received or requested payment of any interest
from the Company for providing said financing. Management believes that
without the continuos financial support of Simco Group, the Company would never
have remained in business.

The Board of Directors unanimously approved establishing Simco Group, Inc. with
fiduciary responsibility for the Company, effective December 27, 1994. On
April 15, 1996, the Board of Directors again voted unanimously to have Simco
group, Inc. continue to support the financial needs of the Company and its
subsidiaries whenever necessary; making loans and borrowing money for the
Companies, selling personal stock or assets of Francis Simola to support the
Company, or to make loans to support financial transactions of the Company.

Because of these financial transactions, Simco Group, Inc. knowingly knew that
it may be at financial risk, loosing personal interest money, and incurring
losses due in personal stock transactions.

At December 31, 1997, the Company had $597,300, ($607,960 in 1996) held by and
invested in an account in the name of Simco. These funds were invested in short
and long-term liquid marketable securities; these funds have been classified as
advances to affiliate. Simco has guaranteed the Company a minimum 8% return on
these funds. During 1998, Simco paid the Company interest of $49,284, ($48,000
in 1997 and $12,000 in 1996). Management believes these terms reflect an arms-
length transactions.

In early 1998, a major security investment decreased in value substantially and
quickly due to uncontrolled market conditions. Simco Group, at its own risk,
used its own money to support the investment during 1998, and continued to fund
and support the Company as needed. Simco also paid interest to the Company.
Management and a majority of the Directors decided to write _off, as of
December 31, 1998, the loss of $557,145.

During 1998, the Company issued 120,000 restricted shares of common stock to
Simco as compensation at an expense of $30,000. The Company also recorded
$60,000 related to payment for expenses and $120,000 for services and $75,000
for consulting services provided for the three new acquisitions of Rotary Power
Enterprise, Channel Freeze Technologies and Alturdyne Energy Systems. These
amounts were credited to the investment account funds to reduce the loss.

18 of 28<PAGE>

During 1997, the Company issued 120,000 restricted shares of common stock
(150,000 shares in 1996) to Simco in satisfaction of prior years' liabilities
related to expenses and consulting services provided. During 1997, the Company
recorded expense of $48,000 related to the issuance of 120,000 restricted
shares as payment for expenses and consulting services provided. The shares
were issued at 50% of the bid price on date of issuance varying from $.30 to
$.625 per share during 1997.

The Company received $1,000,000 through the sale of a redeemable, convertible,
preferred series A Preferred Stock, $0.001 par value, $0.80 stated value.
1,250,000 preferred shares are issued and outstanding.

The Company issued a total of 838,867 shares of new common restricted shares in
1998. 117,647 shares were issued at $0.85 per share for a private placement,
which raised $100,000. 100,000 shares were issued for an acquisition at $0.63
per share. 19,000 shares were issued to the Company Directors at $0.50 per
share. 285,000 shares were issued to key executives as compensation at an
average of $0.33 per share. 317,220 share were issued for satisfaction of
recorded liabilities for expenses and services rendered.

Status of Operations - Management intends to continue to utilize and develop
the intangible assets of the Company. It is Management's opinion that the
Company's cash flow generated from current intangible assets is not impaired,
and that recovery of its intangible assets, upon which profitable operations
will be based, will occur.

Company operating revenues and profit should increase because of the new
acquisitions. Management believes that its working capital may not be
sufficient to support its operations and growth plans, therefore to support the
Company's growth and goals, management is seeking additional funding for this
purpose.

YEAR 2000 ISSUES

The company has formed a committee to investigate any liabilities resulting
from the Y2K problem. The Company's internal computer systems and programs are
being reviewed to make sure they are up to date. If any are not in compliance,
steps are being taken to upgrade the programs from the manufacturers. Any new
computers and/or software programs to be purchased this year will be purchased
as Y2K complied. This same procedure will be addressed for all office equipment
as well. Questionnaires are being sent to the Company's vendors and materials
suppliers to determine their compliance and actions in place to do so. We are
targeting June 1, 1999 to be complete with all compliance actions.

PREVIOUS FINANCIAL ACTIVITY - 1997

RealCold Systems, Inc Sale - WittCold Systems, Inc., Palm Coast, Florida, a
Wittemann Company and wholly owned subsidiary of Dover Resources/Dover

19 of 28<PAGE>

Corporation purchased all of the issued and outstanding capital stock of
RealCold Systems, a wholly owned subsidiary of the Company. RealCold Systems
Inc. and The Wittemann Company previously signed a Joint Cooperative Agreement
in June 1995 for the manufacture and marketing of merchant carbon dioxide
plants and refrigeration products.

RealCold System engineers, manufactures and markets custom industrial
refrigeration systems. Wittemann is the world's leading manufacturer of carbon
dioxide systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. The acquisition culminated after a
successful (50/50) cooperative joint venture between the two companies for the
manufacture and marketing of Merchant Carbon Dioxide Plants and Refrigeration
System Packages.

The effective closing date of all financial accounting transactions, between
the two companies, was as of June 30, 1996, the end of the Registrant's second
quarter reporting period. Closing date of the Acquisition Agreement was on July
23, 1996. Terms and conditions of the acquisition agreement between WittCold
Systems, Inc. and the Registrant are as follows:

The purchase price for the common shares was the aggregate sum of Three Million
Dollars ($3,000,000) plus five percent (5 %) of the Net Sales of Refrigeration
Systems for the ten (10) full calendar years 1996 through 2005 and two and one
half (2 1/2%) of Net Sales of Merchant C02 Systems for the nine (9) full
calendar years 1997 through 2005 (the "Percentage Amount").

If the aggregate Percentage Amount paid to Registrant, as set forth above,
through the year 2005 is not at least Two Million Dollars ($2,000,000), the
Purchaser agrees to pay to Registrant no later than April 30, 2006, the
difference between the aggregate Percentage Amount paid to Registrant and Two
Million Dollars ($2,000,000). Notwithstanding the foregoing, in the event that
George Briley, a Director and major shareholder of the Registrant, is not
employed by and actively engaged in the Company's business for a period of
three full years after the date of Closing, then the foregoing obligation to
pay a minimum Percentage Amount of Two Million Dollars ($2,000,000) is null and
void and Registrant shall be entitled only to the Percentage Amount based on
Actual Net Sales as set forth above.

"Net Sales", as used herein, means payments received from customers less
commissions to non-employee agents, export preparation, inland freight and
forwarding fees, ocean freight, insurance, discounts and all warranty work
performed during the relevant period. The Percentage Amount will be determined
each calendar quarter and any amount due Registrant shall be paid to the
Registrant within thirty days after the end of each calendar quarter starting
January 1, 1997.

RealCold Products Packaging - In March 1997 RealCold Maintenance Systems
changed its name to RealCold Products. RealCold Products is responsible for
custom packaging of commercial refrigeration systems. There are proposed
alliances with other refrigeration companies, whereas RealCold Products will
package various components adding value for a total turnkey refrigeration
system. Management believes the Company should improve income and profits as
this entity provides the industry expertise for its custom packaged products
during 1998.

Nauticon Reorganization - In March 1997, Nauticon hired Thomas F. Reece as the
new Sales Manager for its line of evaporative heat exchange systems, whereas he
has initiated new sales and marketing program. Subsequently, Mr. Thomas F.
Reece has been elected a Director and appointed President of Nauticon, Inc.,

20 of 28<PAGE>

effective October 30, 1997. The evaporative condenser product line is now
operating to specifications after delays in product development. Management is
excited about the prospects for substantial growth in revenues from Nauticon's
operations under Mr. Reece, and projects favorable growth through 1998.

There are some 70 systems installed to date. Nauticon recently installed 35
condensers at a new shopping center in California. There is the potential for
additional systems for other shopping centers. The initial order was very
competitive, whereas the application test ran on site for four weeks. Todate
there are over $500K of proposals out for new system orders projected over the
next few months. Nauticon now has 16 distributors throughout the US, and is in
negotiations with some of the largest refrigeration manufacturers for product
manufacturing and marketing alliances. The prospects for these alliances, if
negotiated successfully, should support a revenue growth that will far exceed
current and future revenue projections. Primary sales targets are the large
refrigeration manufacturers that could produce and distribute product under
their own private label. Besides marketing direct through agents in the US,
other market outlets will be through major distributors worldwide.

Rotary Power International, Inc. Stock Purchase - Per an "Agreement" dated
December 24, 1996 International Cryogenic Systems Corporation (PowerCold")
agreed to invest in Rotary Power International, Inc. ("RPI") the sum of one
million dollars ($1,000,000) in exchange for two million shares (2,000,000) of
RPI common stock.

PowerCold and RPI agreed in principal to merge the two companies in a stock for
stock acquisition, whereby RPI would become a wholly owned subsidiary of
PowerCold. Upon completion of a definitive transaction agreement and approval
by the companies Board of Directors and stockholders, each shareholder of RPI
would receive (.363) shares of PowerCold common stock. The stock for stock
transaction would result in PowerCold issuing a fixed total number of
(1,516,196) shares of common stock for all the issued and outstanding shares of
RPI common stock at the time of closing and execution of the stock purchase and
merger agreement.

Since the Company initially entered into an Agreement to merge with Rotary
Power International, Inc., there was a continuing deterioration in Rotary
Power's negative cash flow from operations. Funding provided by the Company,
that initially invested $1,000,000 in equity and the $1,000,000 in proceeds
from bondholders, was not sufficient to support daily cash flow needs through
the first (5) months of 1997. The Company did not have any obligation to
support Rotary Power with any additional financing. In early May the Company
voluntarily loaned Rotary Power $100,000 for back due rent on the building,
$75,000 for the May interest payment on bond debt, and on June 19, 1997 the
Company loaned Rotary Power an additional $41,767 due employees for payroll. In
June 1997 Management decided not to loan Rotary Power any additional funds for
two reasons; the uncertainty of Rotary Power's collateral for the Company's
financing and after receiving documentation from Company's General Counsel
based on his investigation of Rotary Power, which recently uncovered probable
misrepresentation of material financial information by RPI to PowerCold in
December 1996 and thereafter. Rotary Power went into default on accounts
payable due vendors, payments to the landlord, and payments to the bondholders
Trustee. Consequently, Rotary Power International, Inc. required additional
funding for its daily operations. Therefore, the economic viability and long-
term future of Rotary Power International, Inc. depended on its ability to
obtain additional sources of financing, and there was no assurance that such
financing can be obtained on acceptable terms or at all.

On July 21, 1997, the Company and Rotary Power International, Inc. agreed to
amend The Closing by extending the Agreement an additional forty-five (45)

21 of 28<PAGE>

days. The extension on the Plan and Agreement of Merger between the Company and
Rotary Power International, Inc., expired on September 5, 1997, accordingly,
the Plan and Agreement of Merger is no longer in effect.

In November 1997, a new president took over operations of Rotary Power.
Subsequent events have led to the restructure of the bond debt and creditors.
And management of PowerCold expressed a major interest is in acquiring the
Natural Gas Engine Business from Rotary Power. The Company wrote-off the
$1,216,767 investment in Rotary Power in 1997.

RESULTS OF OPERATIONS - 1997

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

Year Ended December 31,
1997 1996 1995
-------- -------- -------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 83.3 62.8 91.2
Gross margin 16.7 37.2 8.8
Operating expenses (453.9) 76.7 56.0
Operating income (loss) (437.2) (39.5) (47.2)
Other income (expense) 22.0 200.2 (1.3)
Net income (loss) (694.1) 152.2 (48.5)

Fiscal 1997 - The Company's Consolidated Statements of Operations for the
fiscal year ended December 31, 1997 compared to fiscal year ended December 31,
1996: Total revenue for 1997 was $ 391,819 compared to $1,451,521 for 1996;
operating loss of ($1,713,203) for 1997 compared to ($573,012) for 1996; and
net loss of ($2,719,633) or ($0.46) per share for 1997 compared to a net income
of $2,208,749 or $0.39 per share for 1996. Net income (loss) per share was
based on weighted average number of shares of 5,893,000 for 1997 compared to
5,662,000 for 1996.

The Company's Consolidated Balance Sheets as of December 31, 1997 and December
31, 1996 respectively: Total current assets were $1,581,736 for 1997 and
$1,502,208 for 1996; total assets were $2,229,357 for 1997 and $5,145,845 for
1996; total liabilities were 817,191 for 1997 and $1,076,319 for 1996; total
stockholders' equity was $1,412,166 for 1997 and $4,069,526 for 1996; and the
Company has no long term debt.

The Company's substantial loss in 1997 over 1996 in net income, total assets
and shareholders equity was due; to the failed merger of Rotary Power, the
additional costs of Nauticon product development and its start-up marketing
program, and the write-off of Goodwill and certain Patent Technology deemed to
be impaired.

The operating loss was due to the acquisition and reorganization of Rotary
Power, maintaining general Company operating overhead including additional
enhancements to the Nauticon product line and the move to new plant facilities
in Cibolo, Texas. Management wrote off its investment in and advances to
Rotary Power, an unconsolidated affiliate, totaling $1,216,767, and an
additional $867,807 for Goodwill and Patent Technology for a total write-off
of $2,084,574.

The Company issued a total of 157,00 shares of new common restricted shares in
1997 in satisfaction of recorded liabilities, for expenses and services
rendered in 1997.
22 of 28<PAGE>

Effective as of January 1, 1997, the Company received from WittCold Systems,
Inc., under the RealCold Systems sale agreement, a "percentage amount" payment
on product sales for the next ten years. The company received $58,975 in
royalty payments in 1997. The cooperative partnership with Wittcold Systems
over the past year has generated proven revenue including ten shipments of CO2
plants for installation in the Far East and Mainland China. Over forty
proposals have been submitted for carbon dioxide plants and refrigeration
systems worldwide. It is management's understanding that future revenue from
the royalty alliance with WittCold Systems may not be as high as previously
projected for 1998 because of the overseas exchange rate versus the US dollar.

Company revenues should continue to improve throughout 1998; because of the new
marketing and sales program, and the positive customer acceptance for Nauticon
condensers, and the new packaging program for RealCold Products.

Management believes that its working capital may not be sufficient to support
both its operations and growth plans for acquisitions and joint ventures for
the near future. Management is currently in negotiations with related
businesses. Therefore to support the Company's growth and goals, management is
seeking additional funding for this purpose.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements appear on sequential pages F-1 to F-26 Index to
Consolidated Financial Statements of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

During the registrant's fiscal year ending December 31, 1998 and the subsequent
period up to the date of the former accountants release, there were no
disagreements with the former accountant nor with the current account on any
matter of accounting principles or practices, financial statement disclosures
or auditing scope of procedure.

23 of 28<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

Terrence J. Dunne 50 Director January 1, 1993
Treasurer and CFO

George C. Briley 73 Director, Secretary and CTO September 1, 1994
President:
Technicold Services, Inc. September 1, 1994
RealCold Products, Inc September 1, 1994
Nauticon, Inc. October 1, 1998
Channel Freeze Technologies, October 1, 1998
Inc.

H. Jack Kazmar 63 Director and COO October 1, 1998
President:
Rotary Power Enterprise, Inc. October 1, 1998

Carl H, Rosner 69 Chairman and CEO September 1, 1998
Intermagnetics General Corp.

A summary of the business experience and background of the Company's officers
and directors is set forth below.

Francis L. Simola Mr. Simola has been Chairman, CEO and President of
PowerCold since the Company's inception in January 1993. Mr. Simola's
background and experience includes; over 28 years in the computer industry with
positions in various marketing and management operations with Unisys
Corporation, formerly Burroughs Corporation; over 15 years as a consultant and
principal in various high-tech companies. Mr. Simola is the founder and
president of Simco Group Inc., a private investment company that controls a
major interest in PowerCold. Simco provides services consisting of financing,
marketing and management consulting for small technical start-up companies that
have proven specialized niche products. Mr. Simola is a graduate of Peirce
Business College with a degree in Marketing and Management, and attended
Villanova University and Drexel University Evening College for additional
course studies in Finance and Business Administration.

Terrence J. Dunne Mr. Dunne has been CFO and Treasurer of PowerCold since
the Company's inception in January 1993. Mr. Dunne is a Certified Public
Accountant, and a member of the SEC Practice Section of the American Institute
of CPA's. Mr. Dunne has over 25 years of experience in public accounting, with
a concentration of work in the SEC area of auditing and public accounting. Mr.
Dunne has extensive experience providing financial consulting to a variety of
businesses. Mr. Dunne is a graduate of Gonzaga University in Accounting, and
has a MBA from Gonzaga University with a Masters in Taxation.

24 of 28<PAGE>

George C. Briley Mr. Briley has been a director of the PowerCold since
September 1994, and is President of RealCold Products, Inc., and President of
Technicold Services, Inc., PowerCold subsidiary companies. Mr. Briley has over
forty-seven years experience in engineering and marketing in the refrigeration
industry. After receiving his BSEE at Louisiana Polytechnic University, Summa
Cum Laude, Mr. Briley was employed by York Corp. for twelve years, where he
attended the York Engineering Training Program. At York he served as a Project
Engineer and Sales Manager prior to management positions as a Branch Manager
and Regional Manager. He then served with Frick Company for two years as Field
Sales Manager. Mr. Briley was employed for thirteen years with Lewis
Refrigeration Company, as Vice President and Board Member; and fifteen years
with Refrigeration Engineering Corp. (RECO), as Vice President, Marketing and
Research and Board Member. While serving Lewis and RECO, he helped build the
companies into multi million dollar organizations, where they designed,
engineered, manufactured, installed and serviced industrial refrigeration
systems. Mr. Briley holds four US patents, and is a Registered Professional
Engineer in five states. He is the author of many articles and papers regarding
all aspects of industrial refrigeration. His services on professional
organizations include; Founding President of the International Institute of
Ammonia Refrigeration (IIAR); Fellow in American Society of Heating
Refrigeration and Air Conditioning Engineers (ASHRAE), fellow and life member;
Chairman and member of many committees, and a member at present of the ANSI-
ASHRAE 15-1993 "Safety Code for Air Conditioning and Refrigeration".

H. Jack Kazmar - Marketing Consultant with Rotary Power International, Inc. -
1993 - 1997.

Mr. Kazmar is also a representative for several specialty heating and air
conditioning products. Previously he worked at ICC as Vice President of Sales
and Marketing. Mr. Kasmar has had more than 30 years experience in the
commercial heating, ventilation and air conditioning equipment industry. From
1981 till 1969, Jack Kasmar was President and co-founder of Skil-Aire
Corporation, a manufacturer of standardized commercial heating, ventilation and
air conditioning products. From 1971 to 1981, Mr. Kasmar served in a number of
positions of increasing responsibility at Fedders Corporation, including
General Manager of Residential and Commercial Products Division and Airtemp
Applied. Prior to joining Fedders, he held various positions with Worthington
Corporation in direct sales and field management in NYC, Washington D. C.,
Baltimore and Philadelphia areas. Jack Kasmar holds a Bachelor of Science -
Mechanical Engineering from Lafayette College in Easton, Pennsylvania.

Carl H, Rosner - A principal founder of the Company, Mr. Rosner has been
Chairman of the Board of Directors of Intermagnetics General Corporation since
the Company's formation in 1971 and before that headed the Superconductive
Products Operation of the General Electric Company. Mr. Rosner also serves as
Intermagnetics General Corporation's Chief Executive Officer.

Directors of the Company are elected every three years. Officers of the
Company, elected by the Board of Directors, serve annually. There are no family
relationships among the Directors and Officers of the Company.

ITEM 11. EXECUTIVE COMPENSATION

No Officer or Director of the parent company, PowerCold, received any cash
wages as compensation during the year ended 1998. All Directors received a
total of 19,000 shares of common restricted stock based on months served as
Director's for 1998.
25 of 28<PAGE>

Mr. Simola/Simco Group received 120,000 shares of common restricted stock for
services rendered the Company for 1998. Simco Group received $60,000 related to
payment for expenses, $120,000 for services rendered and $75,000 for consulting
services provided for the three new acquisitions. These amounts were credited
to the Company's investment account to reduce debt. Mr. Simola worked 100% of
his time for PowerCold.

Mr. Dunne received 15,000 shares of common restrictive stock for accounting
services for 1998. Mr. Dunne's accounting services include consulting services
on related accounting matters during the year.

Mr. Briley received 100,000 shares of common restricted stock for services
rendered the Company for 1998. Mr. Briley worked 100% of his time for
PowerCold.

Mr. Kazmar received 50,000 shares of common restricted stock for services
rendered the Company for 1998. Mr. Kazmar worked 100% of his time for
PowerCold since October 1, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information as of December 31, 1998, regarding
the number of shares of the Company's common stock beneficially owned by (i)
all beneficial owners of five percent (5%) or more of common stock, and (ii)
each director. (iii) beneficial owner of outstanding preferred stock.

Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)
-------------------------- --------------------------- -------------
George C. Briley 652,602 9.55%
17 Pembroke Lane
San Antonio, TX. 78240

Terrence J. Dunne 394,135 5.77%
West 717 Sprague Ave. No. 1100
Spokane, Washington 99204

Robert E. Jenkins 403,728 5.91%
2903 Hillview Road
Austin, Texas 78703

H. Jack Kazmar 162,000 2.37%
36 West Beechcroft Road
Short Hills, NJ 07078

Carl H. Rosner 2,000 0%
450 Old Niskayuna Road
Latham, NY 12110

Francis L. Simola and (3) 1,058,596 15.49%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118

26 of 28<PAGE>

Simco Group, Inc. (4) 1,026,500 15.02%
650 Sentry Parkway, Ste.1
Blue Bell, PA. 19422

Total Common Stock 3,699,561 54.13%
----------- -----------

Intermagnetics General 1,250,000 100.00%
Corporation
450 Old Niskayuna Road
Latham, NY 12110

Total Preferred Stock 1,250,000 100.00%
----------- -----------

(1) The nature of beneficial ownership for all shares is sole voting and
investment power.
(2) The per cent of class is all common stock and preferred stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

Part IV

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

(a) Financial Statements and Schedules

1.Financial Statements: PowerCold Corporation and Subsidiaries financial
statements and other information appear on pages F-1 to F-26 and Channel
freeze Technologies, Inc. financial statements appear on pages 1 to 11
of the Annual Report on Form 10-K and are filed as a part hereof.

2.Schedules: The schedules are not filed with this Annual Report on Form
10-K because the schedules are either inapplicable or the required
information is presented in the Financial Statements or Notes hereto.

3.Exhibits: None

(b) Reports on Form 8-K:

8-K September 17, 1998 - Agreement - Intermagnetics General Corporation
8-K October 08, 1997 - Agreement - Channel Ice Technologies
8-K October 13, 1997 - Agreement - Rotary Power Enterprise
8-K October 14, 1997 - Agreement - Intermagnetics General Corporation

27 of 28<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 31, 1998

By: /s/Francis L. Simola
----------------------------------------
Francis L. Simola
President and (Chief Executive Officer)

By: /s/Terrence J. Dunne
-----------------------------------------
Terrence J. Dunne
Treasurer and (Chief Accounting Officer)

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

Dated: March 31, 1997

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

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

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

28 of 28<PAGE>

POWERCOLD CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Accountants F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4

Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 F-5

Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997, and 1996 F-6

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 F-7

Notes to Consolidated Financial Statements F-8<PAGE>

PADGETT, STRATEMANN & CO., L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
AND BUSINESS ADVISORS

1635 N.E. Loop410, Suite 700 - San Antonio, Texas 78209-1684
Telephone (210) 828-6281 - Fax (210) 826-8606

An Independently Owned Member of The McGladrey Network
Worldwide Services through RSM International

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
PowerCold Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of
PowerCold Corporation (formerly International Cryogenic Systems
Corporation) and Subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits. The financial statements of the Company for 1996 were
audited by other auditors, whose report, dated March 7, 1997,
included an explanatory paragraph describing the uncertainty of the
recovery of the Company's primary assets, comprising patent rights and
related technology of $1,155,986 and goodwill of $491,892.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.

As shown in the consolidated financial statements, the Company
incurred a net loss of $1,690,187 for 1998 and has incurred<PAGE>

substantial net losses for each of the past two years. At December
31, 1998, current liabilities exceed current assets by $310,381.
These factors, and the others discussed in Note 18, raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.

Intangible assets, which comprise a material portion of the Company's
assets, include patent rights and related technology of $441,078 and
goodwill of $125,925, as of December 31, 1998. The recovery of these
intangible assets is dependent upon achieving profitable operations
and favorable resolution of the matter discussed in Note 14. The
ultimate outcome of these uncertainties cannot presently be
determined. Accordingly, the consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.

/s/PADGETT, STRATEMANN & CO.

Certified Public Accountants
March 5, 1999
San Antonio, Texas

F-3<PAGE>

<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<C> <C>
<S>
ASSETS 1998 1997
------------ ---------------

Current assets:
Cash and cash equivalents $ 21,781 $ 2,274
Restricted cash (notes 4 and 7) 400,000 600,000
Advances to affiliate (note 12) - 597,300
Trade accounts receivable, net of allowance for doubtful
accounts of $84,533 and $7,718, respectively 6,313 117,680
Related party receivables 72,618 -
Interest receivable 9,918 58,082
Refundable income taxes 124,156 124,156
Inventories 156,699 69,082
Prepaid expenses and other current assets 62,511 13,162
------------ ---------------

Total current assets 853,996 1,581,736

Investment in securities available for sale (note 6) 32,500 206
Investment in affiliate (note 3) 825,988 -
Property and equipment, net (note 8) 42,483 65,574
Patent rights and related technology, net (note 2) 441,078 508,153
Goodwill, net (note 2) 125,925 73,688
------------ ---------------

Total assets 2,321,970 $ 2,229,357
============ ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Note payable (note 3) 300,000 $ -
Short-term borrowings (note 11) 424,203 411,108
Accounts payable and accrued expenses 397,934 331,927
Commissions payable 42,240 -
Income taxes payable - 74,156
------------ ---------------

Total current liabilities 1,164,377 817,191
------------ ---------------

Commitments and contingencies (notes 11, 12, 13, and 14)

Stockholders' equity: (notes 3 and 12)
Convertible, preferred stock series A, $0.001 par value,
$1,000,000 in liquidation, 1,250,000 shares authorized,
issued, and outstanding 1,250 -
Common stock, $0.001 par value, 200,000,000 shares
authorized, 6,834,136 and 5,995,269 shares issued and
outstanding at December 31, 1998 and 1997, respectively 6,834 5,995
Additional paid-in capital 5,534,274 4,099,799
Amounts due from stockholders (8,500) (7,500)

Accumulated other comprehensive income - (50)
Accumulated deficit (4,376,265) (2,686,078)
------------ ---------------

Total stockholders' equity 1,157,593 1,412,166
------------ ---------------

Total liabilities and stockholders' equity 2,321,970 $ 2,229,357
============ ===============

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements
F-4<PAGE>

<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<S> <C> <C> <C>
1998 1997 1996
------------- -------------- ------------
Revenue:

Product sales $ 148,659 $ 229,445 $ 1,299,735
Services 293,513 162,374 151,786
------------- -------------- ------------

Total revenues 442,172 391,819 1,451,521
------------- -------------- ------------
Cost of revenue:

Product sales 119,532 271,640 731,042
Services 276,923 54,769 180,340
------------- -------------- ------------

Total cost of revenue 396,455 326,409 911,382
------------- -------------- ------------

Gross margin 45,717 65,410 540,139
------------- -------------- ------------

Operating expenses:
Sales and marketing 509,464 252,292 447,174
General and administrative 602,547 1,452,489 556,671
Allowance for doubtful accounts 81,778 7,718 9,737
Research and development 55,229 66,114 99,569
------------- -------------- ------------

Total operating expenses 1,249,018 1,778,613 1,113,151
------------- -------------- ------------
Operating loss (1,203,301) (1,713,203) (573,012)
------------- -------------- ------------
Other income (expense):
Interest and other income 137,393 146,057 80,759
Interest and other expense (31,289) (59,875) (63,355)

Write-off of advances to affiliate (note 12) (557,145) - -
Gain on sale of subsidiary (note 4) - - 2,888,513
------------- -------------- ------------
Total other income (expense) (451,041) 86,182 2,905,917
------------- -------------- ------------
Income (loss) before provision for income taxes (1,654,342) (1,627,021) 2,332,905
------------- -------------- ------------

Provision (benefit) for income taxes: (note 10)
Federal current provision - (124,156) 793,188
Federal deferred benefit - - (669,032)
------------- -------------- ------------
- (124,156) 124,156
------------- -------------- ------------

Income (loss) before losses of unconsolidated (1,654,342) (1,502,865) 2,208,749
affiliates

Equity in loss of unconsolidated affiliates (note 3) (35,845) (427,593) -
Write-off of investment in unconsolidated affiliate - (789,175) -
(note 3)
------------- -------------- ------------

Net income (loss) $(1,690,187) $ (2,719,633) $ 2,208,749
============= ============== ============
Basic earnings per common share:
Loss from operations $ (0.19) $ (0.29) $ (0.10)
------------- -------------- ------------

Net income (loss) $ (0.27) $ (0.46) $ 0.39
============= ============== ============

Weighted average shares 6,376,647 5,893,000 5,662,000
============= ============== ============

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements
F-5<PAGE>

<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

Preferred Stock Common Stock Amounts Accumulated
Additional Due Other
Paid From Compre- Retained
In Stock- hensive Earnings
Shares Amount Shares Amount Capital Holders Income (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

Balance at December 31, 1995 - $ - 5,371,234 $ 5,371 $3,717,063 $ (7,500) $(2,175,194) $ 1,539,740

Issuance of common stock for - - 467,035 467 319,570 - - - 320,037
services

Comprehensive income:
Net income - year ended - - - - - - - 2,208,749 2,208,749

December 31, 1996
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - 1,000 - 1,000
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

Total comprehensive - - - - - - 1,000 2,208,749 2,209,749
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

income

Balance at December 31, 1996 - - 5,838,269 5,838 4,036,633 (7,500) 1,000 33,555 4,069,526

Issuance of common stock for - - 157,000 157 63,166 - - - 63,323
services

Comprehensive income:
Net income - year ended - - - - - - - (2,719,633) (2,719,633)
December 31, 1997
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - (1,050) - (1,050)
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

Total comprehensive - - - - - - (1,050) (2,719,633) (2,720,683)
income
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

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

Issuance of preferred stock, 1,250,000 1,250 - - 978,246 - - - 979,496

Series A

Issuance of common stock for - - 117,647 118 99,882 - - - 100,000
cash

Issuance of common stock for - - 621,220 621 293,447 - - - 294,068
services

Issuance of common stock for - - 100,000 100 62,900 - - - 63,000
purchase of subsidiary

Amounts due from stockholders - - - - - (1,000) - - (1,000)

Comprehensive income:
Net income - year ended - - - - - - - (1,690,187) (1,690,187)

December 31, 1998
Change in net unrealized
gain (loss) on securities
available for sale, net of - - - - - - 50 - 50
reclassification adjustment
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

Total comprehensive - - - - - - 50 (1,690,187) (1,690,137)
income
--------- --------- --------- --------- ----------- ---------- ---------- ------------- --------------

Balance at December 31, 1998 1,250,000 $ 1,250 6,834,136 6,834 $5,534,274 $(8,500) - $(4,376,265) $ 1,157,593
========= ========= ========= ========= =========== ========== ========== ============= ==============

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements
F-6<PAGE>

<TABLE>
<CAPTION>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<S> <C> <C> <C>
1998 1997 1996
-------------- ------------- --------------

Cash flows from operating activities:
Net loss $ (1,690,187) $(2,719,633) $ 2,208,749
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 99,937 218,322 216,356
Net (gain) loss realized on available-for-sale - 24,493 (7,892)
securities

Gain on sale of investment in unconsolidated (37,121) - -
affiliate
Loss realized on disposition of property and 6,028 - -
equipment
Gain on sale of subsidiary - - (2,888,513)
Loss on disposition of subsidiary - - 53,529
Equity in loss of unconsolidated affiliate 35,845 427,593 -
Write-off of advances to affiliate 557,145 - -

Provision (credit) for doubtful accounts 76,815 5,638 (28,980)
Write-off of investment in unconsolidated affiliate - 789,175 -
Write-off of intangible assets - 867,807 -
Issuance of common stock for services 294,068 63,323 320,037
Changes in assets and liabilities, net of
effects from acquisitions and disposition:
Receivables 10,098 (132,812) (253,052)

Refundable income taxes - (124,156) -
Inventories (87,617) 14 (905,400)
Prepaid expenses and other current assets (49,349) 5,850 2,376
Accounts payable and accrued expenses 66,007 194,266 (281,936)
Commissions payable 42,240 - -
Income taxes payable (74,156) (50,000) 124,156
Deferred revenue - - 917,438
-------------- ------------- --------------

Net cash used in operating activities (750,247) (430,120) (523,132)
-------------- ------------- --------------

Cash flows from investing activities:
Purchase of property and equipment (3,637) (14,219) (22,456)
Investment in affiliate (572,095) - (1,000,000)
Proceeds from sale of investment in unconsolidated 44,984 - -

affiliate
Advances to affiliate - (216,768) -
Purchase of certificate of deposit - (100,000) (300,000)
Proceeds from sale of subsidiary, net of cash - - 2,783,226
disposed
Cash released from escrow related to sale of 200,000 - -
subsidiary
Proceeds from sale of securities available for sale 81,716 1,308,727 581,093

Purchase of securities available for sale (234,152) (610,164) (1,296,513)
(Increase) decrease in advances to affiliate 160,347 10,660 (607,960)
-------------- ------------- --------------

Net cash provided by (used in) investing (322,837) 378,236 137,390
activities
-------------- ------------- --------------

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements
F-6<PAGE>

POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(CONTINUED)

<S> <C> <C> <C>
1998 1997 1996
----------- ------------ ------------

Cash flows from financing activities:
Proceeds from short-term borrowings, related parties - $ - $ 142,997
Proceeds from short-term borrowings 25,061 169,315 799,502
Proceeds from issuance of common stock for cash 100,000 - -
Proceeds from issuance of preferred stock 979,496 - -
Repayment of short-term borrowings, related parties,

net of effects from disposition - (15,000) (153,102)
Repayment of short-term borrowings (11,966) (557,709) (100,000)
Principal payment on capital lease obligations,
net of effects from disposition - - (4,719)
----------- ------------ ------------

Net cash provided by (used in) financing 1,092,591 (403,394) 684,678
activities
----------- ------------ ------------

Net increase (decrease) in cash and cash 19,507 (455,278) 298,936
equivalents

Cash and cash equivalents at beginning of year 2,274 457,552 158,616
----------- ------------ ------------

Cash and cash equivalents at end of year 21,781 $ 2,274 $ 457,552
=========== ============ ============

Interest paid 25,261 $ 35,382 $ 15,732
=========== ============ ============

Cash paid for income taxes 74,156 $ 50,000 $ -
=========== ============ ============

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

Unrealized gain (loss) on securities available for sale 50 $ (1,050) $ 1,000
=========== ============ ============

Noncash financing activities:
Issuance of common stock for purchase of subsidiary 63,000 $ - $ -
=========== ============ ============

Direct financing provided for investment in 300,000 $ - $ -
unconsolidated affiliate
=========== ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements
F-7<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 market, the development, design, manufacture,
distribution, and servicing of refrigeration systems. The Company derives its
revenue from three principal product lines. The first is a line of evaporative
heat exchange systems for the HVAC and refrigeration industry. The second is
consulting engineering services, including process safety management compliance
and ammonia refrigeration and carbon dioxide system design. As part of this
product line, the Company also provides operation, maintenance, and safety
seminars for ammonia refrigeration technicians and supervisors. The third line
is the design and production of unique products for the refrigeration industry.

The Company recently offered two new product lines which did not generate any
revenue during the year ended December 31, 1998. One is a line of custom
configured rotary engines. The second is a proprietary freezing process.

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 14.
The ultimate outcome of these uncertainties cannot be presently determined.
Accordingly, the consolidated 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

F-8<PAGE>

POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

transactions. Wholly-owned subsidiaries of the Company in 1998 include
Technicold Services, Inc.; RealCold Products, Inc.; Nauticon Inc.; and Rotary
Power Enterprise, Inc. 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.

Comprehensive Income

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which was issued in June 1997. SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components, but has no
effect on the Company's net income (loss) or total stockholders' equity. SFAS
130 requires unrealized gains and losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.

Investment in Securities

Pursuant to FASB Statement No. 115, the Company's investments in securities are
classified in three categories and accounted for as follows:

Trading Securities. Debt and equity securities held principally for resale in
the near term are classified as trading securities and recorded at their fair
values. Unrealized gains and losses on trading securities are included in
other income. During the years ended December 31, 1998, 1997, and 1996, the
Company had no securities classified as trading securities.

Securities to be Held to Maturity. Debt securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost
adjusted for amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity. During the years ended December 31, 1998, 1997, and 1996, the
Company had no securities classified as securities to be held to maturity.

Securities Available for Sale. Securities available for sale consist of debt
and equity securities not classified as trading securities nor as securities to
be held to maturity. Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net amount in a separate

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

component of other comprehensive income.

Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The related
write-downs would be included in current year earnings as realized losses.

Gains and losses on the sale of securities available for sale are determined
using the specific identification method and are included in earnings.

Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.

The transfer of a security between categories of investments is accounted for
at fair value. For a debt security transferred into the available-for-sale
category from the held-to-maturity category, the unrealized holding gain or
loss at the date of the transfer is recognized in a separate component of other
comprehensive income.

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, 1998 and 1997, capitalized patent development costs,
net of amortization, were $441,078 and $508,153, respectively. Amortization
expense was $67,075 for the year ended December 31, 1998 and $139,732 for the
years ended December 31, 1997 and 1996. 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-10<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $10,527, $58,497, and $56,971 for the years ended December
31, 1998, 1997, and 1996, respectively. Accumulated amortization amounted to
$42,108 and $151,575 at December 31, 1998 and 1997, 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 January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"). This pronouncement provides a different method
of calculating earnings per share than was previously used in accordance with
APB No. 15, "Earnings Per Share." SFAS 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.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards 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 1997 and 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

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

Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were $3,219, $1,060, and $16,908 for the years ended
December 31, 1998, 1997, and 1996, respectively.

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, advances to affiliate, 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, 1998 and 1997.

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, advances to affiliate, 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, 1998 and
1997. Investments in securities available for sale are recorded at fair value
at December 31, 1998 and 1997.

Capital Structure

During 1997, the Company adopted Statement of Financial Accounting Standards
No. 129, "Disclosure of Information About Capital Structure" ("SFAS 129").

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

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.

Reportable Segments

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. The Company adopted SFAS 131 at December 31, 1998.

Stock Based Compensation

The Company accounts for stock issued for compensation in accordance with APB
25, "Accounting for Stock Issued to Employees." Under this standard,
compensation cost is the difference between the exercise price of the option
and the fair market of the underlying stock on the grant date. In accordance
with FAS 123, "Accounting for Stock Based Compensation," the Company provides
the pro forma effects on net income and earnings per share as if compensation
had been measured using the "fair value method" described therein.

3. Acquisitions and Investment in Affiliate

Acquisition of Rotary Power Enterprise, Inc.

Pursuant to the terms of the Rotary Power Enterprise, Inc. acquisition
agreement, effective October 1, 1998, the Company issued 100,000 shares of
common stock in exchange for 100% of the outstanding stock of Rotary Power
Enterprise, Inc. Rotary Power Enterprise, Inc. was formed during 1998 for the
purpose of developing a new product line for PowerCold. The acquisition
resulted in goodwill of $65,399 which is being amortized on a straight-line
basis over 10 years:

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

Purchase price $ 65,399
Fair value of net assets acquired -
---------
Excess of purchase price over fair value of net assets $ 65,399
acquired =========

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 2,000,000
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 deteriorating financial condition and
increasing losses, management of the Company wrote off its outstanding
investment and advances to RPI during 1997, totaling $789,175.

On September 15, 1998, the Company acquired a one-third interest in Channel
Freeze Technologies, Inc. ("CFTI") in exchange for $850,000 which was paid
$550,000 in cash and a note payable of $300,000 to SIR Worldwide LLC ("SIR"),
and options for SIR to purchase 400,000 shares of PowerCold stock at a price of
$2.50 per share, for a period not to exceed two years. CFTI was formed during
1998 to accommodate the acquisition of intellectual property from SIR.
Concurrent with the purchase, CFTI acquired from SIR all of the intellectual
property related to Channel Ice Technology Units. PowerCold has the right to
earn up to 80.00% ownership in CFTI, as CFTI makes royalty payments to SIR.
The payments are structured to provide a maximum of 70 payments of $85,000 each
to SIR totaling $5,950,000. For each $1,000,000 in Channel Ice Technology Unit
sales, and payment of the related $85,000 in royalties to SIR, PowerCold will
receive an additional 1/70th of the additional 46.67% ownership necessary to
achieve 80.00% ownership of CFTI, after all required payments are made to SIR.

Also, as part of the purchase agreement, CFTI has agreed to additional
compensation to SIR by payment of either a 10% net fee payment or a 13% net
sales fee payment.

Ten percent net fee payments are payments of 10% of the net gross invoice price
on all Channel Ice Technology Units sold to distributors.

Thirteen percent net fee payments are payments of 13% of the net gross invoice
price on all Channel Ice Technology Units of direct sales to end users.

Financial information for Channel Freeze Technologies, Inc. for the three
months ended December 31, 1998 is summarized below:

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

Current assets $ 1,610
Noncurrent assets 836,869
-----------

Total assets 838,479
===========

Current liabilities 93,548
-----------

Total liabilities 93,548
===========

Revenue -

Operating loss (105,070)
-----------

Net loss (105,070)
===========

Equity in losses of unconsolidated affiliates were as follows:

Years Ended
December 31,

1998 1997 1996
--------- ---------------- ------------

CFTI 35,845 $ - $ -
RPI - 427,593 -

The Company has entered into a Letter of Agreement with Alturdyne, Inc. to
purchase the assets and business of Alturdyne Energy Systems ("AES"), a
division of Alturdyne, Inc. The purchase will involve payment by the Company
of $100,000 in cash, a 2.5% royalty payment on the net sales of AES for five
years, issuance of 100,000 shares of the Company's common stock, and options on
200,000 shares of the Company's common stock, exercisable at $2.50 per share
for a period of three years from the date of closing. The acquisition is
expected to be finalized during the first quarter of 1999.

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 was released to the Company on the second anniversary of the
sale's closing (May 1, 1998) 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 5% of the net sales of refrigeration
systems for 10 full calendar years beginning in 1996 and ending in 2005, and
2 1/2% of net sales of merchant CO2 systems for 9 full calendar years

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

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 3 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. During the year ended December 31, 1998,
"earnout" revenues were $1,668 ($58,975 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 expenses (98,637)
Deferred revenue (978,586)
Capital lease obligation (5,815)
Short-term borrowings, related parties (44,000)
----------
111,487
----------

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.

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.

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

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,

1998 1997
--------------- -------------
Parts inventory 140,681 $ 53,064
Product inventory 16,018 16,018
--------------- -------------
156,699 $ 69,082

6. Available-For-Sale Investments

Investments include the following securities available for sale at December 31,
1998:

<TABLE>
<S> <C> <C> <C> <C> <C>
Years Gross Gross
to Fair Unrealized Unrealized
Maturity Value Cost Gains Losses
--------- -------- --------- ------------ -------------

Corporate equity - $ 32,500 $ 32,500 $ - $ -
securities - common stock
</TABLE>

Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1998 were $81,716, $50, and $0, respectively.

7. Restricted Cash

Current restricted cash at December 31, 1998 and 1997 consists of a $400,000

certificate of deposit which collateralizes the short-term borrowings (Note
11). At December 31, 1997, an additional $200,000 was held in escrow from the
sale of RealCold Systems, Inc. (note 3).

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

8. Property and Equipment

Property and equipment consist of the following:

December 31,
1998 1997
------- --------

Machinery and equipment $ 12,540 $23,659
Prototypes and molds 71,030 75,104
Furniture and fixtures 9,894 4,515
------- --------

93,464 103,278
Less accumulated depreciation 50,981 37,704
------- --------

$ 42,483 $65,574
======= =========

Depreciation expense was $20,700, $20,092, and $19,653 in 1998, 1997, and
1996, respectively.

9. Current Liabilities

Included in accrued expenses at December 31, 1998 are the following amounts:
accrued payroll $71,000 and $88,600 related to the litigation discussed in Note
14.

10. Income Tax and Deferred Income Tax

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

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

Years Ended
December 31,
1998 1997 1996

------------- ----------- ------------
Current:
Federal - $ - $ 793,188
Carryback of current year net - (124,156) -
operating loss
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,
1998 1997 1996
---------- ----------- ------------

Computed at the expected statutory $ (574,664) $(553,187) $ 793,188
rate
Nondeductible items and other 654 475 -

permanent differences
Change in valuation allowance 574,010 436,715 (669,032)
Prior year unrecognized deferred - (8,159) -
tax asset
---------- ----------- ------------

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

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

December 31,

1998 1997 1996
------------ ------------ ----------
Deferred tax assets:
Accrued wages payable to shareholder - $ 13,600 $ -
Write-off of intangible assets 334,686 295,055 -
Losses related to unconsolidated 413,700 413,700 -
affiliate
Loss on write-off of impaired stock 189,430 - -
Net operating loss carryforward 486,609 128,060 -
------------ ------------ ----------
F-19<PAGE>

Gross deferred tax assets 1,424,425 850,415 -
Valuation allowance (1,424,425) (850,415) -
------------ ------------ ----------

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

A $1,055,000 tax net operating loss was incurred for the year ended December
31, 1998. A $742,000 tax net operating loss was incurred for the year ended
December 31, 1997. The Company utilized approximately $365,000 as a carryback
to 1996 to reduce the federal tax provision in that year. The Company's net
operating loss carryforwards for income tax purposes is approximately
$1,432,000, of which $1,055,000 expires in 2018 and $377,000 expires in 2012.
During the year ended December 31, 1996, the Company utilized all of its NOL
carryforwards. Cash paid for income taxes was $74,156 in 1998 ($50,000 in 1997
and $0 in 1996).

11. Short-Term Borrowings

Short-term borrowings at December 31, 1998 and 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 18, 1999. The note
is collateralized by a certificate of deposit in the amount of $400,000,
bearing interest at a rate of 4.5%. Subsequent to December 31, 1998, the line
of credit was renewed bearing the same terms as noted above, maturing July 21,
1999.

During the year ended December 31, 1998, the Company borrowed an additional
$25,000 under a line of credit agreement with a commercial bank which is
guaranteed by an officer of the Company. The line matures in July 1999 and
bears interest at a rate of 9.25%

The remaining $61 in short-term borrowings consisted of a liability to a broker

F-20<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for repayment of funds borrowed for the purpose of investment in available-for-
sale securities.

12. 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.

During 1998 and 1997, the Company advanced funds to Simco to invest in short-
term and long-term marketable securities. At December 31, 1998, management of
the Company determined that the value of the marketable securities had been
permanently impaired. The total amount of advances to affiliate of $557,145
was written off. At December 31, 1997, advances to affiliates were $597,300.
Simco guarantees the Company an 8% annual return on these funds. Simco paid
interest to the Company for the year ended December 31, 1998 of $49,284
($48,000 during 1997). During 1998, a total of $195,000 was recorded as
compensation for the Company's Chairman and Chief Executive Officer. No cash
was paid related to the $195,000, but instead was used to reduce the funds
advanced to Simco.

During 1998, the Company recorded expense of $30,000 related to the issuance of
120,000 shares of restricted common stock to Simco as payment for expenses and
consulting services provided. An additional 100,000 shares were issued to
reimburse Simco for payment of $63,000 in expenses of the Company, paid by
Simco. The shares were issued at 50% of the bid price on date of issuance
ranging from $0.25 per share to $0.63 per share. During 1997, the Company
recorded $48,000 of expense 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 the date of issuance varying from $0.30
to $0.625 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
$0.50 per share.

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 1998, the Company issued a total of
335,000 restricted shares of common stock to these three executives, including
the 220,000 shares noted above for a total expense of $136,750. 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 1998 and
1997.

F-21<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, the directors 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, 1998 and 1997.

Included in accounts payable and accrued expenses as of December 31, 1998 is
$97,000 ($94,800 in 1997) for amounts owed to the president of Technicold
Services, Inc. and to the former President of Nauticon Inc.

13. Commitments

Operating Leases

The Company leases certain sales offices, plant space, and equipment under
operating lease agreements which expire at various times through 2001. Total
rent expense was $100,902, $108,676, and $82,219 in 1998, 1997, and 1996,
respectively.

Future minimum rental commitments as of December 31, 1998 were as follows:

Year ending December 31,
1999 $ 70,362
2000 12,205
2001 5,639
--------
$ 88,206
========

The Company subleases a sales office and plant space under a lease agreement
which expires in 1999. Total rental income for the year ended December 31,
1998 from the sublease agreements was $48,450 ($66,528 and $23,402 in 1997 and
1996, respectively).

Firm Purchase Commitments

As part of an agreement to purchase products for resale, the Company has
committed to total minimum payments of $42,240 during 1999 in relation to the
resale of such inventory.

F-22<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Litigation

Management of the Company is seeking to recoup damages from the former
president and shareholder of Nauticon Inc. in connection with Nauticon Inc.'s
acquisition by the Company. Related to this matter is the ownership of certain
patents ($441,078 and $508,153 carrying value at December 31, 1998 and 1997,
respectively) and the amount of compensation owed to the former Nauticon Inc.
shareholder ($88,600 accrued and included in accounts payable and accrued
expenses at December 31, 1998 and 1997). The former Nauticon Inc. 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). Nauticon Inc. is a defendant in several lawsuits filed by suppliers.

Nauticon Inc. denies any liability. Counsel has advised that it is not
possible to project the outcome at this time. 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.

15. Earnings Per Share

Diluted earnings per share is not presented due to the loss from operations in
the years presented. In accordance with the requirements of SFAS 128, no
potential common shares are included in the computation of diluted per share
amounts due to the loss from continued operations. Options to purchase
1,660,000 shares of common stock were outstanding at December 31, 1998 at
exercise prices ranging from $0.50 per share to $2.50 per share, but were not
included because they would have been anti-dilutive to the loss from continuing
operations. The options expire over the period from April 30, 1999 through
February 7, 2001. Preferred dividends of $20,000 increase the loss used to
calculate earnings per share.

16. Capital Structure

Series A Convertible Preferred Stock

The Company currently has 1,250,000 shares of preferred stock outstanding at
December 31, 1998. This stock is designated as Series A Convertible Preferred
Stock and was issued to a single investor. This stock has a par value of $.001
per share and a stated value of $0.80 per share in liquidation and has
preference over common stock in liquidation.

The stock is convertible at the option of the holder at a rate determined by
dividing $1.00 by the conversion price. The conversion price is (i) until June
14, 1999, the lesser of (a) 78% of the average closing bid price for the common
stock on the OTC Bulletin Board (OTCBB) of the 30 trading days ending the day
prior to the conversion and (b) 110% of the average closing bid price for the
common stock on the OTCBB for the 30 trading days prior to September 14, 1998,
or (ii) after June 14, 1999, the lesser of (a) 75% of the average closing bid

F-23<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

price for the common stock on the OTCBB for the 30 trading days ending the day
prior to the conversion and (b) 110% of the average closing bid price for the
common stock on the OTCBB for the 30 trading days prior to September 14, 1998.
Each share of stock shall automatically be converted into shares of common
stock at the then effective conversion price on September 14, 2002. Each share
of the stock may, at the option of the Company, be converted into shares of
common stock at 120% of the then effective conversion price.

Holders of Series A Convertible Preferred Stock are entitled to a number of
votes per share equal to the number of shares of common stock into which each
such share of Series A Convertible Preferred Stock held by such holder is
convertible at the time of such vote.

Each issued and outstanding share of Series A Convertible Preferred Stock shall
be entitled to receive cumulative preferential dividends, payable in cash or
common stock at the option of the Company, at the annual rate of $0.064 per
share, payable quarterly.

As additional consideration, the Company granted the holder ("Investor") of the
Series A Convertible Preferred Stock an option to acquire up to a number of
shares of the Company's common stock, $.001 par value per share, such that
following the purchase of all of such shares of common stock by the Investor,
the Investor shall own 50% of the equity of the Company, on a fully diluted
basis, as of the day the Investor purchased all of such shares. The exercise
price for each share of the Company's common stock acquired under this purchase
option shall be equal to the lessor of (a) $3.00, or (b) the average closing
bid price of the Company's common stock on the OTC Bulletin Board on each of
the 10 trading days ending on the fifth business day before the closing at
which the shares are to be issued to the Investor. The option has a term
expiring at midnight on the 31st of March 1999.

17. Reportable Segments

<TABLE>

<CAPTION>
Nauticon RealCold Technicold Rotary Power
Inc. Products, Services, Enterprise, Totals
Inc. Inc. Inc.
<S> <C> <C> <C> <C> <C>
----------- --------- ------------ ----------- ------------

Revenues from external 112,522 224,477 $ 105,173 $ - $ 442,172
customers
Interest income 5,782 - - - 5,782
Interest expense 24,973 - 64 - 25,037
Depreciation and 85,699 440 12,163 - 98,302
amortization
Segment net loss (461,212) (79,689) (5,943) (7,671) (554,515)
Allowance for doubtful 84,533 - - - 84,533
accounts
Segment assets 545,060 76,304 240,359 96,563 958,286

F-24<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciliations
Revenues:
Total revenues for reportable segments $ 442,172
----------

Consolidated revenues 442,172
==========

Interest:
Total interest income for reportable segments 5,782
Interest income not allocated to operating segments 89,187
Other income 42,424
----------

Consolidated interest and other income 137,393
==========

Total interest expense for reportable segments 25,037
Interest expense not allocated to operating segments 224
Other expense 6,028
----------

Consolidated interest and other expense 31,289
==========

Depreciation and Amortization:
Total depreciation and amortization for reportable segments 98,302
Amortization of goodwill on consolidation 1,635
----------

Consolidated depreciation and amortization 99,937
==========

Net Loss:
Total net loss for reportable segments (554,515)
Net loss not allocated to operating segments (1,134,037)
Amortization of goodwill on consolidation (1,635)
----------

Consolidated net loss (1,690,187)
===========

Allowance for Doubtful Accounts:
Total allowance for doubtful accounts for reportable segments (84,533)
Accounts receivable 90,846
----------

Consolidate accounts receivable net of allowance for doubtful 6,313
accounts
==========

Segment Assets:
Total segment assets for reportable segments 958,286
Intercompany receivables eliminated in consolidation (836,927)
Assets not allocated to operating segments 3,390,746

Goodwill not allocated to operating segments 62,764
Investment in subsidiaries eliminated in consolidation (1,252,899)
-----------

Consolidated assets 2,321,970
==========
F-25<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1997
Nauticon RealCold Technicold
Inc. Products, Services, Totals
Inc. Inc.
---------- ---------- ------------ ----------

Revenues from external customers 229,445 $ - $ 162,374 391,819
Interest expense 22,982 - - 22,982
Depreciation and amortization 109,201 14,300 12,163 135,664
Segment profit (loss) (679,207) (169,273) 25 (848,455)
Allowance for doubtful accounts 7,718 - - 7,718
Segment assets 744,924 20,187 196,189 961,300

Reconciliations
Revenues:
Total revenues for reportable segments 391,819
----------
Consolidated revenues 391,819
============

Interest:
Interest income not allocated to operating segments 85,947
Other income 60,110
----------

Consolidated interest and other income 146,057
============

Total interest expense for reportable segments 22,982
Interest expense not allocated to operating segments 12,400
Other expense 24,493
----------

Consolidated interest and other expense 59,875
============

Depreciation and Amortization:

Total depreciation and amortization for reportable segments 135,664
Amortization of goodwill on consolidation 82,657
----------

Consolidated depreciation and amortization 218,321
============

Net Loss:
Total profit and loss for reportable segments (848,455)

Profit (loss) not allocated to operating segments (1,871,178)
------------

Consolidated net loss (2,719,633)
============

Allowance for Doubtful Accounts:
Total allowance for doubtful accounts for reportable (7,718)

segments
Accounts receivable 125,398
------------

F-26<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated accounts receivable net of allowance for 117,680
doubtful accounts
============

Segment Assets:
Total segment assets for reportable segments 961,300
Intercompany receivables eliminated on consolidation (418,671)
Assets not allocated to operating segments 2,874,228
Investment in subsidiaries eliminated on consolidation (1,187,500)
============
Consolidated assets 2,229,357
============

</TABLE>
<TABLE>

<S> <C> <C> <C> <C> <C> <C>
1996
Jordon
Nauticon RealCold Technicold Vessel RealCold
Ltd. Products, Services, Corpora Systems, Totals
Inc. Inc. tion Inc.
---------- --------- ------------ --------- ---------- ----------

Revenues from 124,999 $ - $ 151,786 $ 106,772 $1,067,964 $1,451,521
external customers
Interest expense 2,535 - 156 - 3,142 5,833
Depreciation and 105,924 13,938 11,517 - 3,846 135,225
amortization
Segment profit (330,010) (38,264) (6,733) 121,195 174,176 (79,636)
(loss)
Allowance for - - (2,080) - - (2,080)
doubtful accounts
Segment assets 801,013 90,799 180,865 - - 1,072,677

</TABLE>

Reconciliations

Revenues:
Total revenues for reportable segments 1,451,521
------------
Consolidated revenues 1,451,521
============

Interest:
Interest income not allocated to operating segments 50,743

Other income 163,096
Other income eliminated on consolidation (133,080)
------------

Consolidated interest and other income 80,759
============

Total interest expense for reportable segments 5,833
Interest expense not allocated to operating segments 1,045

Other expense 56,477
------------

Consolidated interest and other expense 63,355
============

F-27<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and Amortization:
Total depreciation and amortization for reportable segments 135,225
Amortization of goodwill on consolidation 81,131
------------

Consolidated depreciation and amortization 216,356
============

Profit (Loss):
Total profit and loss for reportable segments (79,636)
Intercompany profit (loss) eliminated on consolidation 181,524
Profit not allocated to operating segments 2,106,861
------------

Consolidated profit (loss) 2,208,749
============

Allowance for Doubtful Accounts:
Total allowance for doubtful accounts for reportable (2,080)
segments

Accounts receivable 50,667
------------

Consolidated accounts receivable net of allowance for 48,587
doubtful accounts
============

Segment Assets:
Total segment assets for reportable segments 1,072,677

Assets not allocated to operating segments 5,260,668
Investment in subsidiaries eliminated on consolidation (1,187,500)
------------

Consolidated assets 5,145,845
============

PowerCold currently has four reportable segments: Nauticon Inc.; RealCold
Products, Inc.; Technicold Services, Inc.; and Rotary Power Enterprise, Inc.
During 1996, two additional reportable segments were held by PowerCold for part
of the year (Note 4): RealCold Systems, Inc. and Jordan Vessel Corporation.
Nauticon Inc. 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
Services, Inc. also provides operation, maintenance, and seminars for ammonia
refrigeration technicians and supervisors. Jordan Vessel Corporation offered
industrial refrigeration system components such as liquid recirculating
packages and refrigeration system vessels of all types. RealCold Products,
Inc. offered custom industrial refrigeration packages and merchant carbon
dioxide plants in a joint venture with The Wittemann Company, Inc. RealCold
Products, Inc. designs and produces unique products for the refrigeration
industry. Rotary Power Enterprise, Inc. provides customized rotary engines to
power a variety of chiller and refrigeration systems.

The accounting policies of the segments are the same as those described in the

F-28<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

summary of significant accounting policies. PowerCold evaluates performance
based on profit or loss from operations before income taxes. The Company
accounts for intersegment sales and transfers at cost.

PowerCold's reportable segments are strategic business units that offer
different products or services. They are managed separately because each
business requires different technology and marketing strategies.

All of the companies' assets are held within the United States and all material
revenue were generated within the United States.

During the year ended December 31, 1998, sales to one customer amounted to
approximately $224,000.

18. Going Concern

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years and the Company has used
substantial amounts of working capital in its operations. At December 31,
1998, current liabilities exceed current assets by $310,381 and intangible
assets comprise a material portion of the Company's assets. The recovery of
these intangible assets is dependent upon achieving profitable operations and
favorable resolution of the matter discussed in Note 14. The ultimate outcome
of these uncertainties cannot presently be determined. Management is actively
seeking additional equity financing. Additionally, management believes that
the current year acquisitions will lead to the overall structure necessary to
fulfill the Company's strategic plans.

In view of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, and the success of its future operations. Management believes
that actions presently being taken to obtain additional equity financing and
increase sales, provide the opportunity to continue as a going concern.

19. Stock Based Compensation

During 1998, the Company authorized and issued a total of 600,000 options, at
an exercise price of $0.50 per share, and 300,000 options at an exercise price
of $0.60 per share, for employee compensation (0 options during 1997 and 1996).
The Company also issued a total of 460,000 options during 1998 (0 options
during 1997 and 300,000 options during 1996) for goods and services. The
significant characteristics of these options are summarized as follows:

F-29<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. Stock Based Compensation (continued)

Since the Company accounts for the compensation cost associated with the
issuance of stock options to employees for compensation under APB 25, no
compensation cost was recognized in income during the year ended December 31,
1998 (no options were issued prior to 1998 to employees).

Stock and stock options issued for goods and services are valued based upon the
fair value of the consideration received.

Total and Weighted Average
Exercise Price of Options

Weighted
Average
1998 Total Exercise
Price
- --------------------------------- ------------ ------------

Outstanding at January 1, 1998 300,000 $1.75
Outstanding at December 31, 1998 1,660,000 1.24
Exercisable at December 31, 1998 1,660,000 1.24
Granted at December 31, 1998 1,660,000 1.24
Exercised at December 31, 1998 - -
Forfeited at December 31, 1998 - -
Expired during 1998 - -

1997
- ---------------------------------

Outstanding at January 1, 1997 300,000 1.75
Outstanding at December 31, 1997 300,000 1.75
Exercisable at December 31, 1997 300,000 1.75
Granted at December 31, 1997 300,000 1.75
Exercised at December 31, 1997 - -
Forfeited at December 31, 1997 - -
Expired during 1997 - -

1996
- ---------------------------------
Outstanding at January 1, 1996 - -
Outstanding at December 31, 1996 300,000 1.75
Exercisable at December 31, 1996 300,000 1.75
Granted at December 31, 1996 300,000 1.75
Exercisable at December 31, 1996 300,000 1.75
Forfeited at December 31, 1996 - -
Expired during 1996 - -

F-30<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted-average grant-date fair value of options granted during the year
ended December 31, 1998 was approximately $163,000. The following assumptions
were used to estimate the grant-date fair value of those options:

- - Weighted-average risk-free rate used was 5.23%.
- - Weighted-average of the expected lives was 2.67 years.
- - Weighted-average expected volatility was 160%.
- - No dividends are expected.

Options Outstanding (and Exercisable) at December 31, 1998

Weighted-
Average

Price Number Price Life in
Range Months
- ---------- ----------- -------------- -----------

$0.50 to $1.00 960,000 $ 0.56 19.94
$1.01 to $2.50 700,000 2.18 20.14

Equity Instruments (Other Than Stock Options) Granted

Year Ended
December 31,

Common Stock 1998 1997 1996
- ---------------------------- ---------------- ------------ ------------

Number 838,867 165,000 467,035
Weighted-average grant-date $ 0.54 $ 0.41 $ 0.69
fair value (per share)

F-31<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If the fair value method of accounting for stock options issued for
compensation had been applied, net income would have been:

1998 1997 1996
------------ -------------- --------------

Revenue 442,172 $ 391,819 $ 1,451,521
Cost of revenue 396,455 326,409 911,382
------------ -------------- --------------

Gross margin 45,717 65,410 540,139

Operating expenses 1,426,535 1,778,613 1,113,151
------------ -------------- --------------

Operating loss (1,380,818) $ (1,713,203) $ (573,012)
============ ============== ==============

Net income (loss) (1,867,704) $ (2,719,633) $ 2,208,749
============ ============== ==============

Basic earnings per common
share:
Loss from operations (0.22) $ (0.29) $ (0.10)
------------ -------------- --------------

Net income (loss) (0.30) $ (0.46) $ 0.39
------------ -------------- --------------

Weighted average shares 6,376,647 5,893,000 5,662,000
============ ============== ==============

20. Year 2000 Issue

The Company had not addressed the Year 2000 issue at December 31, 1998.

F-32<PAGE>

Channel Freeze Technologies, Inc.
(A Development State Company)

Financial Statements

December 31, 1998<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Table of Contents

Page

Report of Independent Accountants 1

Balance Sheet 3

Statement of Operations 4

Statement of Changes in Stockholders' Equity 5

Statement of Cash Flows 6

Notes to Financial Statements 7<PAGE>

PADGETT, STRATEMANN & CO., L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
AND BUSINESS ADVISORS

1635 N.E. Loop410, Suite 700 - San Antonio, Texas 78209-1684
Telephone (210) 828-6281 - Fax (210) 826-8606

An Independently Owned Member of The McGladrey Network
Worldwide Services through RSM International

REPORT of Independent Accountants

The Board of Directors and Stockholders
Channel Freeze Technologies, Inc.
Cibolo, Texas

We have audited the accompanying balance sheet of Channel Freeze Technologies,
Inc. as of December 31, 1998, and the related statements of operations, changes
in stockholders' equity, and cash flows for the three months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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 financial statements referred to above present fairly, in
all material respects, the financial position of Channel Freeze Technologies,
Inc. as of December 31, 1998 and the results of its operations and its cash
flows for the three months then ended, in conformity with generally accepted
accounting principles.

As shown in the financial statements, the Company incurred a net loss for the
three months ended December 31, 1998. Current liabilities exceed current
assets by $91,939. The Company will be heavily reliant on obtaining outside
financing to continue operations. These factors and others discussed in Note 7
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.

1<PAGE>

Page 2

Intangible assets, which comprise a material portion of the Company's assets,
include patent rights and related technology of $831,083 as of December 31,
1998. The recovery of these intangible assets is dependent upon achieving
profitable operations. The ultimate outcome of this uncertainty cannot
presently be determined. Accordingly, the financial statements do not include
any adjustments that may result from the outcome of this uncertainty.

/s/PADGETT, STRATEMANN & CO.

Certified Public Accountants
March 5, 1999

2<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Balance Sheet

December 31, 1998

Assets

Current Assets

Cash $ 1,609
----------

Total current assets 1,609
----------

Patents, net (note 1) 831,083
Manufacturing equipment, net (note 3) 5,786
----------

Total assets $ 838,478
==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

Payables:
Trade $ 17,301

Related parties 73,696
Accrued expenses 2,551
----------

Total current liabilities 93,548
----------

Stockholders' Equity

Common stock subscribed - $0.001 par value; 1,000 shares 1
authorized
Additional paid-in capital 850,999
Subscriptions receivable (1,000)

Deficit accumulated during the development stage (105,070)
----------

Total stockholders' equity 744,930
----------

$ 838,478
==========

Notes to the financial statements form an integral part of this statement

3<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

STATEMENT OF OPERATIONS

Three Months Ended December 31, 1998

Operating expenses:
Manufacturing expenses $ 2,750
Selling expenses 6,836
General and administrative expenses 95,484
----------

Net loss $ (105,070)
==========

Notes to the financial statements form an integral part of this statement

4<PAGE>

<TABLE>
<CAPTION>
Channel Freeze Technologies, Inc.
(A Development Stage Company)

Statement of Changes in Stockholders' Equity

Three Months Ended December 31, 1998

<S> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Accumulated
Additional During
Paid-In Subscriptions Development

Shares Amount Capital Receivable Stage Total
------- ------- ------------ --------------- ------------- -----------

Subscription of common stock on formation 1,000 $ 1 $ 999 $ - $ - $ 1,000

Stockholder contribution - - 850,000 - - 850,000

Subscriptions receivable - - - (1,000) - (1,000)

Net loss - three months ended December 31, 1998 - - - - (105,070) (105,070)
------- ------- ------------ --------------- ------------- -----------

Balance at December 31, 1998 1,000 $ 1 $ 850,999 $ (1,000) $ (105,070) $ 744,930
======= ======= ============ =============== ============= ===========
</TABLE>

Notes to the financial statements form an integral part of this statement

5<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

STATEMENT of Cash Flows

Three Months Ended December 31, 1998

Increase (Decrease) in Cash

Cash Flows From Operating Activities
Net loss $ (105,070)
----------
Adjustments to reconcile net loss to net

cash provided by operating activities:
Depreciation and amortization 13,131
Changes in:
Payables - trade 17,301
Payables - related parties 73,696
Accrued expenses 2,551
----------

Total adjustments 106,679
----------

Net cash provided by operating activities 1,609
----------

Cash Flows From Investing Activities - capital
expenditures (850,000)
----------

Cash Flows From Financing Activities - capital
contributions 850,000
----------

Net increase in cash 1,609

Cash at beginning of period -

Cash at end of period $ 1,609
==========

Notes to the financial statements form an integral part of this statement

6<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Notes to Financial Statements

1. Nature of Business and Significant Accounting Policies

Management of the Company expects to derive substantially all of its revenue
through the manufacture and sale of bulk freezing systems. The Company was
formed during 1998 and began operations on October 1, 1998. Management of the
Company anticipates sales to be generated from both domestic and international
customers.

Cash balances are maintained by the Company at a single bank. The account is
insured by the Federal Deposit Insurance Corporation up to $100,000.

The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the industry.
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 of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

A summary of the significant accounting policies followed by the Company in
preparation of the accompanying financial statements is set forth below:

Advertising

The Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were approximately $5,800 during the three months ended
December 31, 1998.

Manufacturing Equipment

Manufacturing equipment is stated at cost. Depreciation is calculated on the
straight-line method based on the estimated useful life of the equipment of 7
years.

7<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Notes to Financial Statements

1. Nature of Business and Significant Accounting Policies (continued)

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 15
years. At December 31, 1998, capitalized patent development costs, net of
amortization, were $831,083. Amortization expense was $12,917 for the three
months ended December 31, 1998. 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.

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 return. 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.

2. Development Stage Company

The Company is considered a development stage enterprise because it has
generated no revenue during the three months ended December 31, 1998.
Management of the Company has been in the process of acquiring assets with
which to begin manufacturing operations and implementing marketing efforts.

8<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Notes to Financial Statements

3. Depreciation and Amortization

Depreciation and amortization expense by major asset classification for the
three months ended December 31, 1998 is summarized below:

Manufacturing equipment 214
Patents $ 12,917
--------

$ 13,131
========

Depreciation and amortization expense is reflected in the accompanying
financial statements as general and administrative expense.

4. Income Tax and Deferred Income Tax

A $105,070 net operating loss was incurred for the period ended December 31,
1998, which will expire in 2018 if not previously utilized to offset taxable
income.

Income tax expense differs from the amount which would be provided by applying
the statutory federal income tax rates for the three months ended December 31,
1998 because of the following:

Computed at the expected statutory rate $ (35,724)
Change in valuation account 35,724
----------
$ -
==========

The components of the balance of deferred income taxes at December 31, 1998 are
as follows:

Gross deferred tax assets $ 35,724
Valuation allowance (35,724)
----------
Net deferred tax liability $ -
==========

9<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Notes to Financial Statements

5. Related Party Transactions

Operating expenses of the Company totaling $73,696 for the three months ended
December 31, 1998 were paid by entities related through common ownership.

The Company was formed during 1998 to accommodate the acquisition from SIR
Worldwide, LLC ("SIR") of all the intellectual property relating to the Channel
Ice Technology Units. Concurrent with the purchase of a one-third interest of
the Company by PowerCold Corporation ("PowerCold"), SIR transferred all of the
intellectual property relating to the Channel Ice Technology Units to the
Company, in exchange for $550,000 in cash from PowerCold, and a note payable of
$300,000 from PowerCold to SIR, and options for SIR to purchase 400,000 shares
of PowerCold stock at a price of $2.50 per share, for a period not to exceed
two years. The Company has an obligation to make additional payments to SIR of
$85,000 for each $1,000,000 of Channel Ice Technology Unit sales, up to a
maximum of $5,950,000. PowerCold earns up to 80.00% ownership in the Company,
as the Company makes these royalty payments to SIR. For each $1,000,000 in
Channel Ice Technology Unit sales, and the payment of the related $85,000 in
royalties to SIR, PowerCold will receive an additional 1/70th of the additional
46.67% ownership necessary to achieve 80.00% ownership of the Company, after
all required payments are made to SIR.

Also, as part of the purchase agreement, the Company has agreed to additional
compensation to SIR by payment of either a 10% net fee payment or a 13% net
sales fee payment.

Ten percent net fee payments are payments of 10% of the net gross invoice price
on all Channel Ice Technology Units sold to distributors.

Thirteen percent net fee payments are payments of 13% of the net gross invoice
price on Channel Ice Technology Units of direct sales to end users.

The intellectual property acquired from SIR has been valued at the $850,000
agreed to be paid to SIR by PowerCold, and the $850,000 has been recorded as
capital by the Company. The additional royalty payments to SIR will be
expensed as paid.

6. Capital Structure

At December 31, 1998, the Company had 1,000 shares of $0.001 par value common
stock authorized. No common stock was issued; however, there were common stock
subscriptions for 1,000 shares of common stock outstanding.

10<PAGE>

Channel Freeze Technologies, Inc.
(A Development Stage Company)

Notes to Financial Statements

7. Going Concern

The Company relies on PowerCold Corporation (Note 5) for its working capital
while the Company institutes production and marketing activities. In the
current year, this investor received a going concern opinion on its audit
report. Management believes the investor will be able to provide sufficient
working capital for the Company to begin operations.

In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continuous operations of the
Company, and the success of its future operations. Management believes that
actions currently being taken to produce sales provide the opportunity to
continue as a going concern.

11<PAGE>

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</TABLE>