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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 33-19584
POWERCOLD CORPORATION
----------------------------------------------
(Name of small business issuer 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)
Issuer's telephone number: 210 659-8450
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Common Stock, $0.001 Par Value OTC Electronic Bulletin Board
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year: $541,238.00
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $2,258,284, which is based on the closing price of
$0.5625 on December 31, 1999. The number of shares of Common Stock outstanding
on December 31, 1999 was 22,876,641. (15,000,000 shares were subsequently
canceled on April 3, 2000)
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 1
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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.
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.
<PAGE> 2
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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 as
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, complimented and secured
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.
<PAGE> 3
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
RealCold Systems Inc. signed a Joint Cooperative Agreement in July 1995 with The
Wittemann Company, a wholly owned subsidiary of Dover Resources and Dover Corp.
(NYSE - DOV), for the manufacture and marketing of merchant carbon dioxide
plants and refrigeration products. The cooperation agreement combines the
technical expertise and experience of RealCold with the marketing of Wittemann.
Wittemann is the world's leading manufacturer of carbon dioxide systems and
refrigeration accessories employed by brewers and other 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 Inc., 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 Inc., 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 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 and distributors.
<PAGE> 4
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
Rotary Power Enterprise, Inc. was formed as a new PowerCold entity, which
acquired the Natural Gas Business from Rotary Power International on July 2,
1998. The agreement included: the business assets including intellectual
property, inventory and manufacturing capability; a marketing agreement with 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 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. was formed as a new PowerCold entity, which
acquired 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, a San Diego, CA
based company. A formal Agreement was signed and a $50,000.00 deposit was paid
to Alturdyne. 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
ALTURCOLD.
<PAGE> 5
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
AFFILIATE - In December 1996 the Company agreed in principal to merge/acquire
Rotary Power International, Inc. The Company initially acquired a 30% equity
interest in RPI (2M shares of common stock for $1M), and proposed a merger of
the companies in a stock for stock transaction, whereby RPI would become a
wholly owned subsidiary of the Company. A Plan of Agreement and Merger was
signed with Rotary Power International, Inc. ("RPI") on March 21, 1997 subject
to RPI shareholder approval. Each shareholder of RPI was to receive .363 shares
of the Company's common stock (1.56M shares) upon shareholder approval.
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.
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. 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.
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. 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. 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. 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.
<PAGE> 6
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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) - 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, which expired, was 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
and refrigeration systems. The Company also supplies permanent magnet systems,
materials separation equipment and FRIGC(R) refrigerants as replacements for
ozone-depleting refrigerants.
The strategic alliance with IMG complimented both companies and supported 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. Although this new emerging opportunity had all the
necessary ingredients for success, to date the strategic alliance was never
fully implemented by the companies.
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; 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.
<PAGE> 7
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
The Company's management objective is to become a major force with niche
products in the multi-billion dollar refrigeration industry and energy business.
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 Cibolo, Texas, and an executive
office in Philadelphia, Pennsylvania. Administrative, engineering and
manufacturing facilities are located in Cibolo, Texas.
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 Inc., 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.
<PAGE> 8
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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 the same for each
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.
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:
<PAGE> 9
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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).
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.
<PAGE> 10
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
ROTARY POWER NATURAL GAS ENGINES OFFERS:
20.000 Hour engine reliability
Low fixed maintenance cost
Few moving parts
Low noise
Compact configuration
Wide horsepower range 20-15OOHP
2000 to 42OORPM variable speed capability (>1OOHP - 36OORPM 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.
<PAGE> 11
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
580 SERIES NATURAL GAS ENGINE
The 580 Series family of twin rotor Natural Gas Rotary Engine, which are
produced by Rotary Power International Inc., 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.
ITEM 2. DESCRIPTION OF PROPERTY
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
On October 11, 1999, the following majority shareholders of the Company voted in
favor of election of Company Directors to a new three year term by a majority
vote of 3,840,583 votes or 51.1% of the outstanding 7,518,653 common shares of
the Company:
Simco Group, Inc., Francis L. Simola & Family 2,611,846 Shares
George C. Briley 652,602 Shares
Terrence J. Dunne 414,135 Shares
Jack Kazmar 162,000 Shares
The following were elected Directors of the Company to serve for three years.
Francis L. Simola
George C. Briley
Jack Kazmar
Carl H. Rosner
<PAGE> 12
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
Intermagnetics General Corporation's investment in the Company entitled them to
have a position on the Board of Directors. Mr. Carl Rosner was never formally
elected a director of the Company prior to this election. Subsequently Carl H.
Rosner has resigned as a Company director.
PART II
ITEM 5. MARKET FOR 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, 1999, there were approximately 280
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.
<TABLE>
1999 1998
----------------- -----------------
High Low High Low
-------- ------- -------- ------
<S> <C> <C> <C> <C>
First Quarter 1 3/8 5/8 1 1/2 1/4
Second Quarter 2 1 1 7/8 1 1/4
Third Quarter 1 7/8 5/8 2 1
Fourth Quarter 1 1/2 1 1/4 7/8
</TABLE>
The Company has paid no cash dividends to date, and it does not intend to pay
any cash dividends in the foreseeable future. The present policy of the Board of
Directors is to retain any future earnings and provide for the Company's growth.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 (subject
to sufficient working capital) for RealCold Products in 2000, 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.
<PAGE> 13
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
During 1999, RealCold Products has generated some $10M in customer proposals.
Because of insufficient working capital for raw materials and labor directly
needed for RealCold, sales and revenue was greatly impaired. The working
capital shortage for RealCold Products was mainly due because of the large
amounts of Company funds that was used for the promotion and support of the new
Channel Freeze business.
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
150 systems installed.
Management believes that Nauticon did not meet its sales and revenue projections
in 1999 due to lack of operating cash flow and limited marketing support because
of the concentrated support on the Channel Freeze business. PowerCold has
funded Nauticon over $1M 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 does not have sufficient resources to continue operations.
The Nauticon product technology was licensed to RealCold Products for a two and
one half per cent royalty fee on product sales.
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 one of 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 an exclusive Distributor Agreement for the Rotary Power
580 series engines form Rotary Power International, Inc.
The Company has delivered fourteen 65 HP engines and one 500 HP engine on its
major sales agreement with Kem Equipment Company, an engine packager for OEM
applications for the oil and gas industry in Western Canada. The Sales
Agreement is 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 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,
and the remaining materials are than disposed of at greatly reduced cost,
recycled or sold.
<PAGE> 14
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
Since the acquisition, Channel Freeze had to overcome changes in product design
and engineering and limited marketing experience and product credibility in the
marketplace, therefore did not meet its sales and revenue projections in 1999.
Channel Freeze has generated over $10M in proposal quotations. The new Channel
Freeze management support team believes that the product is now ready for
customer delivery and acceptance.
ALTURDYNE ENERGY SYSTEMS - PowerCold signed a Letter of Agreement (December
1998), to acquire a division of Alturdyne that produces natural gas engine
driven water chillers. The new company Alturdyne Energy System, Inc. was formed
in September 1999. 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 and generate
additional revenue for the Company in 2000.
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:
<TABLE>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of revenue 77.3 89.7 83.3
Gross margin 22.7 10.3 16.7
Operating expenses (189.3) (282.5) (453.9)
Operating income (loss) (166.6) (272.1) (437.2)
Other income (expense) (13.2) (102.0) 22.0
Net income (loss) (198.9) (382.2) (694.1)
</TABLE>
<PAGE> 15
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
FISCAL 1999 AND 1998 RESULTS - The Company's Consolidated Statements of
Operations for the fiscal year ended December 31, 1999 compared to fiscal year
ended December 31, 1998: Total revenue for 1999 was $541,238 compared to
$442,172 for 1998; operating loss of ($901,762) for 1999 compared to
($1,203,301) for 1998; and net loss of ($1,076,900) or ($0.15) per share for
1999 compared to a net loss of ($1,690,187) or ($0.27) per share for 1998. Net
income (loss) per share was based on weighted average number of shares of
7,106,638for 1999 compared to 6,376,647 for 1998.
The Company's Consolidated Balance Sheets as of December 31, 1999 and December
31, 1998 respectively: Total current assets were $598,030 for 1999 and $853,996
for 1998; total assets were $1,732,824 for 1999 and $2,321,970 for 1998; total
liabilities were $1,139,636 for 1999 and $1,164,377 for 1998; total
stockholders' equity was $ 593,188 for 1999 and $1,157,593 for 1998.
The company's revenues and expenses resulted in an operating loss ($1,076,900)
for 1999 compared to an operating loss of ($1,203,301) for 1998, these are both
operating losses. The Company's operating loss in 1999 was 25.1% less than the
operating loss in 1998, and the net loss for 1999 was 36.3% less than the net
loss in 1998. The decrease in operating losses was due to a reduction of some
$224 thousand in general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's working capital was ($541,606) compared with
($310,381) at December 31, 1998. The decrease was primarily attributable to the
Company's increase in liabilities. The company's cash resources at December 31,
1999 were $14,455 reflecting an decrease in cash resources from $21,781 at
December 31, 1998.
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. In 1999 the Board of Directors
elected to give Simco group 8% interest on outstanding loans to the Company. As
of December 31, 1999 there was an outstanding loan of $365,254 due Simco Group.
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 and principal money, and
incurring losses due in personal stock transactions.
The Company issued a total of 1,042 shares of new common restricted shares in
1999. 483,000 shares were issued for satisfaction of recorded liabilities for
expenses and services rendered. 559,000 shares were issued for cash.
<PAGE> 16
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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 in 2000 because of the new
products from 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.
PREVIOUS FINANCIAL ACTIVITY - 1998
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.
RESULTS OF OPERATIONS - 1998
The following table's sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
<TABLE>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
<PAGE> 17
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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.
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.
<PAGE> 18
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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 mini-mum 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.
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.
In September 1998, 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.
<PAGE> 19
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Power Cold Corporation and subsidiaries consolidated financial statements
incorporated in this annual report Form 10KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the registrant's fiscal year ending December 31, 1999 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are as follows:
<TABLE>
NAME AGE POSITION PERIOD SERVED
- ------------------- --- -------------------------- -----------------
<C> <S> <S> <S>
Francis L. Simola. 60 Chairman of the Board January 1, 1993
President and CEO
George C. Briley 74 Director, and CTO
Secretary, Treasurer September 1, 1994
President:
Technicold Services, Inc. September 1, 1994
RealCold Products, Inc September 1, 1994
Nauticon, Inc. October 1, 1998
Channel Freeze
Technologies, Inc. October 1, 1998
H. Jack Kazmar 68 Director and COO October 1, 1998
President:
Rotary Power Enterprise, Inc. October 1, 1998
Alturdyne Energy Systems, Inc. September 1, 1999
</TABLE>
A summary of the business experience and background of the Company's officers
and directors is set forth below.
<PAGE> 20
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
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.
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.
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.
<PAGE> 21
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
ITEM 10. EXECUTIVE COMPENSATION
No Officer or Director of the parent Company received any cash salary as
compensation during the year ended 1999.
Mr. Simola/Simco Group received 120,000 shares of common restricted stock for
services rendered the Company for 1999. Simco Group received $60,000 related to
payment due for expenses, which has accumulated with loans due Simco Group for
a total due of $365,254.00 loaned the Company.
Mr. Simola worked 100% of his time for PowerCold.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of December 31, 1999, 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.
<TABLE>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- --------------------- --------------------------- ------------
<S> <C> <C>
George C. Briley 652,602 8.29%
17 Pembroke Lane
San Antonio, TX. 78240
Terrence J. Dunne 438,488 5.57%
West 717 Sprague Ave. No. 1100
Spokane, Washington 99204
Robert E. Jenkins 403,728 5.13%
2903 Hillview Road
Austin, Texas 78703
H. Jack Kazmar 162,000 2.06%
36 West Beechcroft Road
Short Hills, NJ 07078
Francis L. Simola and (3) 1,058,596 13.44%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118
Simco Group, Inc. (4) 1,146,500 14.56%
650 Sentry Parkway, Ste.1
Blue Bell, PA. 19422
Total Common Stock 3,861,914 49.03%
- -------------------- --------- ------
Intermagnetics General Corporation 1,250,000 100.00%
450 Old Niskayuna Road
Latham, NY 12110
Total Preferred Stock 1,250,000 100.00%
- ----------------------- --------- -------
</TABLE>
(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.
<PAGE> 22
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
ITEM 12. 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.
ITEM 13. EXHIBITS AND REPORTS
(A) FINANCIAL STATEMENTS AND SCHEDULES
Exhibits: None
Financial Statements exhibited herein the Annual Report on Form 10-KSB and
are filed as a part hereof.
(B) REPORTS ON FORM 8-K:
8-K May 7, 1999 - Resignation of Registrants Director
8-K December 12, 1999 - Changes in Registrants Certifying Accountant
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: April 14, 2000
By: __________________________
Francis L. Simola
President and (Chief Executive 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: April 14, 2000
By: __________________________
Francis L. Simola
Director and President
By: __________________________
George C. Briley
Director, Secretary and Treasurer
By: __________________________
H Jack Kazmar
Director
<PAGE> 23
POWERCOLD CORPORATION
FORM 10-KSB
For the year ended December 31, 1999
R. E. BASSIE & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
POWERCOLD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
POWERCOLD CORPORATION AND SUBSIDIARIES
INDEX
Independent Auditors' Report
Consolidated Financial Statements:
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Years ended December 31, 1999 and 1998
Statements of Stockholders' Equity - Years ended December 31, 1999 and 1998
Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
<PAGE> 24
R. E. BASSIE & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
7171 Harwin Drive, Suite 306
Houston, Texas 77036-2197
Tel: (713) 266-0691 Fax: (713) 266-0692
E-Mail: [email protected]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
PowerCold Corporation:
We have audited the consolidated balance sheet of PowerCold Corporation and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for year ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for 1998 were audited by other
auditors, whose report, dated March 5, 1999, included an explanatory paragraph
describing the uncertainty of the recovery of the Company's primary assets,
comprising patent rights and related technology of $441,078 and goodwill of
$125,925.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PowerCold and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As shown in the consolidated financial statements, the Company incurred a net
loss of $1,076,900 for 1999 and $1,690,187 for 1998. At December 31, 1999
current liabilities exceed current assets by $531, 997. These factors, and
other discussed in note 4 to the consolidated financial statements 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.
/s/ R. E. Bassie & Co., P.C.
Houston, Texas
March 30, 2000
<PAGE> 25
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 14,455 $ 21,781
Restricted cash (note 14) - 400,000
Trade accounts receivable, net of
allowance for doubtful accounts
of $ 81,778 in 1999 and $84,533
in 1998 150,791 6,313
Receivable from Channel Freeze
Technologies 274,910 -
Receivables from related parties 1,312 72,618
Interest receivable - 9,918
Refundable income taxes 52,222 124,156
Inventories 34,993 156,699
Prepaid expenses 69,347 62,511
--------------- --------------
Total current assets 598,030 853,996
Investment in securities available for
sale (note 13) - 32,500
Investment in affiliate (note 2) 621,092 825,988
Property and equipment, net of
accumulated depreciation(note 11) 24,301 42,483
Patent rights and related technology
net (note 2) 374,003 441,078
Goodwill, net (note 2) 115,398 125,925
--------------- --------------
Total assets $ 1,732,824 $ 2,321,970
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses 472,533 397,934
Advances from affiliates (note 10) 365,254 -
Notes payable (note 2) 200,000 300,000
Short-term borrowing (note 15) 21,378 424,203
Commissions payable 67,298 42,240
Current installments of long-term
debt (note 16) 3,564 -
--------------- --------------
Total current liabilities 1,130,027 1,164,377
Long-term debt, less current
installments (note 16) 9,609 -
--------------- --------------
Total liabilities 1,139,636 1,164,377
--------------- --------------
Stockholders' equity (notes 2 and 8):
Convertible, preferred stock series A,
$.001 par value, $1,000,000 in
liquidation, 1,250,000 shares
authorized, issued, and outstanding 1,250 1,250
Common stock, $.001 par value.
Authorized 200,000,000 shares:
issued and outstanding,
7,876,641 shares in 1999 and
6,834,136 shares in 1998 7,876 6,834
Additional paid-in capital 6,044,092 5,534,274
Accumulated deficits (5,451,530) (4,376,265)
--------------- --------------
601,688 1,166,093
Less receivable for stock
subscription (8,500) (8,500)
--------------- --------------
Total stockholders' equity 593,188 1,157,593
Commitments and contingent liabilities - -
--------------- --------------
Total liabilities and
stockholders' equity $ 1,732,824 $ 2,321,970
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- --------------
<S> <C> <C>
Revenues
Product sales $ 442,545 $ 148,659
Services 98,693 293,513
--------------- --------------
Total revenues 541,238 442,172
--------------- --------------
Cost of Revenue:
Product sales 349,804 119,532
Services 68,403 276,923
--------------- --------------
Total cost of revenue 418,207 396,455
--------------- --------------
Gross margin 123,031 45,717
Operating expenses:
Sales and marketing - 509,464
General and administrative 916,127 502,590
Allowance for doubtful accounts (2,755) 81,778
Research and development - 55,229
Depreciation and amortization 111,421 99,957
--------------- --------------
Total operating expenses 1,024,793 1,249,018
--------------- --------------
Operating loss (901,762) (1,203,301)
Other income (expense)
Interest and other income - 137,393
Interest and other expense (71,676) (31,289)
Write-off of advances to affiliate - (557,145)
--------------- --------------
Total other income (expense) (71,676) (451,041)
--------------- --------------
Loss before losses of
unconsolidated affiliates (973,438) (1,654,342)
Equity in loss of
unconsolidated affiliates (note 3) (103,462) (35,845)
--------------- --------------
Net loss $ (1,076,900) $ (1,690,187)
=============== ==============
Basic earnings per common share:
Loss from operations $ (0.14) $ (0.19)
=============== ==============
Net income (loss) $ (0.15) $ (0.27)
=============== ==============
Weighted average shares 7,106,638 6,376,647
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 28
POWERCOLD CORPORTATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
*begin 8 pt type*
<TABLE>
Additional Stock Total
Preferred Common Paid-in Accumulated Subscription Stockholders'
Stock Stock Capital Deficit Receivable Equity
------------ ------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 5,995 $ 4,100,799 $(2,686,078) (8,500) $ 1,412,216
Issuance of preferred
stock Series A 1,250 - 978,246 - - 979,496
Issuance of common stock
for cash - 118 99,882 - - 100,000
Issuance of common stock
for services - 621 293,447 - - 294,068
Issuance of common stock
for purchase of
subsidiary - 100 62,900 - - 63,000
Amounts due from stockholders - - (1,000) - - (1,000)
Net earnings - - - (1,690,187) - (1,690,187)
------------ ------------ ------------ ------------ ------------- --------------
Balance, December 31, 1998 1,250 6,834 5,534,274 (4,376,265) (8,500) 1,157,593
Issuance of common stock
for services - 483 161,627 - - 162,110
Issuance of common stock
for cash - 559 348,191 - - 348,750
Net earnings - - - (1,075,265) - (1,075,265)
------------ ------------ ------------ ------------ ------------- --------------
Balance, December 31, 1999 1,250 7,876 $ 6,044,092 $(5,451,530) $ (8,500) $ 593,188
============ ============ ============ ============ ============= =============
</TABLE>
*end 8pt type*
See accompanying notes to consolidated financial statements.
<PAGE> 29
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 AND 1998
<TABLE>
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,075,265) $ (1,690,187)
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 95,784 99,937
Gain on sale of investment
in unconsolidated affiliate - (37,121)
Loss realized on disposition
of subsidiary - 6,028
Equity in loss of
unconsolidated affiliates - 35,845
Write-off of advances to affiliate - 557,145
Provision (credit) for
doubtful accounts - 76,815
Issuance of common stock
for services 162,110 294,068
(Increase) decrease in
accounts receivable (226,588) 10,098
(Increase) decrease inventories 121,706 (87,617)
Increase in prepaid expenses (6,836) (49,349)
Increase (decrease) in accounts
payable and accrued expenses 75,259 66,007
Increase in accrued salaries
and related liabilities - 42,240
Decrease in amount due to
third-party payors - (74,156)
--------------- --------------
Net cash used in operating activities (853,830) (750,247)
--------------- --------------
Cash flows from investing activities:
Purchase of property and equipment - (3,637)
Cash received from acquired subsidiaries - (572,095)
Proceeds from sale of investment
in unconsolidated affiliate - 44,984
Cash released from escrow related
to sale of subsidiary - 200,000
Proceeds from sale of securities
available for sale 32,500 (234,152)
Release of restriction of cash 400,000 -
Purchase of securities available
for sale - 81,716
(Increase) decrease in advances
to affiliate 365,254 160,347
--------------- --------------
Net cash provided by (used in)
investing activities 797,754 (322,837)
--------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 30
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years ended December 31, 1999 AND 1998
<TABLE>
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings - 25,061
Principal payments on short-term
notes payable (300,000) (11,966)
Proceeds from issuance of shares
under private placement 348,750 100,000
Proceeds from sales of
preferred stock - 979,496
--------------- --------------
Net cash provided by financing
activities 48,750 1,092,591
--------------- --------------
Net increase in cash (7,326) 19,507
Cash at beginning of year 21,781 2,274
--------------- --------------
Cash at end of year $ 14,455 $ 21,781
=============== ==============
Supplemental schedule of cash flow
information:
Interest paid $ 50,628 $ 25,261
=============== ==============
Cash paid for income taxes $ 71,934 $ 74,156
=============== ==============
Noncash investing activities:
Unrealized gain (loss) on
securities available for sale $ - $ 50
=============== ==============
Noncash financing activities:
Issuance of common stock for
purchase of subsidiary $ - $ 63,000
=============== ==============
Direct financing provided for
investment in unconsolidated
affiliate $ - $ 300,000
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
PowerCold Corporation, formally 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
revenues from three principal product lines. The first is a line of evaporative
heat exchange systems for the HVAC and 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.
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 liquied in a closed pressurized vessel system, in exchange
for 2,414,083 shares of common stock. Two directors of the Company were also
directors of the company selling such patent rights.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, after elimination of Intercompany accounts and
transactions. Wholly-owned subsidiaries of the Company in 1999 include
Technicold Services, Inc.; RealCold Products, Inc.; Nauticon Inc.; and Rotary
Power Enterprise, Inc.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to ten years.
EARNINGS PER SHARE
Earnings (losses) per common share have been computed by dividing net earnings
(losses) by the weighted average number of common shares outstanding during the
respective periods.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
<PAGE> 32
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
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, 1999 and 1998, capitalized patent development costs, net
of amortization, were $374,003 and $441,078, respectively. Amortization expense
was $67,075 for the year ended December 31, 1999 and $67,075 for the years ended
December 31, 1998. The Company periodically reviews its capitalized patent
costs to assess recoverability based on the projected undiscounted cash flows
from operations. Impariments 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.
GOODWILL
Goodwill represents the excess of the purchase price and relatd direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill is amortized on a straigt-line basis over 10 years. Amortization of
goodwill amounted to $10,527 and $10,527 for the years ended December 31, 1999
and 1998 respectively. Accumulated amortization amounted to $52,634 and $42,108
at December 31, 1999 and 1998 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.
(2) 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:
Purchase price $65,399
Fair Value of net asset acquired -
-----------
Excess of purchase price over fair value of net assets acquired $65,399
===========
<PAGE> 33
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 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 a payment of the
related $85,000 in royalties to SIR, PowerCold will receive an additional
one-seventh of the additional 46.67% ownership necessary to achieve 80.00%
ownership of CFTI, after all recquired payments are made to SIR. During 1999
$100,000 was paid to SIR Worldwide LLC (SIR) to be applied against the $300,000
note payable.
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. is summarized below:
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
Current assets $(266,958) $ 1,610
Noncurrent assets 774,817 836,869
--------------- ---------------
Total assets $ 512,788 $ 838,479
=============== ===============
<PAGE> 34
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(3) 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
($374,003 and $441,078 carrying value at December 31, 1999 and 1998
respectively) and the amount of compensation owed to the former Nautico Inc.
shareholder ($88,600 accrued and included in accounts payable and accrued
expenses at December 31, 1999 and 1998). 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.
(4) 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, 1999,
current liabilities exceed current assets by $531,997 and intangible assets
comprise a material protion 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. 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 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.
(5) YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define a specific year. Absent corrective actions, a
computer program that has date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions to various activities and
operations.
The Company primarily uses licensed software products in its operations with a
significant portion of processes and transactions centralized in several
particular accounting software packages.
<PAGE> 35
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(6) REPORTABLE SEGMENTS
PowerCold currently has four reportable segments: Nauticon Inc.; RealCold
Products, Inc.; Technicold Services, Inc.; and Rotary Power Enterprise, Inc.
Nauticon Inc. offers a product line of evaporative heat exchange systems for
HVAC and refrigeration industry. Technicold Services, Inc. offers consulting
engineering services, including process safety management compliance and ammonia
regrigeration technicians and supervisors. 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. Segment information for the years ended
December 31, 1999 and 1998 as follows:
<TABLE>
<S> <C> <C>
Net revenues 1999 1998
--------- ---------
Nauticon Inc. $ 91,006 $ 112,522
RealCold Products Inc. 212,596 224,477
Technicold Services, Inc. 50,611 105,173
Rotary Power Enterprises, Inc. 187,025 0
--------- ---------
$ 541,238 $ 442,172
========= =========
Operating income (loss)
Nauticon Inc. $(222,868) $(461,212)
RealCold Products Inc. (146,565) (79,689)
Technicold Services, Inc. 7,538 (5,943)
Rotary Power Enterprises, Inc. (35,597) (7,671)
Other income (expenses) (20,112) (19,225)
--------- ---------
$(417,604) $(573,770)
========== ==========
Identifiable assets
Nauticon Inc. $ 385,927 $ 545,060
RealCold Products Inc. 144,651 76,304
Technicold Services, Inc. 59,473 240,359
Rotary Power Enterprises, Inc. 129,993 96,563
--------- ---------
$ 720,044 $ 958,286
========= =========
</TABLE>
<PAGE> 36
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(7) STOCK BASED COMPENSATION
During 1999, the Company authorized and issued a total of 1,004,558 options at
an exercies price of $.50 per share for employee compensation. During 1998, the
Company authorized and issued a total of 600,000 options at an exercise price of
$.60 per share, for employee compensation. The Company also issued a total of
$460,000 options during 1998 for goods and services. Since the Company accounts
for the compensation cost associated with the issuance of stock options to
employees for compensation under APB25, no compensation cost was recognized in
income during the years ended December 31, 1999 and December 31, 1998.
Stock and stock options issued goods and services are valued based upon the fair
value of the consideration received.
<TABLE>
Total and Weighted Average Exercise Price of Options
-----------------------------------------------------------
Weighted Average
1999 Total Exercise Price
- ------------------------------------ ----------- -----------------
<S> <C> <C>
Outstanding at January 1, 1999 1,660,000 $1.24
Outstanding at December 31, 1999 2,554,558 1.00
Exercisable at December 31, 1999 2,554,558 1.00
Granted at December 31, 1999 2,554,558 1.00
Exercised at December 31, 1999 -
Forfeited at December 31, 1999 -
Expired during 1999 -
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 -
</TABLE>
Valuing per SFAS 123, par 22, the weighted average exercise price is $1.00 at
December 31, 1999. Average price for 1999 was $.90 with volitity of .47. The
fair value of options granted during 1999 was approximately $250,000.
<PAGE> 37
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(8) PREFERRED STOCK
The Company currently has 1,250,000 shares of preferred stock outstanding at
December 31, 1999. 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 $.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. 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.
(9) FEDERAL INCOME TAX EXPENSE
There is no federal income tax expense for the year ended December 31, 1999.
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:
<TABLE>
Years Ended December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Computed at the expected statutory rate $ (366,528) $ (574,664)
Nondeductible items and other permanent
differences 938 654
Change in valuation allowance 365,590 574,010
------------ ------------
Prior year unrecognized deferred tax asset $ 0 $ 0
============ ============
</TABLE>
<PAGE> 38
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
The temporary differences that result in deferred tax assets are as follows:
<TABLE>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued wages payable to shareholder $ 0 $ 0
Write-off of intangible assets 334,686 334,686
Losses related to unconsolidated affiliate 413,700 413,700
Loss on write-off of impaired stock 189,430 189,430
Net operating loss carryforward 852,199 486,609
------------ ------------
Gross deferred tax assets 1,790,015 1,424,425
Valuation allowance (1,790,015) (1,424,425)
------------ ------------
Net deferred tax assets $ 0 $ 0
============ ============
</TABLE>
A $961,085 tax net operating loss was incurred for the year end December 31,
1999. The Company's net operating loss carryforwards for income tax purposes is
approximately $1,790,015, of which $358,015 expires in 2019, $1,055,000 in 2018,
and $377,000 in 2012.
(10) ADVANCE TO AFFILIATE
Simco advanced $365,254 in 1999 to PowerCold at 8% rate of interest.
(11) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31, 1999 and 1998:
<TABLE>
1999 1998
------------ ------------
<S> <C> <C>
Machinery and equipment 26,877 12,540
Prototypes and molds 73,420 71,030
Furniture and fixtures 8,804 9,894
------------ ------------
Total property and equipment 109,101 93,464
Less accumulated depreciation and 84,800 50,981
------------ ------------
Net property and equipment $ 24,301 $ 42,483
============ ============
</TABLE>
Depreciation expense was $33,819 and $20,700 in 1999 and 1998 respectively.
<PAGE> 39
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(12) CURRENT LIABILITIES
Included in accrued expenses at December 31, 1999 are the following
amounts: accrued payroll $71,000 and $88,600 related to the litigation
discussed in Note 21.
(13) AVAILABLE-FOR-SALE INVESTMENTS
Investments include the following securities available for sale at December 31,
1999:
Years Gross Gross
To Fair Unrealized Unrealized
Maturity Value Cost Gains Losses
-------- ----- ---- ---------- ----------
Corporate equity securities
- common stock - $ 0 $ 0 $ 0 $ 0
========= ===== ==== ========== ==========
Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1999 were $32,500, $0 and $0 respectively.
(14) RESTRICTED CASH
During 1999, a $400,000 certificate of deposit was used to pay off short term
borrowing. There was no restricted cash as of December 31, 1999.
(15) SHORT-TERM BORROWINGS
As of December 31, 1999, short-term borrowing consisted of a loan from Security
National Bank at a 9.5% rate of interest.
(16) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Note payable to a bank at 9.5%
due April 10, 2004 $ 13,173 $ -
Less current maturities of long-
term debt 3,564 -
------------ ------------
Long-term debt, excluding
current maturities $ 9,609 $ -
============ =============
</TABLE>
<PAGE> 40
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(17) COMMITMENTS
OPERATING LEASES
The Company leases certain sales offices, plant space, and equipment under
operating lease agreements which expire at various times throughout 2002. Total
rent expense was $95,322 and $100,902 in 1999 and 1998 respectively.
Future minimum rental commitments as of December 31, 1999 were as follows:
Year ending December 31,
2000 $102,934
2001 $100,231
2002 $ 50,891
--------
$254,056
========
(18) 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.
(19) EARNINGS PER SHARE
Diluted earnings per share is not presented due to the loss from operations in
he 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
2,554,558 shares of common stock were outstanding at December 31, 1999 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets for POWERCOLD CORPORATION AND SUBSIDIARIES at
December 31, 1999 and the Consolidated Statements of Operations for
POWERCOLD CORPORATION AND SUBSIDIARIES for the year ended December 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,455
<SECURITIES> 0
<RECEIVABLES> 427,013
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 598,030
<PP&E> 398,304
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,732,824
<CURRENT-LIABILITIES> 1,130,027
<BONDS> 0
1,250
0
<COMMON> 7,876
<OTHER-SE> 593,188
<TOTAL-LIABILITY-AND-EQUITY> 1,732,824
<SALES> 442,545
<TOTAL-REVENUES> 541,268
<CGS> 349,804
<TOTAL-COSTS> 1,024,793
<OTHER-EXPENSES> (71,767)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (901,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,076,900)
<DISCONTINUED> 0
<EXTRAORDINARY> (103,462)
<CHANGES> 0
<NET-INCOME> (1,076,900)
<EPS-BASIC> (0.014)
<EPS-DILUTED> (0.015)
</TABLE>
