POWERCOLD CORP, 10-K/A, 2000-11-28

POWERCOLD CORP
10-K/A, 2000-11-28
AIR-COND & WARM AIR HEATG EQUIP & COMM & INDL REFRIG EQUIP

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
AMENDMENT NO. 2

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: $562,403.00

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 7,876,641. The number of shares of Preferred Stock
outstanding on December 31, 1999 was 1,250,000.

Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>

INDEX
-----

PART I PAGE

ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13

ITEM 6. SELECTED FINANCIAL DATA 13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION 14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 21

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21

ITEM 11. EXECUTIVE COMPENSATION 22

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 22

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 24

SIGNATURES 25

<PAGE> 2

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.

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.

<PAGE> 3

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.

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.

<PAGE> 4

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.

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.

<PAGE> 5

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.

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.

<PAGE> 6

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.

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.

<PAGE> 7

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.

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.

<PAGE> 8

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.

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

<PAGE> 9

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 compared to Can Ice, Vertical Plate
and Blast Freezing: Uses 10% - 15% less energy cost and one tenth the labor
cost; automated palletizing on muti-storage pallets; 10% - 50% less installation
and maintenance costs; automated clean in place and minimal product handling; no
building required and uses a smaller foot print.

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

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.

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.
<PAGE> 11

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 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.

Subsequent event to this filing: Effective August 31, 2000, The Company,
Nauticon, Inc. and Robert E. Jenkins agreed upon a full and final settlement of
the lawsuit titled Nauticon, Inc. et al Vs Robert E. Jenkins Cause No. 97-13035,
in the 53rd District court of Travis County, Texas.

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

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.

<PAGE> 12
PART II

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

(a) Market Information:

The Registrant's Common Stock, trading symbol PWCL, is traded on the OTC
Electronic Bulletin Board.
The following table sets forth the high and low sale prices of the Company's
Common Stock as reported by one of the market makers for the periods indicated.

1998 Bid 1998 Ask
High Low High Low
----- ----- ----- -----
First Quarter 1 1/2 1/4 1 3/8 5/8
Second Quarter 1 7/8 1 1/4 2 1
Third Quarter 1 7/8 5/8 2 1
Fourth Quarter 1 1/2 1 1/4 7/8

1999 Bid 1999 Ask
High Low High Low
----- ----- ----- -----
First Quarter 1 1/4 1/4 1 1/2 5/8
Second Quarter 1 5/8 1/2 2 1
Third Quarter 1 7/8 1/2 2 1
Fourth Quarter 1 1/4 1/2 1 3/4 1

(b) Holders: As of December 31, 1999, there were approximately 280 record
holders of the Company's Common Stock.

(c) 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.

The Company issued an aggregate of 1,028,005 unregistered shares during the
fiscal year 1999. The Company issued 536,938 shares for recorded expenses and
consulting services at an average share price of $0.30 per share. The Company
issued 491,067 shares to investors for private placements for $340,100 in equity
capital at an average share price of $0.69 per share. Historically the Company
issues restricted common shares for private placement funding on a negotiated
basis up to minimum of a 50% discount off the then current share price, and the
Company also issues restricted common shares for expenses and service rendered
based on a discount up to a 50% off the share price within the quarter issued
according to the value of the service.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for PowerCold Corporation
and its subsidiaries. The financial data for fiscal years ending December 31,
1995 through December 31, 1999 have been derived from the Company's audited
Consolidated Financial Statements included elsewhere in this Report, and should
be read in conjunction with those Consolidated Financial Statements and related
notes.

<PAGE> 13

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

Year Ended December 31, 1999 1998 1997 1996 1995
-------------------------- ------- ------- ------- ------- -------
Revenues $ 562 $ 442 $ 393 $ 1,452 $ 2,244
Operating (loss) $(1,199) $(1,203) $(1,713) $ (573) $(1,060)
Net Income (loss) $(1,253) $(1,690) $(2,720) $ 2,209 $(1,089)
Net Income (loss) per share $ (0.18) $ (0.27) $ (0.46) $ 0.39 $ (0.23)
Weighted average number
of shares 7,107 6,377 5,893 5,662 4,776

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

Year Ended December 31, 1999 1998 1997 1996 1995
-------------------------- ------- ------- ------- ------- -------
Total assets $ 1,634 $ 2,322 $ 2,229 $ 5,146 $ 2,298
Total liabilities $ 1,220 $ 1,164 $ 817 $ 1,076 $ 759
Long term debt $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders' equity $ 414 $ 1,158 $ 1,412 $ 4,070 $ 1,539

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

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.

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.

<PAGE> 14
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.

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.
<PAGE> 15

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 1999

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

Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------

Revenue 100.0% 100.0% 100.0%
Cost of revenue (0.07) 89.7 83.3
Gross margin (0.07) 10.3 16.7
Operating expenses (213.4) (282.5) (453.9)
Operating income (loss) (222.9) (272.1) (437.2)
Net income (loss) (222.9) (382.2) (694.1)

COMPARABLE FISCAL 1999, 1998 AND 1997 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 $ 562,403 compared to $442,172 for 1998 and $391,819 for 1997;
operating losses of ($1,199,942) for 1999 compared to ($1,1,796,291) for 1998
and ($2,929,971) for 1997; and net loss of ($1,253,395) or ($0.18) per share for
1999 compared to a net loss of ($1,690,187) or ($0.27) per share for 1998 and a
net loss of ($2,843,789) or ($0.46) per share for 1997. 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 and 5,893,000 for 1997.

The company's revenue increased 21.4% in 1999; operating expenses decreased
37.0%. The company's revenues and expenses resulted in a decrease of 25.8% in
operating loss for 1999 ($1,253,395) compared to ($1,690,187) as an operating
loss of for 1998. The Company's net loss decreased 25.8%% for 1999 to
($1,253,395) from ($1,690,187) for 1998. Revenue increase was due to the
increasing market acceptance of the Nauticon evaporative condenser systems. The
decrease in operating losses was primarily due to the elimination of $557,145 in
advances to an affiliate in 1998, and to a reduction of $196,982 in general
operating expenses due to new administration operating procedures at the Cibolo
facility. The Company has decreased the direct selling program for the Nauticon
products to selling through distributors and agents.

<PAGE> 16

The Company's Consolidated Balance Sheet as of December 31, 1999 and December
31, 1998 respectively: Total current assets decreased 63.5%, $ 323,180 for 1999
and $886,496 for 1998; total assets decreased 29.6%, $1,634,361 for 1999 and
$2,321,970 for 1998; total liabilities increased 4.6%, $1,220,303 for 1999 and
$1,164,377 for 1998; total stockholders' equity was $414,058 for 1999 and
$1,157,593 for 1998, a 64.2% decrease.

The primary decrease in current assets was reduction of $400,000 in restricted
cash, which was secured by a $400,000 certificate of deposit, and a decrease of
$121,706 in inventory. The $124,293 decrease in total assets occurred from the
adjusted accounting transaction of the Channel Freeze transaction (Reference
Note 17 in the Consolidated Financial Statements).

The increase in liabilities was due primarily to increase in accounts payable of
some $80,324, and the Company was advanced $365,254 during 1999 by Simco Group,
Inc., an affiliate and major stockholder. A short term note payable was
eliminated from the proceeds by the stated restricted cash.

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.
Historically the Company issues restricted common shares for private placement
funding on a negotiated basis up to minimum of a 50% discount off the then
current share price, and the Company also issues restricted common shares for
expenses and service rendered based on a discount up to a 50% off the share
price within the quarter issued according to the value of the service. As of
December 31, 1999 there was 7,876,641common shares outstanding and 1,250,00
preferred shares outstanding to one shareholder.
Liquidity and Capital Resources: At December 31, 1999, the Company's working
capital was ($887,514) compared with ($277,881) at December 31, 1998. The
decrease in cash was primarily attributable to the Company's elimination of the
$400,000 certificate of deposit and the advance from affiliate. 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.

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.

Management believes that its working capital may not be totally sufficient to
support both its current operations and growth plans for additional acquisitions
and joint ventures for the near future. Management is implementing a new
operating plan for 2000 providing guidance for cash management and revenue
growth. The Company is also currently seeking investor proposals to obtain
additional major financing to support its future growth plans and acquisitions.

The current status of Company acquisitions is dependent on the success of
investor funding. PowerCold signed a Letter of Agreement (December 1998), to
acquire a division of Alturdyne that produces natural gas engine driven water
chillers. To date the transaction has not been finalized pending funding. The
two companies operate as a joint alliance for the sales of engine and generator
products.

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.

<PAGE> 17

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.

PREVIOUS FINANCIAL ACTIVITY - 1998

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:

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

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

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

<PAGE> 18

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.

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

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

At December 31, 1997, the Company had $597,300, ($607,960 in 1996) held by and
invested in an account in the name of Simco. These funds were invested in short
and long-term liquid marketable securities; these funds have been classified as
advances to affiliate. Simco has guaranteed the Company a 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.

<PAGE> 19

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.

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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Power Cold Corporation and subsidiaries consolidated financial statements
incorporated in this annual report Form 10KSB.

<PAGE> 20
ITEM 9. 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 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of the Company are as follows:

NAME AGE POSITION PERIOD SERVED
--------------------- --- ------------------------------ -------------------

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

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

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

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

<PAGE> 21

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. Mr. Simola, Mr.
Briley and Mr. Kazmar has devoted 100% of their time for PowerCold's daily
operating activities during the last fiscal year 1999.

ITEM 11. EXECUTIVE COMPENSATION

No executive officer or director of the parent Company received any cash salary
as compensation during the year ended 1999. And no officer of the parent
Company was paid by a source other than PowerCold for time that was actually
spent in furtherance of PowerCold's affairs.

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.

ITEM 12. 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.

<PAGE> 22

NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OF CLASS (2)
-------------------------------- --------------------------- ------------

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%
-------------------------------- --------------------------- ------------

(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.
(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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

<PAGE> 23

George Briley, Chief Technology Officer of PowerCold, has loaned the Company
$27,000. Mr. Briley has received no interest on the loan transaction.

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

(A) LIST THE FOLLOWING DOCUMENTS FILED AS A PART OF THE REPORT:

Financial Statements exhibited herein the Form 10-K Annual Report and are filed
as a part hereof:

Independent Auditors' Reports:

Report on the 1999 Financial Statements

Report on the 1998 and 1997 Financial Statements

Consolidated Financial Statements:

Balance Sheets - December 31, 1999 and 1998

Statements of Operations - Years ended December 31, 1999, 1998 and 1997

Statements of Stockholders' Equity - Years ended December 31, 1999,
1998 and 1997

Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997

Notes to Consolidated Financial Statements

(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

<PAGE> 24

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

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

Dated: November 10, 2000

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.

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

Dated: November 10, 2000

/s/ George C. Briley
By: __________________________
George C. Briley
Director, Secretary and Treasurer

Dated: November 10, 2000

/s/ H. Jack Kazmar
By: __________________________
H. Jack Kazmar
Director

Dated: November 10, 2000

<PAGE> 25

POWERCOLD CORPORATION AND SUBSIDIARIES

INDEX

Independent Auditors' Reports

Report on the 1999 Financial Statements

Report on the 1998 and 1997 Financial Statements

Consolidated Financial Statements:

Balance Sheets - December 31, 1999 and 1998

Statements of Operations - Years ended December 31, 1999, 1998
and 1997

Statements of Stockholders' Equity - Years ended December 31, 1999,
1998 and 1997

Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997

Notes to Consolidated Financial Statements

<PAGE> 26
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.

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.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in Note 2, the Company
has suffered recurring losses from operations and has net negative working
capital that raise substantial doubt about the Company's ability to continue as
a going concern. Management plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed in Note 17, the Company's consolidated financial statements for the
year ended December 31, 1999 have been restated to reflect the proper accounting
for the investment in a wholly owned subsidiary.

/s/ R. E. BASSIE & CO., P.C.

Houston, Texas
March 30, 2000, except with respect to
Note 3 to which date is September 15, 2000

<PAGE> 27
PADGETT, STRATEMANN & CO., L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
1635 N.E. Loop410, Suite 700 - San Antonio, Texas 78209-1684
elephone (210) 828-6281 - Fax (210) 826-8606

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

REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
PowerCold Corporation and Subsidiaries

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

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

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

As shown in the consolidated financial statements, the Company incurred a net
loss of $1,690,187 for 1998 and has incurred substantial net losses for each of
the past two years. At December 31, 1998, current liabilities exceed current
assets by $310,381. These factors, and the others discussed in Note 18, raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.

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

/s/PADGETT, STRATEMANN & CO.
Certified Public Accountants
March 5, 1999 San Antonio, Texas
<PAGE> 28

POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998

<TABLE>
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS

Current assets:
Cash $ 14,464 $ 21,781
Restricted cash (note 7) - 400,000
Securities available for sale (note 5) - 32,500
Trade accounts receivable, net of allowance
for doubtful accounts of $138,379 in 1999
and $84,533 in 1998 152,154 6,313
Receivables from related parties - 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 323,180 886,496
-------------- --------------

Investment in affiliate (note 17) - 825,988
Property and equipment, net (note 6) 29,229 42,483
Patent rights and related technology, net of
accumulated amortization of $365,932 in 1999
and $242,591 in 1998 (note 17) 1,166,554 441,078
Goodwill, net of accumulated amortization of
$52,635 in 1999 and $42,108 in 1998 115,398 125,925
-------------- --------------

Total assets $ 1,634,361 $ 2,321,970
============== ==============

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 29
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998

<TABLE>
1999 1998
-------------- --------------
<S> <C> <C>
Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable and accrued expenses 778,258 697,934
Commissions payable 42,240 42,240
Advances from affiliates (note 3) 365,254 -
Short-term borrowings (note 7 ) 21,378 424,203
Current installments of long-term debt (note 8) 3,564 -
-------------- --------------
Total current liabilities 1,210,694 1,164,377
Long-term debt, less current
installments (note 8) 9,609 -
-------------- --------------
Total liabilities 1,220,303 1,164,377
-------------- --------------

Stockholders' equity (notes 2, 9, 10 and 17):
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 at December 31, 1999 and
6,834,136 shares at December 31, 1998 7,876 6,834
Additional paid-in capital 6,044,092 5,534,274
Accumulated deficits (5,629,660) (4,376,265)
-------------- --------------
423,558 1,166,093
Less receivables for stock subscription 9,500 8,500
-------------- --------------
Total stockholders' equity 414,058 1,157,593
Commitments and contingent liabilities (notes 2, 14 and 15)
Total liabilities and stockholders' equity $ 1,634,361 $ 2,321,970
============== ==============

See accompanying notes to consolidated financial statements.

<PAGE> 30
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997

</TABLE>
<TABLE>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Product sales $ 461,572 $ 148,659 $ 229,445
Services 100,831 293,513 162,374
------------- ------------- -------------
Total revenues 562,403 442,172 391,819
------------- ------------- -------------
Cost of revenue:
Product sales 564,938 119,532 271,640
Services 37,132 276,923 54,769
------------- ------------- -------------
Total cost of revenue 602,070 396,455 326,409
------------- ------------- -------------
Gross margin (39,667) 45,717 65,410
Operating expenses:
Sales and marketing 168,003 509,464 252,292
General and administrative 647,089 502,610 1,234,167
Research and development 166,262 55,229 66,114
Provision (recovery) for doubtful accounts (2,754) 81,778 7,718
Equity loss in unconsolidated affiliate - 35,845 427,593
Write-off of advances to affiliate - 557,145 789,175
Depreciation and amortization 181,675 99,937 218,322
------------- ------------- -------------
Total operating expenses 1,160,275 1,842,008 2,995,381
------------- ------------- -------------
Operating loss (1,199,942) (1,796,291) (2,929,971)
Other income (expense):
Interest income 8,706 97,969 85,947
Interest expense (70,249) (31,289) (59,875)
Other income 8,090 39,424 60,110
------------- ------------- -------------
Total other income (expense) (53,453) 106,104 86,182
------------- ------------- -------------
Loss before provision for income taxes (1,253,395) (1,690,187) (2,843,789)
Federal income expense (benefit) (note 12) - - (124,156)
------------- ------------- -------------
Net loss $ (1,253,395) $ (1,690,187) $ (2,719,633)
============= ============= =============
Earnings per common share -
basic and diluted $ (0.18) $ (0.27) $ (0.46)
============= ============= =============
Weighted average number of common shares 7,106,638 6,376,647 5,893,000
============= ============= =============
Consolidated statements of
comprehensive loss

Net loss $ (1,253,395) $ (1,690,187) $ (2,719,633)
Unrealized gain (loss) on shares
available-for-sale - 50 (1,050)
------------- ------------- -------------
Comprehensive loss $ (1,253,395) $ (1,690,137) $ (2,720,683)
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE> 31
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997

Cash flows from operating activities:

Net loss $ (1,253,395) $ (1,690,187) $ (2,719,633)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 34,890 22,335 20,093
Amortization of patients and
related technology 136,258 67,075 139,732
Amortization of goodwill 10,527 10,527 58,497
Net loss realized on
available-for-sale securities - - 24,493
Gain on sale of investment in
unconsolidated affiliate - (37,121) -
Loss realized on disposition
of subsidiary - 6,028 -
Equity in loss of unconsolidated
Affiliate - 35,845 427,593
Write-off of advances to affiliate - 557,145 -
Write-off of investment in
unconsolidated affiliate - - 789,175
Write-off of intangible assets - - 867,807
Provision for doubtful accounts - 76,815 5,638
Issuance of common stock for services 162,110 294,068 63,323
(Increase) decrease in assets:
Accounts receivable (145,841) 10,098 (132,812)
Receivable from related party 72,618 - -
Interest receivable 9,918 - -
Refundable income taxes 71,934 - (124,156)
Inventories 121,706 (87,617) 14
Prepaid expenses (6,836) (49,349) 5,850
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 53,215 66,007 194,266
Commissions payable - 42,240 -
Income taxes payable - (74,156) (50,000)
------------- ------------- -------------

Net cash used in operating activities (732,896) (750,247) (430,120)
------------- ------------- -------------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 32
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997

<TABLE>
Accumulated Total
Additional Stock Other Stock-
Preferred Common Paid-in Accumulated Subscription Comprehensive holders'
Stock Stock Capital Deficit Receivable Income Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
Dec. 31,1996 $ - $ 5,838 $ 4,036,633 $ 33,555 $ (7,500) $ 1,000 $ 4,069,526

Issuance of
common tock
for services - 157 63,166 - - - 63,323
Change in net
unrealized gain
on securities
available-
for-sale, net
of reclass-
ification
adjustment - - - - - (1,050) (1,050)
Net loss - - - (2,719,633) - - (2,719,633)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
Dec. 31, 1997 - 5,995 4,099,799 (2,686,078) (7,500) (50) 1,412,166

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
Change in net
Unrealized
loss on
securities
available-
for-sale, net
of reclass-
ification
adjustment - - - - - 50 50
Amounts due
from stock-
holders - - - - (1,000) - (1,000)
Net loss - - - (1,690,187) - - (1,690,187)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
Dec. 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
Amounts due
from stock-
holders - - - - (1,000) - (1,000)
Net loss - - - (1,253,395) - - (1,253,395)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
Dec. 31, 1999 $ 1,250 $ 7,876 $ 6,044,092 $(5,629,660) $ (9,500) $ - $ 414,058
============ ============ ============ ============ ============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE> 33
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997

<TABLE>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchase of property and equipment (15,636) (3,637) (14,219)
Purchased of patent rights - - -
Investment in affiliate - (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 81,716 1,308,727
Release of restriction on cash 400,000 - -
Advances to affiliate - - (216,768)
Purchase of certificate of deposit - - (100,000)
Purchase of securities
available-for-sale - (234,152) (610,164)
Increase in advances from affiliate 365,254 - -
Decrease in advances to affiliate - 160,347 10,660
------------- ------------- -------------
Net cash provided by (used in)
investing activities 782,118 (322,837) 378,236
------------- ------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt (2,464) - -
Proceeds from short-term borrowings - 25,061 169,315
Repayment of short-term borrowings (402,825) (11,966) (557,709)
Proceeds from issuance of shares
under private placement 348,750 100,000 -
Proceeds from sales of preferred stock - 979,496 -
Repayment of short-term borrowings,
related parties - - (15,000)
------------- ------------- -------------
Net cash provided by (used in)
financing activities (56,539) 1,092,591 (403,394)
------------- ------------- -------------
Net increase (decrease) in cash (7,317) 19,507 (455,278)
Cash at beginning of year 21,781 2,274 457,552
------------- ------------- -------------
Cash at end of year $ 14,464 $ 21,781 $ 2,274
============== ============= =============
Supplemental schedule of cash flow information:
Interest paid $ 50,628 $ 25,261 $ 35,382
============== ============= =============
Cash paid for income taxes $ - $ 74,156 $ 50,000
============== ============= =============
Noncash investing activities:
Unrealized gain (loss)
on securities available-for-sale $ - $ 50 $ (1,050)
============== ============= =============
Noncash financing activities:
Issuance of common stock for purchase
of subsidiary $ - $ 63,000 $ -
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
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 or PowerCold) was incorporated on October 7, 1987 in the State of
Nevada and operates in one business market; the development, design,
manufacturing, 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
industry. The second is consulting engineering services, including process
safety management compliance and ammonia refrigeration and carbon dioxide system
design. As part of this product line, the Company also provides operation,
maintenance, and safety seminars for ammonia refrigeration technicians and
supervisors. The third line is the design and production of unique products for
the refrigeration industry.

On December 28, 1992, The Company acquired the patent rights (U.S. Patent No.
4,928,492) and related engineering and technology to a process of quick freezing
food products, and cleaning and treating various nonfood products by using a
circulating cryogenic liquid in a closed pressurized vessel system, in exchange
for 2,414,083 shares of common stock. 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 are listed in Note 10,
reportable segments.

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.

INVENTORIES

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

INVESTMENT IN SECURITIES

Pursuant to Statement of Financial Accounting Standards (SFAS) No. 115, the
Company investments in securities are classified in three categories and
accounted for as follows:

TRADING SECURITIES - Debt and equity securities held principally for resale in
the near term are classified as trading securities and recorded at their fair
values. Unrealized gains and losses on trading securities are included in other
income. During the years ended December 31, 1999, 1998 and 1997, the Company
had no securities classified as trading securities.

<PAGE> 35
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

SECURITIES TO BE HELD TO MATURITY - Debt securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost
adjusted for amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity. During the years ended December 31, 1999, 1998 and 1997, the Company
had no securities classified as securities to be held to maturity.

SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale consist of debt
and equity securities not classified as trading securities or as securities to
be held to maturity. Unrealized holding gains and losses, net of tax, on
securities available-for-sale are reported as a net amount in a separate
component of other comprehensive income.

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

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

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash and cash equivalents,
advances to affiliate, trade accounts receivable, investment in securities
available-for-sale, restricted cash, accounts payable and accrued expenses and
short-term borrowings. All instrutments other than the investment in securities
available-for-sale are accounted for on a historical cost basis, which, due to
the short maturity of these financial instruments, approximates fair value at
December 31, 1999 and 1998. Investment in securities available-for-sale is
recorded at fair value at December 31, 1998.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined in SFAS No. 105, "Disclosure of Information about Fair
Value of Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," consists primarily of cash and
cash equivalents, advances to affiliate, trade accounts receivable, investments
in securities available-for-sale, and restricted cash. The Company maintains
its cash and cash equivalents in major, creditworthy financial institutions and
has not experienced any losses on its deposits. The Company's receivables do
not represent a significant concentration of credit risk at December 31, 1999
and 1998.

<PAGE> 36
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

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.

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. The Company periodically reviews its capitalized patent costs to assess
recoverability based on the projected undiscounted cash flows from operations.
Impairments are recognized in operating results when a permanent diminution in
value occurs.

GOODWILL

Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill is amortized on a straight-line basis over 10 years. 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.

REVENUE RECOGNITION

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

COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130), which was issued in June 1997. SFAS 130
establishes rules for the reporting and display of comprehensive income and its
components, but had no effect on the Company's net income (loss) or total
stockholders' equity. SFAS 130 requires unrealized gains and losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in comprehensive income.

ADVERTISING EXPENSES

Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were $54,763, $3,219 and $1,060 for the years ended
December 31, 1999, 1998 and 1997, respectively.

<PAGE> 37
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

STOCK BASED COMPENSATION

The Company accounts for stock issued for compensation in accordance with APB
25, "Accounting for Stock Issued to Employee." Under this standard,
compensation cost is the difference between the exercise price of the option and
fair market of the underlying stock on the grant date. In accordance with SFAS
No. 123, "Accounting for Stock Based Compensation," the Company provides the pro
forma effects on net income and earnings per share as if compensation had been
measured using the "fair value method" described therein.

INCOME TAXES

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

EARNINGS PER SHARE

On January 1, 1998, the Company adopted SFAS No. 128. SFAS 128 provides for
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity similar to fully diluted earnings
per share.

USE OF ESTIMATES

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

RECLASSIFICATIONS

Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.

<PAGE> 38
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

(2) 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 $887,514 and intangible assets
comprise a material portion of the Company's assets. The recovery of these
intangible assets is dependent upon achieving profitable operations and
favorable resolution of the matter discussed in Note 14. The ultimate outcome
of these uncertainties cannot presently be determined. Management is actively
seeking additional equity financing. Additionally, management believes that the
prior 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.

(3) RELATED PARTY TRANSACTIONS

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

During 1999, Simco advanced $365,254 to the Company. During 1998, the Company
advanced funds to Simco to invest in short-term and long-term marketable
securities. At December 31, 1998, management of the Company determined that the
value of the marketable securities had been permanently impaired. The total
amount of advances to affiliates of $557,145 was written-off. Simco guarantees
the Company an 8% annual return on these funds. Simco paid interest to the
Company for the year ended December 31, 1998 of $49,284. During 1998, a total
of $195,000 was recorded as compensation for the Company's Chairman and Chief
Executive Officer. No cash was paid related to the $195,000, but instead was
used to reduce the funds advanced to Simco.

During 1998, the Company recorded expense of $30,000 related to the issuance of
120,000 shares of restricted common stock to Simco as payment for expenses and
consulting services provided. An additional 100,000 shares were issued to
reimburse Simco for payment of $63,000 in expenses of the Company, paid by
Simco. The shares were issued at 50% of the bid price on date of issuance
ranging from $0.25 per share to $.063 per share.

On September 30, 1994, the Board of Directors approved agreements with three key
executives. The agreements provide that compensation for services rendered be
paid through cash payments or through a stock option plan, determined annually
by the Board. Sale of stock is subject to approval by the Treasurer and
President of the Company. During 1998, the Company issued a total of 335,000
restricted shares on common stock to these three executives, including the
220,000 shares noted above for a total expense of $136,750. Shares are issued
at 50% of the current bid price of the Company's stock. No cash was paid to
these three executives during 1998.

<PAGE> 39
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

In addition, the directors receive an annual payment of $2,500 for director's
fees. The agreements further provide that two of the individuals receive a 2%
commission not to exceed 5% on any direct sales of the Company. The third
individual receives the highest of 3% commission on gross revenues and 5% on
gross operating profits, or $10,000 per month. These employees also have the
option to purchase shares of common restrictive stock of the Company at 50% of
bid price 30 days after receiving payments for these services. In order to
obtain these benefits, the employees must perform services for a period of three
years effective on date of agreement or receive a pro rata share based on years
of service. No commissions were accrued related to the agreements at December
31, 1999 and 1998.

Included in accounts payable and accrued expenses as of December 31, 1999 is
$97,000 for amounts owed to the president of Technicold Services, Inc. and to
the former President of Nauticom Inc.

(4) ACQUISITION

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
==========

(5) SECURITIES AVAILABLE-FOR-SALE

Investments include the following securities available-for-sale (stated at fair
value) at December 31, 1998.

Years Gross Gross
To Fair unrealized unrealized
maturity value Cost gains gains
-------- ------- ------ ---------- ----------

Corporate equity
Securities $ - $32,500 $32,500 $ - $ -
========= ======= ======= ========== ==========

Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available-for-sale for the years ended December 31,
1999 and 1998 were $32,500, $0, $0 and $81,716, $50, $0, respectively.

<PAGE> 40
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

(6) PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

December 31,
----------------------
1999 1998
---------- ----------

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
========== ==========

Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$33,819, $22,335 and $20,092, respectively.

(7) NOTES PAYABLE

At December 31, 1999 and 1998, notes payable represented the following:

A note payable to a bank under a financing agreement that permits the Company to
borrow up to $25,000. The agreement provides for interest at 9.25%. The note
is secured by the personal guarantee from one of the officers. At December 31,
1999 and 1998, $21,378 and $25,000, respectively, were outstanding against the
note. The financing agreement matured in July 1999.

A note payable to a bank under a financing agreement that permits the Company to
borrow up to $400,000. The agreement provides for interest at 7%. The note was
secured by a $400,000 certificate of deposit. At December 31, 1998, $399,142
was outstanding against the note. The note was repaid in 1999 with the proceeds
from the above-mentioned certificate of deposit.

(8) LONG-TERM DEBT

Long-term debt at December 31, 1999 represents a note payable in monthly
installments of $297, with interest at 9.5%, through April 2004. Aggregate
yearly maturities of long-term debt for the year after December 31, 1999 are as
follows:

2000 $ 3,564
2001 2,783
2002 3,041
2003 3,785
-------
$13,173
========

<PAGE> 41
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

(9) 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.

(10) STOCK BASED COMPENSATION

In fiscal 1995, the company adopted a concept of awarding stock options to key
employees and outside directors of the Company. The concept surrounding the
idea of awarding stock options is to increase the ownership of common stock of
the Company by those key employees and outside directors who contribute to the
continued growth, development and financial success of the Company and its
subsidiaries, and to attract and retain key employees and reward them for the
Company's future profitable performance.

The options granted might be either incentive stock options under the Internal
Revenue Code or options, which do not qualify as incentive stock options.
Options are granted for a period of up to three years. The options granted
under this plan were fully vested at grant date.

On October 1, 1999, the Company's Board of Directors authorized and issued a
total of 1,004,558 options at an exercise price of $0.50 for employee
compensation. On February 7, 1998 and July 10, 1998, the Company's Board of
Directors authorized and issued 450,000 and 300,000 options, respectively at an
exercise price of $0.50 for employee compensation and an additional 400,000
options were authorized and issued at an exercise price $2.50 for an acquisition
on September 30, 1998. On April 30, 1997, the Company's Board of Directors
authorized and issued a total of $60,000 options at an exercise price of $0.50
for services. Stock and stock options issued in relation to the acquisition and
services are valued based upon the fair value of the consideration received.

The Company applies Accounting Principles Board Opinion Number 25 in accounting
for options and accordingly recognized no compensation cost for its stock
options in 1999 or 1998. The following reflect the Company's pro-forma net loss
and net loss per share had the Company determined compensation costs based upon
fair market values of options at the grant date, as well as the related
disclosures required by SFAS 123.

<PAGE> 42
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

Weighted
Average
Options Exercise-Price
------------ --------------
Balance outstanding- January 1, 1997 600,000 $ 1.75
Issued 60,000 $ 0.50
Exercised -
Cancelled -
Expired -
Balance outstanding- December 31, 1997 660,000 $ 1.75
Issued 1,150,000 $1.20
Exercised -
Cancelled (300,000) $ 1.75
Expired -
Balance outstanding-December 31, 1998 1,510,000 $ 1.33
Issued 1,004,558 $ 0.50
Exercised -
Cancelled -
Expired (60,000) $ 1.33
Balance outstanding-December 31, 1999 2,454,558 $ 1.00

At December 31, 1999 exercise prices for outstanding options ranged from $0.50
to $2.50. The weighted average contractual life remaining of such options was
2.3 years.

The per share weighted average fair of stock options issued during fiscal 1999,
fiscal 1998, and fiscal 1997 were $0.50, $1.20 and $0.50, respectively, on the
dates of issuance using the Black-Scholes option pricing model with the
following weighted average assumptions: expected dividend yield- 0.0% in 1999,
0.0% in 1998, and 0.0% in 1997; risk free interest rate- 30.31% in 1999, 33.10%
in 1998, and 27.01% in 1997; expected life of 3 years in 1999, 1998 and 1997,
and volatility factor of 1.05 in 1999, 1.15 in 1998, and 0.94 in 1997.

The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of trade options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

<PAGE> 43
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

Pro-forma net income and earnings per share had the Company accounted for its
options under the fair value method of SFAS 123 is as follows:

1999 1998 1997
------------ ------------ ------------
Net loss as reported $(1,253,395) $(1,690,187) $(2,719,633)
Adjustment required by SFAS 123 (505,130) (805,432) (64,342)
------------ ------------ ------------
Pro-forma net loss $(1,758,525) $(2,495,619) $(2,783,975)
============ ============ ============
Pro-forma net loss per share:
Basic and diluted $(.25) $(.39) $(.47)

(11) REPORTABLE SEGMENTS

PowerCold currently has five reportable segments: Nauticon Inc., RealCold
Products, Inc., Technicold Services, Inc., Rotary Power Enterprise, Inc. and
Channel Freeze Technologies, 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 refrigeration 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. Channel Freeze Technologies, Inc. generates revenue through the
manufacture and sale of bulk freezing systems. Segment information for the
years ended December 31, 1999, 1998 and 1997 are as follows:

<PAGE> 44
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------

Revenues:
Nauticon Inc. $ 91,006 $ 112,522 $ 229,445
RealCold Products Inc. 212,596 224,477 -
Technicold Services, Inc. 50,611 105,173 162,374
Rotary Power Enterprises, Inc. 187,025 - -
Channel Freeze Technologies, Inc. - - -
Corporate 21,165 - -
------------ ------------ ------------
$ 562,403 $ 442,172 $ 391,819
============ ============ ============

Operating loss:
Nauticon Inc. $ (290,569) $ (461,212) $ (379,207)
RealCold Products Inc. (243,429) (79,689) (169,273)
Technicold Services, Inc. 7,538 (5,943) 25
Rotary Power Enterprises, Inc. (8,454) (7,671) -
Channel Freeze Technologies, Inc. (313,801) - -
Corporate (351,227) (1,241,776) (2,381,516)
------------ ------------ ------------
$(1,199,942) $(1,796,291) $(2,929,971)
============ ============ ============

Identifiable assets:
Nauticon Inc. $ 385,927 $ 545,060 $ 744,924
RealCold Products Inc. 144,650 76,304 20,187
Technicold Services, Inc. 122,137 240,359 196,189
Rotary Power Enterprises, Inc. 129,992 96,563 -
Channel Freeze Technologies, Inc. 797,531 - -
Corporate 110,725 1,363,684 1,268,057
------------ ------------ ------------
$ 1,690,962 $ 2,321,970 $ 2,229,357
============ ============ ============

Depreciation and Amortization:
Nauticon Inc. $ 96,761 $ 85,699 $ 109,201
RealCold Products Inc. 2,419 440 14,300
Technicold Services, Inc. 12,090 12,163 12,163
Rotary Power Enterprises, Inc. 365 - -
Channel Freeze Technologies, Inc. 70,040 - -
Corporate - 1,635 82,658
------------ ------------ ------------
$ 181,675 $ 99,937 $ 218,322
============ ============ ============

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

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

During the year ended December 31, 1998, sales to one customer amounted to
approximately $224,000.
<PAGE> 45
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

(12) FEDERAL INCOME TAX EXPENSE

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 for the years ended December 31, 1999, 1998 and 1997.

1999 1998 1997
------------ ------------ ------------

Computed at the expected statutory rate $ (426,154) $ (574,664) $ 793,188
Nondeductible items and other
permanent differences 938 654 475
Change in valuation allowance 425,216 574,010 436,715
------------ ------------ ------------
Prior year unrecognized deferred
tax asset $ - $ - $ (124,156)
============ ============ ============

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

December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------

Deferred tax assets:
Accrued wages payable to shareholder $ - $ - $ 13,600
Write-off of intangible assets 334,686 334,686 295,055
Losses related to unconsolidated
affiliate 413,700 413,700 413,700
Loss on write-off of impaired stock 189,430 189,430 -
Net operating loss carryforward 911,825 486,609 129,060
------------ ------------ ------------
Gross deferred tax assets 1,849,641 1,424,425 850,415
Valuation allowance (1,849,641) (1,424,425) (850,415)
------------ ------------ ------------
Net deferred tax assets $ - $ - $ -
============ ============ ============

The Company incurred tax net operating losses of approximately $778,000,
$1,055,000 and $742,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company utilized approximately $365,000 as a carryback to
1996 to reduce the federal tax provision in that year. The Company's net
operating loss carryforwards for income tax purposes is approximately
$2,210,000, of which $778,000 expires in 2019, $1,055,000 in 2018, and $377,000
in 2012.

<PAGE> 46
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

(13) EARNINGS PER SHARE

Diluted earnings per share is not presented due to the loss from operations in
the years presented. In accordance with the requirements of SFAS 128, no
potential common shares are included in the computation of diluted per share
amounts due to the loss from continued operations. Options to purchase
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.

(14) 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, $100,902 and $108,676 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
==========

(15) 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.

(16) 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.

<PAGE> 47
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

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. The Company has not experienced any
year 2000 problems to date; however, the Company plans to continue to monitor
the situation closely.

(17) RESTATEMENT

On May 18, 1998, Channel Freeze Technologies, Inc. (CFTI) was formed as a
wholly-owned subsidiary of the Company for accommodate the acquisition of
intellectual property assets related to Channel Ice Technology. On September
15, 1998, the Company entered into an agreement to acquire eighty percent (80%)
of the assets (primarily patients) of Channel Ice Technologies from SIR
Worldwide LLC (SIR) for $850,000 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 from the date of closing. The Company made cash payment of $550,000 in
1998 and $100,000 in 1999, with a remaining liability of $200,000 and $300,000
at December 31, 1999 and 1998, respectively. The agreement also required the
Company to issue two-third of the stock of CFTI to SIR, which would leave the
Company with only a one-third ownership in CFTI. The Board of Directors of the
Company passed a resolution approving the issuance of two-third of the shares of
stock of CFTI to SIR; however, the shares were never issued. The agreement
provided the Company the ability to increase (buy back) their ownership interest
(up to 80%) in CFTI by making additional payments totaling $5,950,000. For each
$1 million dollars in Channel Ice Technology unit sales, PowerCold shall acquire
an additional 1% equity interest in CFTI for each payment of $85,000, up to a
maximum ownership interest by PowerCold in CFTI of 80%.

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.

In 1998, the transaction was accounted using the equity method of accounting
since the Company only owned a one-third interest in CFTI (based solely on the
Board approval of a resolution to issue two-third of CFTI's common stock to
SIR). Financial information for Channel Freeze Technologies, Inc. as of
December 31, 1998, and three months then ended is summarized below:

Current assets $ 1,609
Noncurrent assets 836,869
-----------
Total assets 838,478
Less current liabilities 93,548
------------
Equity $ 744,930
============
Net loss $ 105,069
============

For the year ended December 31, 1998, $35,845 was included in the consolidated
statement of operations as equity loss in unconsolidated affiliate.

<PAGE> 48
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998

In late 1999, the Company discovered problems with the design of the machinery
and spent considerable resources to redesign the machinery. Due to these
problems, the Company decided not to issue two-third of the common stock of CFTI
to SIR, which effectively revert 100% ownership in CFTI back to PowerCold.
Based on the fact that the stock was never issued to SIR, the consolidated
financial statements for 1999 are being restated to correct the treatment of
CFTI as an equity investment and consolidate CFTI as a wholly-owned subsidiary
of PowerCold.

The restatement (correction of an error) is as follows:

As previously Increase
reported (decrease) Restated
-------------- -------------- --------------
Investment in affiliate $ 621,092 $ (621,092) $ -
Accounts receivable 150,791 57,964 208,755
Receivable from CFTI 274,910 (274,910) -
Property and equipment, net 24,300 4,929 29,229
Patent rights and related
technology, net 374,003 792,551 1,166,554
Total liabilities 1,139,636 137,268 1,276,904
Equity loss in unconsolidated
affiliate (204,896) 204,896 -
-------------- -------------- --------------
Net loss $ (1,075,265) $ (178,130) $ (1,253,395)
============== ============== ==============

The restated net loss for 1999 is reconciled as follow:

Net loss as reported $ (1,075,265)
Less equity loss in unconsolidated affiliate 204,896
Plus 100% of CFTI's loss in consolidation (313,801)
Plus 1998 loss not included in the 1998 consolidation (69,225)
--------------
Restated net loss $ (1,253,295)
==============