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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment Number 1
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 33-19584
POWERCOLD CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Nevada 23-2582701
------------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification No.)
103 Guadalupe Drive Cibolo, Texas 78108
-------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 210 659-8450
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Common Stock, $0.001 Par Value OTC Electronic Bulletin Board
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year: $541,238.00
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $2,258,284, which is based on the closing price of
$0.5625 on December 31, 1999. The number of shares of Common Stock outstanding
on December 31, 1999 was 22,876,641. (15,000,000 shares were subsequently
canceled on April 3, 2000)
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 1
R. E. BASSIE & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
POWERCOLD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
POWERCOLD CORPORATION AND SUBSIDIARIES
INDEX
Independent Auditors' Report
Consolidated Financial Statements:
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Years ended December 31, 1999 and 1998
Statements of Stockholders' Equity - Years ended December 31, 1999 and 1998
Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
<PAGE>
R. E. BASSIE & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
7171 Harwin Drive, Suite 306
Houston, Texas 77036-2197
Tel: (713) 266-0691 Fax: (713) 266-0692
E-Mail: [email protected]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
PowerCold Corporation:
We have audited the consolidated balance sheet of PowerCold Corporation and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for year ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for 1998 were audited by other
auditors, whose report, dated March 5, 1999, included an explanatory paragraph
describing the uncertainty of the recovery of the Company's primary assets,
comprising patent rights and related technology of $441,078 and goodwill of
$125,925.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PowerCold and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As shown in the consolidated financial statements, the Company incurred a net
loss of $1,075,265 for 1999 and $1,690,187 for 1998. At December 31, 1999
current liabilities exceed current assets by $531, 997. These factors, and
other discussed in Note 16 to the consolidated financial statements raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ R. E. Bassie & Co., P.C.
Houston, Texas
March 30, 2000
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
Assets 1999 1998
------ --------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 14,455 $ 21,781
Restricted cash (notes 4 and 6) - 400,000
Trade accounts receivable, net of allowance
for doubtful accounts of $ 138,379 in 1999
and $84,533 in 1998 150,791 6,313
Receivable from Channel Freeze Technologies 274,910 -
Receivables from related parties 1,312 72,618
Interest receivable - 9,918
Refundable income taxes 52,222 124,156
Inventories 34,993 156,699
Prepaid expenses 69,347 62,511
--------------- --------------
Total current assets 598,030 853,996
--------------- --------------
Securities available for sale - 32,500
Investment in affiliate (note 3) 621,092 825,988
Property and equipment, net (note 5) 24,301 42,483
Patent rights and related technology net 374,003 441,078
Goodwill, net 115,398 125,925
--------------- --------------
Total assets $ 1,732,824 $ 2,321,970
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 672,533 697,934
Commissions payable 67,298 42,240
Advances from affiliates (note 2) 365,254 -
Notes payable (note 6) 21,378 424,203
Current installments of long-term debt (note 7) 3,564 -
--------------- --------------
Total current liabilities 1,130,027 1,164,377
Long-term debt, less current installments (note 7) 9,609 -
--------------- --------------
Total liabilities 1,139,636 1,164,377
--------------- --------------
Stockholders' equity (notes 2 and 8):
Convertible, preferred stock, Series A, $.001
par value, $1,000,000 in liquidation, 1,250,000
shares authorized, issued, and outstanding 1,250 1,250
Common stock, $.001 par value. Authorized 200,000,000
shares: issued and outstanding, 7,876,641 shares
in 1999 and 6,834,136 shares in 1998 7,876 6,834
Additional paid-in capital 6,044,092 5,534,274
Accumulated deficits (5,451,530) (4,376,265)
--------------- --------------
601,688 1,166,093
Less receivables for stock subscription 8,500 8,500
--------------- --------------
Total stockholders' equity 593,188 1,157,593
Commitments and contingent liabilities - -
--------------- --------------
Total liabilities and stockholders' equity $ 1,732,824 $ 2,321,970
=============== ==============
</TABLE> See accompanying notes to consolidated financial statements.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues
Product sales $ 442,545 $ 148,659
Services 98,693 293,513
--------------- ---------------
Total revenues 541,238 442,172
--------------- ---------------
Cost of Revenue:
Product sales 349,804 119,532
Services 68,403 276,923
--------------- ---------------
Total cost of revenue 418,207 396,455
--------------- ---------------
Gross margin 123,031 45,717
Operating expenses:
Sales and marketing - 509,464
General and administrative 916,127 584,368
Allowance for doubtful accounts (2,755) -
Research and development - 55,229
Depreciation and amortization 111,421 99,957
--------------- ---------------
Total operating expenses 1,024,793 1,249,018
--------------- ---------------
Operating loss (901,762) (1,203,301)
Other income (expense):
Interest and other income - 137,393
Interest and other expense (71,676) (31,289)
Write-off of advances to affiliate - (557,145)
--------------- ---------------
Total other income (expense) (71,676) (451,041)
--------------- ---------------
Loss before provision for income taxes (973,438) (1,654,342)
Provision for federal income expenses - -
Net loss before losses of unconsolidated affiliates (973,438) (1,654,342)
Equity in loss of unconsolidated
affiliates (note 3) (103,462) (35,845)
--------------- ---------------
Net loss $ (1,076,900) $ (1,690,187)
=============== ===============
Basic earnings per common share:
Loss from operations $ (0.14) $ (0.19)
=============== ===============
Net loss $ (0.15) $ (0.27)
=============== ===============
Weighted average number of shares 7,106,638 6,376,647
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
*begin 8 pt type*
<TABLE>
Additional Stock Total
Preferred Common Paid-in Accumulated Subscription Stockholders'
Stock Stock Capital Deficit Receivable Equity
------------ ------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 5,995 $ 4,100,799 $(2,686,078) (8,500) $ 1,412,216
Issuance of preferred
stock Series A 1,250 - 978,246 - - 979,496
Issuance of common stock
for cash - 118 99,882 - - 100,000
Issuance of common stock
for services - 621 293,447 - - 294,068
Issuance of common stock
for purchase of
subsidiary - 100 62,900 - - 63,000
Amounts due from stockholders - - (1,000) - - (1,000)
Net loss - - - (1,690,187) - (1,690,187)
------------ ------------ ------------ ------------ ------------- --------------
Balance, December 31, 1998 1,250 6,834 5,534,274 (4,376,265) (8,500) 1,157,593
Issuance of common stock
for services - 483 161,627 - - 162,110
Issuance of common stock
for cash - 559 348,191 - - 348,750
Net loss - - - (1,075,265) - (1,075,265)
------------ ------------ ------------ ------------ ------------- --------------
Balance, December 31, 1999 1,250 7,876 $ 6,044,092 $(5,451,530) $ (8,500) $ 593,188
============ ============ ============ ============ ============= =============
</TABLE>
*end 8pt type*
See accompanying notes to consolidated financial statements.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,075,265) $ (1,690,187)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 111,421 99,937
Gain on sale of investment in
unconsolidated affiliate - (37,121)
Loss realized on disposition of subsidiary - 6,028
Equity in loss of unconsolidated affiliates 103,462 35,845
Write-off of advances to affiliate - 557,145
Provision for doubtful accounts - 76,815
Issuance of common stock for services 162,110 294,068
(Increase) decrease in accounts receivable (43,044) 10,098
Increase in receivable from Channel Freeze (274,910) -
Decrease in receivable from related party 71,306 -
Decrease in interest receivable 9,918 -
Decrease in refundable income taxes 71,934 -
(Increase) decrease in inventories 121,706 (87,617)
Increase in prepaid expenses (6,836) (49,349)
Increase (decrease) in accounts payable
and accrued expenses (25,401) 66,007
Increase in commissions payable 25,058 42,240
Decrease in federal income taxes payable - (74,156)
--------------- ---------------
Net cash used in operating activities (748,541) (750,247)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment - (3,637)
Cash received from acquired subsidiaries - (572,095)
Proceeds from sale of investment in
unconsolidated affiliate - 44,984
Cash released from escrow related to sale
of subsidiary - 200,000
Proceeds from sale of securities available for sale 32,500 (234,152)
Release of restriction on cash 400,000 -
Purchase of securities available for sale - 81,716
Increase in advances from affiliate 365,254 -
Decrease in advances to affiliate - 160,347
--------------- ---------------
Net cash provided by (used in) investing activities 797,754 (322,837)
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Principal payments on long-term debt (2,464) -
Proceeds from short-term borrowings - 25,061
Principal payments on short-term notes payable (402,825) (11,966)
Proceeds from issuance of shares under
private placement 348,750 100,000
Proceeds from sales of preferred stock - 979,496
--------------- ---------------
Net cash provided by (used in) financing activities (56,539) 1,092,591
--------------- ---------------
Net increase (decrease) in cash (7,326) 19,507
Cash at beginning of year 21,781 2,274
--------------- ---------------
Cash at end of year $ 14,455 $ 21,781
=============== ===============
Supplemental schedule of cash flow information:
Interest paid $ 50,628 $ 25,261
=============== ===============
Cash paid for income taxes $ - $ 74,156
=============== ===============
Noncash investing activities:
Unrealized gain (loss) on securities
available for sale $ - $ 50
=============== ===============
Noncash financing activities:
Issuance of common stock for purchase of
subsidiary $ - $ 63,000
=============== ===============
Direct financing provided for investment
in unconsolidated affiliate $ - $ 300,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
PowerCold Corporation, formally International Cryogenic Systems Corporation,
(the Company) was incorporated on October 7, 1987 in the state of Nevada and
operates in one business market, the development, design, manufacture,
distribution, and servicing of refrigeration systems. The Company derives its
revenues from three principal product lines. The first is a line of evaporative
heat exchange systems for the HVAC and refrigeration and carbon dioxide system
design. As part of this product line, the company also provides operation,
maintenance, and safety seminars for ammonia refrigeration technicians and
supervisors. The third line is the design and production of unique products for
the refrigeration industry.
On December 28, 1992, The Company acquired the patent rights (U.S. Patent No.
4,928,492) and related engineering and technology to a process of quick freezing
food products, and cleaning and treating various nonfood products by using a
circulating cryogenic 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 in 1999 include
Technicold Services, Inc., RealCold Products, Inc., Nauticon Inc., and Rotary
Power Enterprise, Inc.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to ten years.
EARNINGS PER SHARE
Earnings (losses) per common share have been computed by dividing net earnings
(losses) by the weighted average number of common shares outstanding during the
respective periods.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
INVESTMENTS
Investments consist of marketable equity securities (common stock). Marketable
securities are stated at market value as determined by the most recently traded
price of each security at the balance sheet date.
Equity securities available for sale are carried at fair value. Unrealized
losses of such securities are included as a component of stockholders' equity.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as incurred. The
cost of intellectual property purchased from others that are immediately
marketable or that have an alternative future use are capitalized and amortized
as intangible assets. Capitalized costs are amortized using the straight-line
method over the estimated economic life of the related asset, typically 10
years. At December 31, 1999 and 1998, capitalized patent development costs, net
of amortization, were $374,003 and $441,078, respectively. Amortization expense
was $67,075 for the year ended December 31, 1999 and $67,075 for the year ended
December 31, 1998. The Company periodically reviews its capitalized patent
costs to assess recoverability based on the projected undiscounted cash flows
from operations. Impairments are recognized in operating results when a
permanent diminution in value occurs.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the customer.
Service revenue is recognized when services are performed and billable.
GOODWILL
Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill is amortized on a straight-line basis over 10 years. Amortization of
goodwill amounted to $10,527 for the years ended December 31, 1999 and 1998.
Accumulated amortization amounted to $52,634 and $42,108 at December 31, 1999
and 1998, respectively. The Company periodically reviews its goodwill to assess
recoverability based on projected undiscounted cash flows from operations.
Impairments are recognized in operating results when a permanent diminution in
value occurs.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
(2) 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 affiliate of $557,145 was written-off. Simco guarantees
the Company an 8% annual return on these funds. Simco paid interest to the
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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.
In additions, 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.
(3) ACQUISITIONS AND INVESTMENT IN AFFILIATE
ACQUISITION OF ROTARY POWER ENTERPRISE, INC.
Pursuant to the terms of the Rotary Power Enterprise, Inc. acquisition
agreement, effective October 1, 1998, the Company issued 100,000 shares of
common stock in exchange for 100% of the outstanding stock of Rotary Power
Enterprise, Inc. Rotary Power Enterprise, Inc. was formed during 1998 for the
purpose of developing a new product line for PowerCold. The acquisition
resulted in goodwill of $65,399, which is being amortized on a straight-line
basis over 10 years:
Purchase price $ 65,399
Fair value of net asset acquired -
----------
Excess of purchase price over fair value of
net assets acquired $ 65,399
======
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
INVESTMENT IN AFFILIATE
The Company formed Channel Freeze Technologies, Inc. (CFTI) in 1998 to
accommodate the acquisition of intellectual property assets related to Channel
Ice Technology. On September 15, 1998, the Company executed an Agreement to
acquire eighty percent (80%) of the assets of Channel Ice Technologies from SIR
Worldwide LLC for a cash payment of $850,000 and additional installment fee
payments of $5,950,000, plus stock options, and together with transfer of twenty
(20%) interest in CFTL.
The Company paid an initial partial down payment of $250,000 and an additional
$400,000, plus $3,750 in interest, of the $850,000 cash purchase price. A
liability in the amount of $200,000 and $300,000 is included in accounts payable
and accrued expenses at December 31, 1999 and 1998, respectively, for the
remaining balance of the $850,000 cash payment. Fee payments due for sales of
Channel Ice Technology units; either a 10% net fee payment for distributors or a
13% net sales fee payment for the basic sale of the net gross invoice price on
all Channel Ice Technology units sold. Stock options; to acquire 400,000 shares
of the common stock of PowerCold, par value $.001, at a price of $2.50 per
share, for a period not to exceed two (2) years from the date of closing.
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%.
The Company shall have the right to prepay any or all amounts owed. PowerCold
shall have exclusive right of first refusal and option to acquire all interest
in CFTI for a period not to exceed five years and for a price equal to the then
market value or as mutually agreed.
Financial information for Channel Freeze Technologies, Inc. is summarized below:
December 31,
-------------------------
1999 1998
--------- ----------
Current assets $ 16,452 $ 1,609
Noncurrent assets 779,746 836,869
--------- ----------
Total assets 796,198 838,478
Less current liabilities 355,568 93,548
--------- ----------
Equity $ 440,630 $ 744,930
========= ==========
Net loss $ 304,300 $ 105,069
========= ==========
(4) RESTRICTED CASH
Restricted cash at December 31, 1998, consisted of a certificate of deposit,
which collateralized short-term borrowings.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(5) 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 84,800 50,981
--------- ----------
Net property and equipment $ 24,301 $ 42,483
========= ==========
Depreciation expense for the years ended December 31, 1999 and 1998 was $33,819
and $20,700, respectively.
(6) 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.
(7) 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 years after December 31, 1999 are as
follows:
2000 $ 3,564
2001 2,783
2002 3,041
2003 3,785
---------
$ 13,173
=========
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(8) PREFERRED STOCK
The Company currently has 1,250,000 shares of preferred stock outstanding at
December 31, 1999. This stock is designated as Series "A" Convertible Preferred
Stock and was issued to a single investor. This stock has a par value of $.001
per share and a stated value of $.80 per share in liquidation and has preference
over common stock in liquidation.
The stock is convertible at the option of the holder at a rate determined by
dividing $1.00 by the conversion price. Each share of stock shall automatically
be converted into shares of common stock at the then effective conversion price
on September 14, 2002. Each share of the stock may, at the option of the
Company, be converted into shares of common stock at 120% of the then effective
conversion price.
Holders of Series "A" Convertible Preferred Stock are entitled to a number of
votes per share equal to the number of shares of common stock into which each
such share of Series "A" Convertible Preferred Stock held by such holder is
convertible at the time of such vote.
Each issued and outstanding share of Series "A" Convertible Preferred Stock
shall be entitled to receive cumulative preferential dividends, payable in cash
or common stock at the option of the Company, at the annual rate of $0.064 per
share, payable quarterly.
(9) STOCK BASED COMPENSATION
During 1999, the Company authorized and issued a total of 1,004,558 options at
an exercise price of $.50 per share for employee compensation. During 1998, the
Company authorized and issued a total of 600,000 options at an exercise price of
$.60 per share, for employee compensation. The Company also issued a total of
$460,000 options during 1998 for goods and services. Since the Company accounts
for the compensation cost associated with the issuance of stock options to
employees for compensation under APB Number 25, no compensation cost was
recognized in income during the years ended December 31, 1999 and December 31,
1998.
Stock and stock options issued goods and services are valued based upon the fair
value of the consideration received.
Total and Weighted Average Exercise Price of Options
- -----------------------------------------------------------
Weighted Average
1999 Total Exercise Price
- -------------------------- ------------ ---------------
Outstanding at January 1, 1999 1,660,000 $1.24
Outstanding at December 31, 1999 2,554,558 1.00
Exercisable at December 31, 1999 2,554,558 1.00
Granted at December 31, 1999 2,554,558 1.00
Exercised at December 31, 1999 - -
Forfeited at December 31, 1999 - -
Expired during 1999 - -
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
Weighted Average
1999 Total Exercise Price
- -------------------------- ------------ ---------------
Outstanding at January 1, 1998 300,000 $1.75
Outstanding at December 31, 1998 1,660,000 1.24
Exercisable at December 31, 1998 1,660,000 1.24
Granted at December 31, 1998 1,660,000 1.24
Exercised at December 31, 1998 - -
Forfeited at December 31, 1998 - -
Expired during 1998 - -
Valuing per SFAS 123, par 22, the weighted average exercise price is $1.00 at
December 31, 1999. Average price for 1999 was $.90 with validity of .47. The
fair value of options granted during 1999 was approximately $250,000.
(10) REPORTABLE SEGMENTS
PowerCold currently has four reportable segments: Nauticon Inc., RealCold
Products, Inc.,Technicold Services, Inc., and Rotary Power Enterprise, Inc.
Nauticon Inc. offers a product line of evaporative heat exchange systems for
HVAC and refrigeration industry. Technicold Services, Inc. offers consulting
engineering services, including process safety management compliance and ammonia
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. Segment information for the years ended
December 31, 1999 and 1998 as follows:
December 31,
-------------------------
Net Revenues 1999 1998
--------- ----------
Nauticon Inc. $ 91,006 $ 112,522
RealCold Products Inc. 212,596 224,477
Technicold Services, Inc. 50,611 105,173
Rotary Power Enterprises, Inc. 187,025 -
--------- ----------
$ 541,238 $ 442,172
========== ==========
Operating loss
Nauticon Inc. $(290,568) $(461,212)
RealCold Products Inc. (213,306) (79,689)
Technicold Services, Inc. 7,538 (5,943)
Rotary Power Enterprises, Inc. (35,597) (7,671)
Corporate expenses (368,194) (648,786)
--------- ----------
$(900,127) $(1,203,301)
========== ==========
Identifiable assets
Nauticon Inc. $ 385,927 $ 545,060
RealCold Products Inc. 144,651 76,304
Technicold Services, Inc. 59,473 240,359
Rotary Power Enterprises, Inc. 129,993 96,563
Corporate 1,012,780 1,363,684
--------- ----------
$1,732,824 $2,321,970
========= =========
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(11) FEDERAL INCOME TAX EXPENSE
There is no federal income tax expense for the year ended December 31, 1999.
Income tax expense from continuing operations differs from the amount, which
would be provided by applying the statutory federal income tax rates because of
the following:
Year ended December 31,
--------------------------
1999 1998
------------ ------------
Computed at the expected statutory rate $ (366,528) $ (574,664)
Nondeductible items and other permanent
differences 938 654
Change in valuation allowance 365,590 574,010
------------ ------------
Prior year unrecognized deferred tax asset $ - $ -
============= ===========
The temporary differences that result in deferred tax assets are as follows:
December 31,
-------------------------
1999 1998
---------- -----------
Deferred tax assets:
Accrued wages payable to shareholder $ - $ -
Write-off of intangible assets 334,686 334,686
Losses related to unconsolidated affiliate 413,700 413,700
Loss on write-off of impaired stock 189,430 189,430
Net operating loss carryforward 852,199 486,609
---------- -----------
Gross deferred tax assets 1,790,015 1,424,425
Valuation allowance (1,790,015) (1,424,425)
---------- -----------
Net deferred tax assets $ - $ -
========== ===========
A $961,085 tax net operating loss was incurred for the year-end December 31,
1999. The Company's net operating loss carryforwards for income tax purposes is
approximately $1,790,015, of which $358,015 expires in 2019, $1,055,000 in 2018,
and $377,000 in 2012.
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(12) 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.
(13) COMMITMENTS
OPERATING LEASES
The Company leases certain sales offices, plant space, and equipment under
operating lease agreements, which expire at various times throughout 2002.
Total rent expense was $95,322 and $100,902 in 1999 and 1998 respectively.
Future minimum rental commitments as of December 31, 1999 were as follows:
Year ending December 31,
2000 $ 102,934
2001 100,231
2002 50,891
----------
$ 254,056
==========
(14) LITIGATION
Management of the Company is seeking to recoup damages from the former president
and shareholder of Nauticon Inc. in connection with Nauticon Inc.'s acquisition
by the Company. Related to this matter is the ownership of certain patents
($441,078 and $508,153 carrying value at December 31, 1998 and 1997
respectively) and the amount of compensation owed to the former Nauticon Inc.
shareholder ($88,600 accrued and included in accounts payable and accrued
expenses at December 31, 1998 and 1997). The former Nauticon Inc. shareholder
was granted options to purchase 133,763 shares of common stock of the Company at
$1.50 per share (increasing to $2.00 per share before expiring in July 2000).
Nauticon Inc. is a defendant in several lawsuits filed by suppliers. Nauticon
Inc. denies any liability. Counsel has advised that it is not possible to
project the outcome at this time. It is the opinion of management that this
matter will not have a material adverse effect on the Company's financial
position or results of operations.
(15) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years and the Company has used
substantial amounts of working capital in its operations. At December 31, 1999,
current liabilities exceed current assets by $531,997 and intangible assets
<PAGE>
POWERCOLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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. 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.
(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.
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POWERCOLD CORPORATION
Dated: May 24, 2000
/s/ Francis L. Simola
By: --------------------------
Francis L. Simola
President and (Chief Executive Officer)
