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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 333-19584
POWERCOLD CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2582701
(State of Incorporation) (IRS Employer Identification No.)
115 Canfield Road, La Vernia, Texas 78121
(Address of principal executive offices) (Zip Code)
Registrant'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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ x ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. $22,545,000.00
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 16,027,882
Documents Incorporated by Reference: None
1
INDEX
PART I Page
Item 1. Business 3
Item 2. Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 13
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 19
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 20
Signatures 49
2
PART I
ITEM 1. BUSINESS
GENERAL
PowerCold Corporation 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 system applications. 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. Air Condition
and refrigeration is the most energy intensive operation most business operators
face. PowerCold has the opportunity to provide products and systems that
customers require to take 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 air condition,
refrigeration and power systems. PowerCold has the products, experience and
creative ability to package unique energy saving 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 industry 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.
Subsequent to filing this Form 10K, the company has reorganized into four
subsidiary companies, effective January 1, 2002: PowerCold Products, Inc.,
supporting all "Cold" related products, Power Sources, Inc., supporting all
"Power" related products, Ultimate Comfort Systems, Inc., supporting proprietary
applications for heating, ventilating and air conditioning systems (HVAC), and
Technicold Services, Inc. provides engineering consulting services to the air
condition, refrigeration and power industries.
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 have operated as wholly
owned subsidiaries of PowerCold; RealCold Products, Inc., Technicold Services,
Inc. and Nauticon, Inc. RealCold Products designs and manufactures air condition
and refrigeration systems, Technicold Services provide consulting services for
commercial refrigeration and freezing systems for use worldwide, and Nauticon
owns a unique product line of patented evaporative condensers and heat exchange
systems for the HVAC and refrigeration industry.
3
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 provided 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 was 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
received 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. Mr. Dunne is no longer is a director of the Company. The Company
has since written off the patent and dissolved the cryogenic business because of
the lack of food grade Freon, no longer a viable and economic refrigerant.
SUBSIDIARY COMPANIES
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, Inc.
offers a patented product line of evaporative condensers and 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 combined the
technical expertise and experience of RealCold with the marketing experience of
Wittemann. The industry combination of technology, sales and manufacturing
experience proved to be a successful venture. Subsequently, Wittcold Systems,
Inc., a division of Wittemann Company, acquired RealCold Systems in July 1997.
In August 1996, PowerCold acquired Nauticon Inc., a company that manufactured
and marketed a product line of innovative patented evaporative condensers and
heat exchange systems for the HVAC and refrigeration industry, representing over
five years of development. The assets include United States Patent 5,501,269
issued on March 26, 1996, and entitled Condenser Unit, and United States Patent
5,787,722 issued August 4, 1998, and entitled Heat Exchange Unit. 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 condensers and heat
exchange systems 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
4
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 air condition industry; an industry that faces serious changes
for the first time in years due to energy and environmental concerns worldwide.
The three operating subsidiaries, Technicold Services, Inc., RealCold Products,
Inc. and Nauticon Inc., supported by the parent public entity, PowerCold,
supported 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 La Vernia, Texas. Nauticon supports all evaporative
heat exchange and refrigeration systems and operations from their corporate
facility in La Vernia, 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. Represented agents and distributors support sales and
marketing activities.
Subsequently, effective January 1, 2002, RealCold Products, Inc. name was
changed to PowerCold Products, Inc. and Nauticon, Inc. was dissolved as an
operating entity. The Nauticon product line is being supported under PowerCold
Products, Inc.
PowerCold Products, Inc. - designs, manufactures and markets a proprietary
product line of patented evaporative condensers and heat exchange systems for
the heating, ventilation and air condition (HVAC) and refrigeration industry.
PowerCold Products supports the Company's Nauticon and EV Chill product lines by
engineering design, manufacturing and packaging its products. PowerCold Products
also supports custom refrigeration systems by engineering, designing and
packaging special customer orders. There are proposed alliances with other
refrigeration companies, whereas PowerCold Products will package various
components adding value for a total turnkey air condition or refrigeration
system.
The Nauticon patented products are innovative in design, use new material
technology, are simple to manufacture, and have a low operating cost. They are
used for evaporative condensers, fluid coolers, sub-coolers commercial and
industrial refrigeration system components, liquid recirculating packages and
custom refrigeration products for commercial and industrial use. Nauticon
products can reduce power cost in the air condition and refrigeration industry
by up to 40% making these units contribute to the utilities' needs to reduce
power demand.
The Chiller line of products includes: EV-Chill: water chillers, namely, water
chilling and refrigeration systems utilizing water evaporative condensers for
commercial and industrial use; EV-Cool: air conditioning units utilizing
evaporative condensers for commercial and industrial use; EV-Dry:
dehumidification system utilizing evaporative fluid coolers to cool warm dry air
for commercial and industrial use; EV-Frig: refrigeration condensing units
utilizing evaporative condensers for commercial and industrial use.
5
Power Sources, Inc. - effective December 1, 2001, the Company acquired 100% of
Power Sources, Inc. Power Sources designs and markets cogeneration systems,
which use engine-driven generators to produce both electricity and thermal power
as a way of cutting power costs. The business is a major cogeneration provider
in the New York metropolitan area. Technology and Assets assigned by UMRC to the
newly formed Power Sources, Inc. includes; pertinent selected technology and
relevant intellectual property for cogeneration systems, and all pertinent
outstanding UMRC's cogeneration systems customer contracts. The cogeneration
systems technology will be marketed and sold direct to customers by and through
Power Sources, Inc. and will also be supported, as needed, by PowerCold and its
related subsidiary companies.
Cogeneration systems, also known as Distributed Generation, use engine driven
generators to produce both electric power and thermal energy that have typically
achieved paybacks based on energy and electric cost savings in 18 to 36 months.
As a result of the acquisition, PowerCold will be able to offer customers
complete self-contained heating/chilling units to reduce peak power requirements
as well as the ability to self-generate all the power needed for a commercial
building. Units range in size from 100 kilowatts to 2 megawatts. Customers can
expect to reduce power or energy costs by 40% or more.
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. Packaged industrial refrigeration systems produced by PowerCold
Products will now use natural gas rotary engines instead of competitor engines.
A packaged, commercial air conditioning system using the natural gas rotary
engine and the Nauticon evaporative condenser provides major energy savings for
large commercial building facilities.
Subsequently, effective January 1, 2002, Rotary Power Enterprise, Inc. was
dissolved as an operating entity. The assets of Rotary Power Enterprise were
transfer into Power Sources, Inc. acquired in December 2001 to support the
Company's "Power" business operations.
Rotary Power Enterprise, Inc. was formed in September 1998 as a new PowerCold
entity to acquire the Natural Gas Business from Rotary Power International, Inc.
PowerCold is also a major shareholder of Rotary Power International, Inc.
(OTCC:RPIN). The agreement included: the business assets including intellectual
property, inventory and packaging capability; North American rights to the small
65 series Mazda natural gas engine block, subject to a new Mazda Agreement; and
a Distributor Agreement for the Rotary Power 580 series engines form Rotary
Power International, Inc. In August 2000 Rotary Power Enterprise signed a
non-exclusive manufacturing license agreement for the 580 series natural gas
engine with Rotary Power International.
Subsequently, effective January 1, 2002, Channel Freeze Technologies, Inc. was
dissolved as an operating entity. The Company is negotiating with the previous
owners for the technology. Channel Freeze Technologies, Inc. was formed in
September 1998, as a PowerCold subsidiary, to acquire certain assets of Channel
Ice Technologies. The technology includes a proprietary patent for an economical
multi-purpose freezing system. The company is allocating all its resources into
its current product line, therefore, management decided there was no synergy for
the Channel Freeze technology and does not vision the product in the Company's
future business plans.
6
Ultimate Comfort Systems, Inc. - On December 1, 2000, the Company acquired the
technology rights, patent rights, and license agreement for integrated piping
technology for a heating and air conditioning system. This technology was
transferred into the newly formed wholly owned subsidiary of the Company,
Ultimate Comfort Systems, Inc. This acquisition gave the Company exclusive,
non-transferable United States transfer rights to the technology and all related
assets.
TRADEMARKS: The Company filed application for registration of a
trademark/service mark for the following products:
Nauticon: manufacturing and packaging of evaporative condensers, fluid coolers;
commercial and industrial refrigeration system components, liquid recirculating
packages and custom refrigeration products for commercial and industrial use.
EV-Chill: water chillers, namely, water chilling and refrigeration systems
utilizing water evaporative condensers for commercial and industrial use.
EV-Cool: air conditioning units utilizing evaporative condensers for commercial
and industrial use.
EV-Dry: dehumidification system utilizing evaporative fluid coolers to cool warm
dry air for commercial and industrial use.
EV-Frig: refrigeration condensing units utilizing evaporative condensers for
commercial and industrial use.
EpowerRX.net: providing consulting and engineering services in the field of
distributed power generation, electrical load management, air conditioning and
refrigeration systems, namely, promoting and providing information on and links
to the resources of others pertaining to distributed power generation,
electrical load management of commercial and industrial refrigeration, air
conditioning and dehumidification systems for commercial and industrial use by
means of a global computer network
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. The Company wrote off the
original investment in Rotary Power, and currently owns 1,940,000 shares of
Rotary Power International, Inc. (OTCC-RPIN)
7
STRATEGIC ALLIANCE
Alturdyne - An innovative manufacturer of standby diesel generator sets, turbine
and rotary generator sets, pumps and natural gas engine-driven chillers. 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 available to support
the design and production of rotary engines and gensets for the Company.
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 175 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 50 years technical experience in
refrigeration engineering and design; a well-known expert consultant in the
refrigeration industry. Related management has over 60 years experience in
refrigeration engineering and sales and marketing. The subsidiary companies
include experienced marketing and technical management and support personnel.
The Company's management objective is to become a major force in the
multi-billion dollar air condition, refrigeration industry and power business,
and providing proprietary niche products. The Company's goal is to achieve
profitable growth and increase shareholder value by increasing its line of
superior products and services, through evolving product enhancements and
strategic alliances with related products and companies.
The Company maintains corporate offices in La Vernia, Texas, and an office in
Philadelphia, Pennsylvania. Administrative, engineering and manufacturing
facilities are located in La Vernia, Texas. Marketing offices are located in San
Antonio, Texas, Wood Ridge, New Jersey, Babb, Montana, and Tampa Florida
PRODUCTS:
NAUTICON EVAPORATIVE CONDENSERS - The Company envisions an enormous worldwide
market demand for its proprietary evaporative condensing systems use in air
conditioning systems. The Nauticon patented products are innovative in design,
use new material technology, are simple to manufacture, and have a low operating
cost. They are used for evaporative condensers, fluid coolers, sub-coolers
commercial and industrial refrigeration system components, liquid recirculating
packages and custom refrigeration products for commercial and industrial use.
Nauticon products can reduce power cost in the air condition and refrigeration
industry by up to 40% supporting the utilities' needs to reduce power demand.
Unique low cost manufacturing processes and techniques are common with both
material and low cost labor. Nauticon units are superior to other industry
products; they are self-cleaning, chemically free low-maintenance evaporative
condensers. Nauticon's primary advantage is energy savings, yielding extremely
high EER ratings to not only better, but to offset the regulated change to low
efficiency refrigerants. 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.
8
COMPETITION - varies from the small to the very large air condition manufactures
in the industry, all competing for this multi billion-dollar industry. The
Company believes that it has a truly unique product concept that serves a very
wide arena of commercial applications (20 - 1,000 ton) for the national market
as well as the international market. There is no competition from one
manufacturer with this range of evaporative condensers. 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.
Direct competitive systems are marketed by some of the major competitors in the
industry; large systems by Evapco and BAC, smaller systems by Recold. These
competitors are well established and have substantially greater financial and
other resources. But no one has the patented features of the Nauticon unit; it
is the only self-cleaning, chemically free low-maintenance evaporative condenser
available.
EV CHILLER SYSTEMS - PowerCold Products designs, packages and markets unique
chiller systems utilizing the Nauticon evaporative condensers (EV Chillers).
Four chiller systems are made available that meet a wide variety of industry
requirements for HVAC and refrigeration system installations. EV-Chill: water
chillers, namely, water chilling and refrigeration systems utilizing water
evaporative condensers for commercial and industrial use. EV-Cool: air
conditioning units utilizing evaporative condensers for commercial and
industrial use. EV-Dry: dehumidification system utilizing evaporative fluid
coolers to cool warm dry air for commercial and industrial use. EV-Frig:
refrigeration condensing units utilizing evaporative condensers for commercial
and industrial use.
COMPETITION - varies from the small to the very large air condition manufactures
in the industry, all competing for this multi billion-dollar industry. There is
no competition from one manufacturer with this range of chillers using the
patented Nauticon evaporative condensers. Most of the 6 -7 industry vendor's
including the large manufacturers such as Carrier, Trans and York are well
established and have substantially greater financial and other resources. But no
one has the specific patented features of the Nauticon unit and the unique
design features of the EV Chiller line of products.
HVAC SYSTEMS - PowerCold's Ultimate Comfort Systems owns the exclusive U.S.
technology rights for an integrated piping technology system for heating,
ventilating and air conditioning systems (HVAC). The first principle of the
patented HVAC system are the existing pipes, as the delivery system, to provide
hot and chilled water to individual fan coil units. The proprietary technology
is designed to utilize the fire sprinkler piping to circulate the cooling water
around the building. In addition, the domestic hot water lines also distribute
heating energy.
The dual use of the piping system provides cost effective, high quality,
compressor-free systems to the hospitality industry. Guess rooms offer the
precise comfort of four-pipe air conditioning without the capital cost expense.
Installation and construction costs are comparable to conventional
through-the-window Position Terminal Air Conditioners (PTAC) units. The
Ultimate Comforts System also avoids the discomfort of poor temperature/humidity
control and sleepless nights from noisy compressor cycling.
High quality chiller systems, manufactured by PowerCold Products provide even
more economical installations with their energy efficient design features and
unsurpassed reliability and maintainability. PowerCold's HVAC system provides
energy saving operating advantages; as electric deregulation increases the cost
of operating air conditioning, its efficient use of energy provides an
increasing competitive cost advantage.
9
COMPETITION - There is no competition from a one-source vendor for the
specialized hospitality market to support a total integrated HVAC system. No
one has a patent integrated piping system combined with its own evaporative
chiller systems including the patent Nauticon evaporative condenser. Most of
the 6 -7 industry vendor's including the large manufacturers such as Carrier,
Trans and York are well established and have substantially greater financial and
other resources to produce a chiller system. But no one has the specific
patented features to produce and install a complete turn key HVAC system; a
patented integrated piping system, patented Nauticon evaporative condensers, and
the unique design features of the EV Chill product.
PowerCold's Ultra-Efficient HVAC and Refrigeration Technologies Can
Significantly Cut Peak Power Demand and Costs: Deregulated electricity during
the hot summer peak-power-demand-days can cost 10-100 times more than normal.
Commercial customers' demand-surcharges, which are based on their peak-power
usage during the 20-30 days per year when temperatures soar to 95 + F, can
represent 30-50% of their total electric bill in some parts of the country.
Consequently, reducing peak power demand during these few days could
significantly reduce or eliminate surcharge costs. Commercial air conditioning
and refrigeration (accounting for $7 billion of 2000's $37 billion in peak-power
demand costs) are the Company's initial target markets. America is well
entrenched with air condition and refrigeration systems, but there is a great
niche market for the Company's unique and innovative evaporative condensers and
chiller products. PowerCold and its related entities have the refrigeration
engineering expertise and new innovative products that are needed and in demand
today to save significant energy costs for an industry that hasn't seen many
changes in the last 50 - 60 years.
ROTARY POWER NATURAL GAS ENGINES:
Natural Gas Rotary Engine (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. The
Company 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 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.
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580 SERIES NATURAL GAS ENGINE
The 580 Series family of twin rotor Natural Gas Rotary Engine, which is 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 developments has been for a twin rotor
engine rated at 500HP at 36OORPM. This will provide the power to generators for
peak power shaving. The four rotor (composed of two 5OOHP modules) rated at
1000HP and the six rotor (three 5OOHP two rotor modules) rated at 1 5OOHP
complete the family. The 580 natural gas engine runs on low-pressure natural gas
and does not use expensive high-pressure fuel injection equipment and costly
turbochargers found on diesel engines, thus offering a very competitive natural
gas power plant for industrial applications.
ITEM 2. PROPERTY
The Company maintains its corporate office in La Vernia, Texas, and an executive
office in Philadelphia, Pennsylvania. The La Vernia facility is 47,000 sq. ft.
and houses administrative, engineering and manufacturing operations. Sales and
marketing offices are located in San Antonio, Texas; Wood Ridge, New Jersey;
Babb, Montana; and Tampa, Florida.
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
On 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
The Annual Meeting of Shareholders was held on November 15, 2000 at the
Company's facility in La Vernia, Texas. Proposal No. 1 was to ratify the
selection of the independent auditors of the Company. Proposal No. 2 was to
ratify the adoption of the 2002 Company stock option plan. Proposal No. 3 was
to authorize to vote on other matters. Total voted shares represented by proxy
was 9,762,131 and the percentage of voted shares was 64.36%. The outstanding
voted shares were 15,167,377. Election results where certified by the Company's
stock transfer agent, Computershare Investor Services.
Proposal No. 1: For Against Abstain
--------- ------- -------
9,703,395 3,100 55,636
Proposal No. 2: For Against Abstain Not Voted
--------- ------- ------- ----------
7,649,737 58,618 35,568 2,018,208
Proposal No. 3: For Against Abstain
--------- ------- -------
9,672,645 49,648 39,838
11
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.
2000 BID 2000 ASK
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter 2.28 .50 2.40 .56
Second Quarter 2.18 .75 2.31 .87
Third Quarter 2.43 1.12 2.50 1.31
Fourth Quarter 1.43 .56 1.56 .68
2001 BID 2001 ASK
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter 1.28 .59 1.41 .59
Second Quarter 1.31 .66 1.35 .70
Third Quarter 1.25 .71 1.25 .71
Fourth Quarter 2.59 .75 2.59 .80
(b) Holders: As of December 31, 2001, there were approximately 753 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.
During the year ended December 31, 2001, the Company issued for cash, 1,836,214
shares of common stock with 603,083 warrants attached. The stock was valued at
$1,284,020 and the warrants were valued at $405,480. These warrants have an
average exercise price of $1.10 and expire between May 31, 2002 and December 6,
2003. An additional 308,603 shares of common stock were issued for cash of
$150,833. The Company issued 85,679 shares of common stock as commissions to
various promoters for selling its stock. This stock was valued at the fair
market value of $148,503. The Company issued 385,500 shares of common stock for
consulting services valued at $115,000, general services valued at $25,000 and
compensation valued at $56,500. The Company issued 372,081 shares of common
stock to repay loans in the amount of $207,500 and 240,419 common stock shares
for interest and financing expenses of $122,250. Additionally 45,000 common
stock shares were issued for $22,500 in prepaid rent, 35,000 shares were issued
to satisfy $26,418 of accounts payable and 50,000 common stock shares valued at
$108,500 to acquire Power Sources, Inc.
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,
1997 through December 31, 2001 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.
12
SUMMARY STATEMENT OF OPERATIONS (In thousands, except per share data)
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenues $ 882 $ 395 $ 562 $ 442 $ 393
Operating (loss) $(2,260) $(1,412) $(1,199) $(1,203) $(1,713)
Net Income (loss) $(2,238) $(1,319) $(1,253) $(1,690) $(2,720)
Net Income (loss)
per share $ (0.16) $ (0.13) $ (0.18) $ (0.27) $ (0.46)
Weighted average
number of shares 15,005 10,157 7,107 6,377 5,893
SUMMARY BALANCE SHEET (In thousands, except per share data)
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total assets $ 4,058 $ 1,999 $ 1,582 $ 2,322 $ 2,229
Total liabilities $ 1,318 $ 569 $ 1,220 $ 1,164 $ 817
Long term debt $ 0 $ 6 $ 0 $ 0 $ 0
Shareholders' equity $ 2,339 $ 1,255 $ 3,061 $ 1,158 $ 1,412
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
Subsequent to the filing of this Form 10K, the company has reorganized into four
subsidiary companies, effective January 1, 2002: PowerCold Products, Inc.,
supporting all "Cold" related products, Power Sources, Inc., supporting all
"Power" related products, Ultimate Comfort Systems, Inc., supporting proprietary
applications for heating, ventilating and air conditioning systems (HVAC), and
Technicold Services, Inc. provides engineering consulting services to the air
condition, refrigeration and power industries.
PowerCold Products, Inc. - designs, manufactures and markets a proprietary
product line of patented evaporative condensers and heat exchange systems for
the heating, ventilation and air condition (HVAC) and refrigeration industry.
PowerCold Products supports the Company's Nauticon and EV Chill product lines by
engineering design, manufacturing and packaging its products. PowerCold Products
also support custom refrigeration systems by engineering, designing and
packaging special customer orders. There are proposed alliances with other
refrigeration companies, whereas PowerCold Products will package various
components adding value for a total turnkey air condition or refrigeration
system. PowerCold Products currently has over $2M in back log orders and
expected final customer contracts for chiller systems and evaporative
condensers.
13
The Nauticon patented products are innovative in design, use new material
technology, are simple to manufacture, and have a low operating cost. They are
used for evaporative condensers, fluid coolers, sub-coolers commercial and
industrial refrigeration system components, liquid recalculating packages and
custom refrigeration products for commercial and industrial use. Nauticon
products can reduce power cost in the air condition and refrigeration industry
by up to 40% making these units contribute to the utilities' needs to reduce
power demand. PowerCold has invested over $1M in operating capital into the
Nauticon product over the last few years. Initially major operating and legal
expenses due to previous inept Nauticon management hindered sales and
production. Therefore Nauticon did not meet its sales and revenue projections
over the past few years. Subsequently during 2001 the Nauticon product
technology was greatly enhance from a single 40-ton evaporative condenser up to
five multi configured units producing up to 1,000 ton of air conditioning.
Management believes that Nauticon evaporative condenser will more than meet its
sales objectives in 2002. There are some $1.7 million of proposed quotations
currently out to customers. There are over 200 units installed in various
commercial buildings.
The Chiller line of products includes: EV-Chill: water chillers, namely, water
chilling and refrigeration systems utilizing water evaporative condensers for
commercial and industrial use; EV-Cool: air conditioning units utilizing
evaporative condensers for commercial and industrial use; EV-Dry:
dehumidification system utilizing evaporative fluid coolers to cool warm dry air
for commercial and industrial use; EV-Frig: refrigeration condensing units
utilizing evaporative condensers for commercial and industrial use.
Power Sources, Inc. - effective December 1, 2001, the Company acquired 100% of
Power Sources, Inc. Power Sources designs and markets cogeneration systems,
which use engine-driven generators to produce both electricity and thermal power
as a way of cutting power costs. The business is a major cogeneration provider
in the New York metropolitan area, with 42 projects completed in the region in
the past four years. Technology and Assets assigned by UMRC to the newly formed
Power Sources, Inc. includes; pertinent selected technology and relevant
intellectual property for cogeneration systems, and all pertinent outstanding
UMRC's cogeneration systems customer contracts. The cogeneration systems
technology will be marketed and sold direct to customers by and through Power
Sources, Inc. and will also be supported, as needed, by PowerCold and its
related subsidiary companies. UMRC may also support Power Sources, Inc. in
marketing and selling the cogeneration system technology. Customer contracts
will be subcontracted to UMRC for design, engineering and installation. Power
Sources, Inc. will pay UMRC 85% of the customer contract for its services, and
Power Sources, Inc. will keep 15% of the customer contract, as its profit. The
parties have signed a mutual agreement on confidentiality, non-circumvention and
non-disclosure.
Acquired in the transaction for Power Sources were trade receivables of
$921,050, which were December 31, 2001 revenues, with $721,392 accounts payable
attached and contracts in place of $331,175 with $281,499 accounts payable
attached. The Company also acquired technology rights valued at $222,666. There
is over $8 million in bid proposals out to fourteen prospective customers in the
New York metropolitan area. The company anticipates that Power Systems will
generate major growth in revenue and profits from cogeneration business over the
next few years.
14
Cogeneration systems, also known as Distributed Generation, use engine driven
generators to produce both electric power and thermal energy. Over the past four
years, UMRC has completed 42 cogeneration projects in the greater New York area
that have typically achieved paybacks based on energy and electric cost savings
in 18 to 36 months. As a result of the acquisition, PowerCold will be able to
offer customers complete self-contained heating/chilling units to reduce peak
power requirements as well as the ability to self-generate all the power needed
for a commercial building. Units range in size from 100 kilowatts to 2
megawatts. Customers can expect to reduce power or energy costs by 40% or more.
During 2002, Rotary Power Enterprise, Inc. will be dissolved as an operating
entity. The assets of Rotary Power Enterprise were transfer into Power Sources,
Inc. a new corporation formed in December 2001 to support the Company's "Power"
business operations.
Rotary Power Enterprise, Inc. was formed in September 1998 as a new PowerCold
entity to acquire the Natural Gas Business from Rotary Power International, Inc.
PowerCold is also a major shareholder of Rotary Power International, Inc.
(OTCC:RPIN). The agreement included: the business assets including intellectual
property, inventory and packaging capability; North American rights to the small
65 series Mazda natural gas engine block, subject to a new Mazda Agreement; and
a Distributor Agreement for the Rotary Power 580 series engines form Rotary
Power International, Inc. In August 2000 Rotary Power Enterprise signed a
non-exclusive manufacturing license agreement for the 580 series natural gas
engine with Rotary Power International.
The Company formed Alturdyne Energy Systems, Inc. (AES) in September 1999 to
support the natural gas engine driven water chiller business. Subsequently AES
has been dormant subject to further negotiations. The Company plans to acquire
the chiller business from Alturdyne, which has over (140) customer chiller
systems installed and has over $3 million in proposal bids out to customers.
The Company has a Strategic Alliance with Alturdyne for manufacturing and
marketing of its respective products. Alturdyne is an innovative manufacturer
of standby diesel generator sets, turbine and rotary generator sets, pumps and
natural gas engine-driven chillers. Alturdyne's strength lies in its power
engineering personnel, who are knowledgeable in the generator set business,
telephone company applications, small turbines, rotaries and chillers. Their
capabilities and experience in developing low cost, customer power packages that
meet specific needs have established Alturdyne's excellent reputation in the
industry. Alturdyne's added expertise is in the design and production of rotary
engines.
During 2002, Channel Freeze Technologies, Inc. may be dissolved as an operating
entity. The Company is negotiating with the previous owners of the technology.
Channel Freeze Technologies, Inc. was formed in September 1998, as a PowerCold
subsidiary, to acquire certain assets of Channel Ice Technologies. The
technology includes a proprietary patented for an economical multi-purpose
freezing system. Because the company is allocating all its resources into its
current product line, management decided there is limited synergy with the
Channel Freeze technology and does not envision the continuing development of
these products.
Ultimate Comfort Systems, Inc. - On December 1, 2000, the Company acquired the
technology rights, patent rights, and license agreement for integrated piping
technology for a heating and air conditioning system. This technology was then
placed into a newly formed wholly owned subsidiary of the Company, Ultimate
Comfort Systems, Inc. This acquisition gave the Company exclusive,
non-transferable United States transfer rights to the technology and all related
assets. There are 15 installations in hotel/motels and extended care facilities.
15
Some of the installations are saving over 40% energy costs. During 2001 the
Company invested some $300,00 supporting engineering and marketing programs for
major hotel projects. Subsequently there is an order backlog of over $1.5
million in engineering design contracts and final equipment configuration orders
for new hotel buildings. There are over $2.3 million in proposed sales
quotations out for twelve new hotel sites for major hotel chains. The company
anticipates that Ultimate Comfort Systems will have major growth in revenue and
profits for this unique proprietary application over the next few years.
The following table sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------ ----------- ------------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 94.1 71.7 (0.07)
Gross margin 5.9 28.3 (0.07)
Operating expenses (262.1) (385.6) (213.4)
Operating income (loss) (256.2) (357.3) (222.9)
Net income (loss) (264.0) (357.3) (222.9)
COMPARABLE FISCAL 2001, 2000 AND 1999 RESULTS
The Company's Consolidated Statements of Operations for the fiscal year ended
December 31, 2001 compared to fiscal year ended December 31, 2000 and December
31, 1999:
Total revenue for 2001 increased 123.3% to $882,089 from $ 395,040 for 2000, and
in 1999 sales were $562,403; operating losses for 2001 increased 43.7% to
($2,260,002) from ($1,572,214) for 2000, and in 1999 operating losses were
($1,199,942); the net loss for 2001 increased 77% to ($2,328,402) or ($0.16)
from ($1,319,195) or ($0.13) per share for 2000, and in 1999 the net loss was
($1,253,395) or ($0.18) per share. Net loss per share was based on weighted
average number of shares of 15,005,371 for 2001, 10,156,76 for 2000, and
7,106,638 for 1999.
The company's revenue increased 123.3% in 2001 to $882,089. Eliminated in the
consolidation of PowerCold was PSI revenue for December 2001, of $921,050, which
is included in trade receivables. Sales were stalled in the fourth quarter due
to management's decision to revamp the Nauticon product line. The outcome is a
newly evolved Nauticon unit with nearly double its capacity - a patent has been
applied for on the new more efficient unit. Operating losses increased 43.7%
because of a sharp increase in research and development (new Nauticon units and
new EV chiller product line) and $125,000 in new advertising and marketing.
Increased operating expenses were also due to moving and setting up a new
manufacturing plant and operating two facilities for part of the year. Total
cost of revenue was primarily due to the increase in labor and material costs
for three new innovative chiller systems that were delivered to three different
customers requiring unique engineering features. The benefit of these new
systems created a standard modular chiller product line, whereas the company
expects to increase its operating margins by some 12% - 15%.
Included in the Company's Consolidated Balance Sheet as of December 31, 2001,
December 31, 2000 and December 31, 1999 respectively are: Total current assets
which increased 284.7% to $2,670,808 for 2001 from $694,301 for 2000 and in 1999
currant assets which were $270,958; total assets which increased 103% to
$4,057,916 for 2001 from $1,998,595 for 2000 and in 1999 total assets which were
16
$1,582,139; total liabilities which increased 131.8% to 1,318,010 for 2001 from
$568,650 for 2000 and in 1999 total liabilities which were $1,210,694; total
stockholders' equity which increased 86.4% to $2,339,193 for 2001 from
$1,254,819 for 2000 and in 1999 total stockholders' equity which was $361,836.
The primary increase in current assets was due to increases in accounts
receivable and securities for sale, which also related to the increase in total
assets. The increase in liabilities was due primarily to accounts payable.
Acquired in the acquisition of Power Sources, Inc were trade receivables of
$921,050, and $721,392 in accounts payable, and unbilled revenue of $49,676.
The Company also acquired technology rights valued at $222,666.
During the year ended December 31, 2001, the Company issued for cash, 1,836,214
shares of common stock with 603,083 warrants attached. The stock was valued at
$1,284,020 and the warrants were valued at $405,480. These warrants have an
average exercise price of $1.10 and expire between May 31, 2002 and December 6,
2003. An additional 308,603 shares of common stock were issued for cash of
$150,833. The Company issued 85,679 shares of common stock as commissions to
various promoters for selling its stock. This stock was valued at the fair
market value of $148,503. The Company issued 385,500 shares of common stock for
consulting services valued at $115,000, general services valued at $25,000 and
compensation valued at $56,500. The Company issued 372,081 shares of common
stock to repay loans in the amount of $207,500 and 240,419 common stock shares
for interest and financing expenses of $122,250. Additionally 45,000 common
stock shares were issued for $22,500 in prepaid rent, 35,000 shares were issued
to satisfy $26,418 of accounts payable and 50,000 common stock shares valued at
$108,500 to acquire Power Sources, Inc.
During the year ended December 31, 2000, the Company issued 4,792,742 shares of
its common stock of which 1,329,602 shares were issued for cash of $1,158,000,
615,000 shares for prepaid consulting valued at $307,500, 593,355 for services
valued at $296,678, 100,000 shares for a technology license valued at $50,000,
and 800,000 shares for debt valued at $400,000. Included in the aforementioned
issuances are a total of 1,480,000 shares issued to officers, directors, or
affiliates of the Company, which are subject to transfer restrictions as defined
by Rule 144 of the Securities Act of 1933. In addition, 1,354,785 shares were
issued for the conversion of 100% of the Company's Series "A" Convertible
Preferred Stock.
During the year ended December 31, 1999, the Company issued 1,042,641 shares of
its common stock of which 483,641 shares were issued for services valued at
$162,110 and 559,000 shares were issued for cash of $348,750.
During 2001, the Company authorized and issued 895,000 options at an average
exercise price of $0.96 for services, compensation and the acquisition of Power
Sources, Inc.
During 2000, the Company authorized and issued a total of 750,000 options at an
average exercise price of $1.20 for investment funding, and 250,000 options at
an average exercise price of $0.50 as compensation. During 1999, the Company
authorized and issued a total of 1,004,558 options at an exercise price of $0.50
for employee compensation.
Liquidity and Capital Resources: At December 31, 2001, the Company's working
capital increased to $1,352,798 compared to $125,651 at December 31, 2000 and
($939,736) at December 31, 1999. The increase in cash was primarily
attributable to equity capital from the sale the Company's stock. And the
increase in accounts receivable was primarily due to the trade receivables of
$921,050 acquired from Power Sources. The Company raised some $1.8 million in
equity capital in 2001, and subsequently raised some $1.5 million in March of
2002.
17
Status of Operations: Management intends to continue to utilize and develop the
intangible assets of the Company. At December 31, 2001, intangible assets
comprise a material portion of the Company's assets. The recovery of these
intangible assets is dependent upon achieving profitable operations. 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 is sufficient to support its current operations and
growth plans for 2002. The current status of future acquisitions is dependent on
continued interest between the parties, successful due diligence and investor
funding.
Company operating revenues and profits should increase in 2002 because of the
new reorganization, including new experienced personnel, a new manufacturing
facility and a new enhanced product line, including the Nauticon line of
products (now up to 1,000 ton condensing units). Management expects major
revenue growth from its wholly owned subsidiary, Ultimate Comfort Systems, and
from its newly acquired Power Sources technology, which will lead to the overall
structure necessary to fulfill the Company's current strategic plans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Power Cold Corporation and subsidiaries consolidated financial statements
incorporated in this annual report Form 10K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the registrant's fiscal year ending December 31, 2001 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 accountant 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 SINCE
- ------------------- ---- ------------------------------- -------------------
Francis L. Simola. 63 Chairman of the Board January 1, 1993
President and CEO
George C. Briley 76 Director, CTO and Secretary September 1, 1994
H. Jack Kazmar 69 Director, COO and Treasurer October 1, 1998
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 is the
founder and president of Simco Group Inc., a private investment company that
controls a major interest in PowerCold.
GEORGE C. BRILEY Mr. Briley has been a director of the PowerCold since
September 1994, and is President of Technicold Services, Inc., a PowerCold
subsidiary company. Mr. Briley has over fifty years experience in engineering
and marketing in the refrigeration industry.
18
H. JACK KAZMAR Mr. Kazmar has been a director of the PowerCold since October
1998. Mr. Kazmar has more than 40 years experience in the commercial heating,
ventilation and air conditioning equipment industry.
Directors of the Company are elected every three years. Officers of the
Company, elected by the Board of Directors, serve annually. There are no family
relationships among the Directors and Officers of the Company. Mr. Simola, Mr.
Briley and Mr. Kazmar have 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 continuous payroll compensation during the year ended 2001. No officer of the
parent Company was paid by any other source other than PowerCold for time that
was actually spent in furtherance of PowerCold's affairs.
Mr. Briley has received less than $40,000 from Technicold Services. Inc. for
consulting services. Mr. Kazmar received $60,000 for consulting services.
Simco Group/ Simola received 120,000 shares of common restricted stock for
services rendered the Company, and received $60,000 related to payment due for
corporate operating expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 2000, regarding
the number of shares of the Company's common stock beneficially owned by (i) all
beneficial owners of five percent (5%) or more of common stock, and (ii) each
director. (iii) beneficial owner of outstanding preferred stock.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ---------------------------- --------------------------- ------------
George C. Briley 634,602 3.96%
17 Pembroke Lane
San Antonio, TX. 78240
H. Jack Kazmar 262,000 1.63%
36 West Beechcroft Road
Short Hills, NJ 07078
Francis L. Simola and (3) 1,092,432 6.82%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118
Simco Group, Inc. (4) 1,800,664 11.23%
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
Henry N. Sanborn 1,336,956 8.34%
505 Charles Street Avenue
Towson, MD 21204
Total Common Stock 5,126,654 31.99%
(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.
19
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.
During 2001, Simco Group was issued 262,500 shares of common stock for payment
of loans, interest and financing fees and consulting services.
During 2000, Simco Group converted $400,000 of its loans to the Company into
800,000 shares of the Company's common stock. See Note 11.
During 1999, the Company's directors received an annual payment of $2,500 for
directors' fees. After 1999, the directors were not compensated.
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 2001 Financial Statements
Consolidated Financial Statements:
Balance Sheets - December 31, 2001, 2000 and 1999
Statements of Operations - Years ended December 31, 2001, 2000 and 1999
Statements of Stockholders' Equity - Years ended December 31, 2001, 2000
and 1999
Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
8-K April 2, 2001 4/ 2/01 Legg Mason Wood Walker, Investment Banking
8-K April 20, 2001 4/20/01 Lopez
8-K October 3, 2001 10/03/01 Lopez
8-K December 14, 2001 12/14/01 Power Sources Acquisition
8-K November 11, 2001 11/ 9/01 Chesapeake Securities Research Corporation
20
POWERCOLD CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
WILLIAMS & WEBSTER PS
CERTIFIED PUBLIC ACCOUNTANTS
BANK OF AMERICA FINANCIAL CENTER
W 601 RIVERSIDE, SUITE 1940
SPOKANE, WA 99201
(509) 838-5111
POWERCOLD CORPORATION
TABLE OF CONTENTS
December 31, 2001
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations and Comprehensive Loss 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
21
To the Board of Directors
PowerCold Corporation
La Vernia, Texas
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of PowerCold
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, and comprehensive loss, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements of PowerCold Corporation as of December 31, 1999 were
audited by other auditors whose reports dated March 30, 2000, except with
respect to Note 3 to which the date is September 15, 2000, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of PowerCold Corporation as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has sustained substantial operating losses in recent years and has used
substantial amounts of working capital in its operations. At December 31, 2001,
intangible assets comprise a material portion of the Company's assets. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
March 24, 2001
22
POWERCOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 290,174 $ 106,864 $ 14,464
Securities available for sale 970,000 - -
Trade accounts receivable,
net of allowance 1,094,919 38,665 152,154
Receivables from related parties 1,686 - -
Inventory 241,853 241,272 34,993
Unbilled revenue 49,676 - -
Prepaid expenses 22,500 307,500 69,347
------------- ------------- -------------
Total Current Assets 2,670,808 694,301 270,958
------------- ------------- -------------
Property and equipment, net 77,660 73,570 29,229
Patent rights and related
technology, net 1,282,937 1,195,627 1,166,554
Goodwill, net 16,866 27,392 115,398
Deposits 9,645 7,705 -
------------- ------------- -------------
TOTAL ASSETS $ 4,057,916 $ 1,998,595 $ 1,582,139
============= ============= =============
The accompanying notes are an integral part of these financial statements
23
POWERCOLD CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $ 1,023,596 $ 195,460 $ 578,258
Account payable - related party - 10,567 -
Commissionsand royalty payable 55,067 42,240 42,240
Advances from affiliate - 73,636 365,254
Notes payable 36,329 43,328 21,378
Acquisition payable 200,000 200,000 200,000
Current portion of capital
lease payable 3,018 3,419 3,564
------------- ------------- -------------
Total Current Liabilities 1,318,010 568,650 1,210,694
------------- ------------- -------------
CAPITAL LEASE PAYABLE, net of
current portion 5,413 6,826 9,609
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES 395,300 168,300 -
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Convertible preferred stock
Series A, $0.001 par value;
5,000,000 shares authorized,
0, 0, and 1,250,000 shares
issued and outstanding,
respectively - - 1,250
Common stock, $0.001 par value;
200,000,000 shares authorized,
16,027,882, 12,669,383, and
7,876,641 shares issued and
outstanding, respectively 16,027 12,669 7,876
Additional paid-in capital 10,210,665 8,243,227 6,034,592
Stock options 471,980 - -
Accumulated deficit (9,329,479) (7,001,077) (5,681,882)
Accumulated other comprehensive
Income 970,000 - -
------------- ------------- -------------
2,339,193 1,254,819 361,836
------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,057,916 $ 1,998,595 $ 1,582,139
============= ============= =============
The accompanying notes are an integral part of these financial statements
24
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
REVENUES
Product sales $ 814,338 $ 312,865 $ 461,572
Services 67,751 82,175 100,831
------------- ------------- -------------
Total Revenues 882,089 395,040 562,403
------------- ------------- -------------
COST OF REVENUES
Material 325,914 164,480 377,935
Direct labor 459,889 84,808 168,721
Manufacturing supplies 25,045 16,994 37,132
Shipping and handling 19,489 16,955 18,282
------------- ------------- -------------
Total Cost of Revenues 830,337 283,237 602,070
------------- ------------- -------------
GROSS PROFIT (LOSS) 51,752 111,803 (39,667)
------------- ------------- -------------
OPERATING EXPENSES
Sales 183,271 312,571 168,003
Advertising and marketing 127,690 2,021 -
General and administrative 759,630 472,461 647,089
Research and development 451,947 - 166,262
Leased equipment 25,376 - -
Legal and accounting 137,421 127,011 -
Consulting 310,000 335,489 -
Occupancy 108,599 110,031 -
Provision (recovery) for doubtful
Accounts 22,505 10,379 (2,754)
Depreciation and amortization 185,315 153,494 181,675
------------- ------------- -------------
Total Operating Expenses 2,311,754 1,523,457 1,160,275
------------- ------------- -------------
LOSS FROM OPERATIONS (2,260,002) (1,411,654) (1,199,942)
OTHER INCOME (EXPENSES)
Interest income 6,512 6,622 8,706
Interest and financing expense (122,250) (2,763) (70,249)
Gain on settlement of litigation - 88,600 -
Other income 47,338 - 8,090
------------- ------------- -------------
Total Other Income (Expenses) (68,400) 92,459 (53,453)
------------- ------------- -------------
LOSS BEFORE INCOME TAX (2,328,402) (1,319,195) (1,253,395)
INCOME TAX EXPENSE - - -
------------- ------------- -------------
NET LOSS (2,328,402) (1,319,195) (1,253,395)
OTHER COMPREHENSIVE INCOME
Unrealized gain on investments 970,000 - -
------------- ------------- -------------
Comprehensive loss $ (1,358,402) $ (1,319,195) $ (1,253,395)
============= ============= =============
The accompanying notes are an integral part of these financial statements
25
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED)
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.16) $ (0.13) $ (0.18)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 15,005,371 10,156,716 7,106,638
============= ============= =============
The accompanying notes are an integral part of these financial statements
26
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accum-
ulated
Preferred Stock Common Stock Stock Other Total
------------------------ ---------------------- Additional Accum- Sub- Comphre- Stock-
Number of Number of Paid-in ulated cription hensive holders'
Shares Amount Shares Amount Capital Deficit Receivable Income Equity
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1998 1,250,000 1,250 6,834,000 6,834 5,524,774 (4,428,487) - - 1,105,371
Issuance of common
stock as follows:
- for services at an
average of $0.34
per share - - 483,641 483 161,627 - - - 162,110
- for cash at an
average of $0.62
per share - - 559,000 559 348,191 - - - 348,750
Net loss, December
31, 1999 - - - - - - - - (1,253,395)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1999 1,250,000 1,250 7,876,641 7,876 6,034,592 (5,681,882) - - 362,836
Stock issued for
cash at an average
of $0.87 per
common share - - 1,329,602 1,330 1,156,670 - - - 1,158,000
Stock issued as
prepaid consulting
fees at $0.50 per
common share - - 615,000 615 306,885 - - - 307,500
Stock issued for
services at an
average of $.058
per common share - - 593,355 593 296,085 - - - 296,678
Perferred stock
converted to
common stock at par (1,250,000) (1,250) 1,354,785 1,355 (105) - - - 1,250
Stock issued and
options exercised in
exchange for
technology license
at $0.50 per
common share - - 100,000 100 49,900 - - - 50,000
Stock issued and options
exercised in
exchange for debt at
$0.50 per common share - - 800,000 800 399,200 - - - 400,000
Net loss, December
31, 2000 - - - - - (1,319,195) - - (1,319,195)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 2000 - - 12,669,383 12,669 8,243,227 (7,001,077)$ - - 1,257,069
The accompanying notes are an integral part of these financial statements
27
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accum-
ulated
Preferred Stock Common Stock Stock Other Total
------------------------ ---------------------- Additional Accum- Sub- Comphre- Stock-
Number of Number of Paid-in ulated cription hensive holders'
Shares Amount Shares Amount Capital Deficit Receivable Income Equity
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance carryforward,
December 31, 2000 - - 12,669,383 12,669 8,243,227 (7,001,077) $ - - 1,257,069
Common stock issued
for services at
$0.59 per share - - 42,500 43 24,958 - - - 25,000
Common stock issued
for consulting
services at $0.50
per share - - 230,000 230 114,770 - - - 115,000
Common stock issued
for conversion of
debt at $0.61
per share - - 372,081 372 207,128 - - - 207,500
Common stock issued
as pre payament of
rent at $0.50
per share - - 45,000 45 22,455 - - - 22,500
Common stock issued
as interest and
financing expense
at $0.50 per share - - 240,419 240 122,010 - - - 122,250
Common stock issued
as compensation at
$0.50 per share - - 113,000 113 56,387 - - - 56,500
Common stock issued
for payment of
accounts payable at
$0.75 per share - - 35,000 35 26,383 - - - 26,418
Common stock and
options issued for
acquisition of PSI
at $2.16 per share - - 50,000 50 108,450 - 66,500 - 175,000
Common stock: 2,144,820
shares issued with
603,083 attached
warrants for cash
at $0.86 per share
and 85,679 shares
valued at $1.73 per
share as issuing
costs less total
issuing costs of
$296,142 - - 2,230,499 2,230 1,284,898 - 405,480 - 1,692,608
Other comprehensive
income - - - - - - - 970,000 970,000
Net loss,
December 31, 2001 - - - - - (2,328,402) - - (2,328,402)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2001 - $ - 16,027,882 $ 16,027 $10,210,665 $(9,329,479)$ 471,980 $ 970,000 $2,341,443
=========== =========== =========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
28
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,328,402) $ (1,319,195) $ (1,253,395)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 185,315 153,494 181,675
Gain on settlement of litigation - (88,600) -
Provision for doubtful accounts 22,505 10,379 -
Issuance of common stock for
services 196,500 604,178 162,110
Issuance of common stock for
expenses 26,418 108,383 -
Issuance of common stock for
interest and inancing 122,250 - -
(Increase) decrease in assets:
Accounts receivable (157,709) 103,110 (145,841)
Receivable from related party (1,686) - 72,618
Interest receivable - - 9,918
Refundable income taxes - - 71,934
Inventories (581) (206,279) 121,706
Prepaid expenses 307,500 (245,858) (6,836)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 10,326 (214,498) 53,215
Accounts payable, related party (10,567) - -
Commissions payable 12,827 - -
------------- ------------- -------------
Net cash used in operating
activities (1,615,304) (1,094,886) (732,896)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (17,105) (885) (15,636)
Proceeds from sale of securities
available for sale - - 32,500
Release of restriction on cash - - 400,000
------------- ------------- -------------
Net cash provided by (used in)
investing activities (17,105) (65,885) 416,864
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements
29
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from affiliate - - 365,254
Principal payments on long-term
debt (1,814) (2,527) (2,464)
Proceeds from short-term
borrowings, related parties 232,500 97,698 -
Repayment of short-term
borrowings - - (402,825)
Proceeds from issuance of
shares under private placement 1,692,608 1,158,000 348,750
Increase in deposits (1,940) - -
Repayment of short-term
borrowings, related parties (105,635) (65,000) -
------------- ------------- -------------
Net cash provided by financing
activities 1,815,719 1,253,171 308,715
------------- ------------- -------------
Net increase (decrease) in cash 183,310 92,400 (7,317)
Cash at beginning of year 106,864 14,464 21,781
------------- ------------- -------------
Cash at end of year $ 290,174 $ 106,864 $ 14,464
============= ============= =============
Supplemental cash flow information:
Interest paid $ - $ 2,763 $ 50,628
Income taxes paid $ - $ - $ -
NON CASH TRANSACTIONS:
Unrealized gain (loss) on
securities available for sale $ 970,000 $ - $ -
Issuance of common stock and
options for purchase of
subsidiary $ 175,000 $ - $ -
Issuance of common stock as
prepayment for consulting
services $ - $ 307,500 $ -
Issuance of common stock for
services $ 196,500 $ 296,678 $ 162,110
Issuance of common stock as
payment of expenses $ 26,418 $ 108,383 $ -
Issuance of common stock for
technology license $ - $ 50,000 $ -
Issuance of common stock for
payment of debt $ 207,500 $ 291,617 $ -
Issuance of common stock for
payment of interest and
financing expenses $ 122,250 $ - $ -
Reclassification of deposit to
equipment $ - $ 50,000 $ -
Issuance of common stock as
stock offering costs $ 148,503 $ - $ -
The accompanying notes are an integral part of these financial statements
30
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
PowerCold Corporation, formerly International Cryogenic Systems Corporation,
(the Company) was incorporated on October 7, 1987 in the State of Nevada.
PowerCold is a solution provider of energy efficient products for the
refrigeration, air conditioning and power industries. The Company operates
across many market sectors from large industrial food processors to small
commercial air conditioning systems. The Company develops, manufactures and
markets proprietary equipment to achieve significant electric power cost savings
for commercial and industrial firms. PowerCold's energy efficient and
environmentally safe products are designed to reduce power costs for air
conditioning, refrigeration and on-site building power. 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 line
is the design and production of unique products for the refrigeration industry.
The third is consulting engineering services, including process safety
management compliance, and ammonia refrigeration and carbon dioxide system
design.
On December 28, 1992, the Company acquired the patent rights (U.S. Patent No.
5,501,269) and related engineering and technology to a process of quick-freezing
food products, and cleaning and treating various nonfood products. This process
was accomplished by using a circulating cryogenic liquid in a closed pressurized
vessel system. The patent acquisition was made in exchange for 2,414,083 shares
of the company's common stock. Two directors of the Company were also directors
of the company selling the patent rights.
On August 4, 1995, the Company acquired Nauticon, Inc., including its related
technology and assets for 900,000 shares and 300,000 options (expired July 31,
2000) of the Company's stock. The assets currently include U.S. Patent No.
5,501,269 issued on March 26, 1996, and entitled Condenser Unit, and U.S. Patent
No. 5,787,722 issued August 4, 1998, and entitled Heat Exchange Unit.
On May 18, 1998, the Company incorporated a wholly owned subsidiary, Channel
Freeze Technologies, Inc., to acquire intellectual property rights of Channel
Ice Technologies. The Company has produced its first unit with this technology
(see Note 17) and is awaiting its sale.
The Company formed Alturdyne Energy Systems, Inc. in September 1999 to support
the natural gas engine driven water chiller business. Subsequent to its
formation, the entity has been essentially dormant.
On December 1, 2000, the Company acquired assets of Ultimate Comfort Systems,
Inc., including its technology rights, patent rights (U.S. Patent No.
5,183,102), and license agreement for integrated piping technology for a heating
and air conditioning system. This acquisition gave the Company exclusive,
non-transferable United States transfer rights to the aforementioned technology
and all related assets. This technology was then placed into a newly formed,
wholly owned subsidiary of the Company, Ultimate Comfort Systems. See Note 5.
On December 1, 2001, Powercold acquired all of the common stock of Power
Sources, Inc. (hereinafter "PSI"), a newly formed entity engaged in the
development and marketing of cogeneration systems technology. See Note 5.
31
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.
Accounting Methods
- -------------------
The Company's financial statements are prepared using the accrual method of
accounting.
Use of Estimates
- ------------------
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, after elimination of the intercompany accounts
and transactions. Wholly owned subsidiaries of the Company are listed in Note
13.
Reclassification
- ----------------
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. This reclassification has resulted in no changes
to the Company's accumulated deficit or net losses presented.
Cash and Cash Equivalents
- ----------------------------
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. See Note 6.
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, advances to related
party, trade accounts receivable, accounts payable, accrued expenses and notes
payable. All instruments are accounted for on the historical cost basis, which,
due to the short maturity of these financial instruments, approximates fair
value at December 31, 2001
32
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Instruments
- -----------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 130"), "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which is effective for
the Company as of January 1, 2001. This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At December 31, 2001, the Company has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
Property and Equipment
- ------------------------
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. See Note 7.
Concentration of Credit Risk
- -------------------------------
The Company maintains its cash in several commercial accounts at major financial
institutions. At December 31, 2001, the Company's cash balance, in two
accounts, exceeded Federal Deposit Insurance Corporation (FDIC) limits by
$24,824 and $54,568.
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.
33
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
- --------------------
The Company recognizes revenue from product sales upon shipment to the customer.
Service revenue is recognized when services are performed and billable.
Bad Debts
- ----------
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions.
Product Warranties
- -------------------
The Company sold the majority of its products to consumers along with one-year
unconditional repair or replacement warranties. Warranty expense is included in
cost of sales.
Research and Development
- --------------------------
Research and development expenses are charged to operations as incurred. The
cost of intellectual property purchased from others that is immediately
marketable or that has an alternative future use is capitalized and amortized as
intangible assets. Capitalized costs are amortized using the straight-line
method over the estimated economic life, typically 10 years, of the related
asset. 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.
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.
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.
Compensated Absences
- ---------------------
Employees of the Company are entitled to paid vacation, sick, and personal days
off, depending on job classification, length of service, and other factors. The
Company accrues vacation expense throughout the year and, if employees do not
utilize their allotment, the Company will cash out all unused pay on the last
calendar day of the year.
34
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 statutory income tax rates in effect for the year in which the
differences are expected to reverse.
Investment in Securities
- --------------------------
Investments in debt and marketable equity securities are designated as trading,
held to maturity, or available for sale in accordance with statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Trading securities are reported at
fair value, with changes in fair value included in earnings. Available for sale
securities are reported at fair value, with net unrealized gains and losses
included as a component of equity. Held-to-maturity securities are reported at
amortized cost. Gains and losses on the sale of securities are determined using
the specific identification method. For all investment securities, unrealized
gains and losses that are other than temporary are recognized as a component of
earnings in the period incurred. Market value is determined based on quoted
market prices. At December 31, 2001, all of the Company's investment securities
were classified as available for sale. See Note 8.
Earnings Per Share
- --------------------
On January 1, 1998, the Company adopted SFAS No. 128, which 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. Although there were common stock equivalents outstanding at December
31, 2001, they were not included in the calculation of earnings per share
because they would have been considered anti-dilutive.
Accounting Pronouncements
- --------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This new standard establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations.
Statement 144 requires that these long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or discontinued operations. This statement is effective beginning
for fiscal years after December 15, 2001, with earlier application encouraged.
The Company adopted SFAS 144 and does not believe that the adoption will have a
material impact on the financial statements of the Company at December 31, 2001.
35
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (continued)
- ---------------------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 establishes guidelines related to the
retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements issued
for the fiscal years beginning after June 15, 2002 and with earlier application
encouraged. The Company adopted SFAS No. 143 and does not believe that the
adoption will have a material impact on the financial statements of the Company
at December 31, 2001.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 provides for the
elimination of the pooling-of-interests method of accounting for business
combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142
prohibits the amortization of goodwill and other intangible assets with
indefinite lives and requires periodic reassessment of the underlying value of
such assets for impairment. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. An early adoption provision exists for companies with
fiscal years beginning after March 15, 2001. Application of the
non-amortization provision of SFAS No. 142 is expected to result in an increase
in net income of approximately $10,000 in fiscal 2002. The Company is currently
evaluating the impact of the transitional provisions of the statement.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000, and is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company believes that the adoption of this standard will not have a
material effect on the Company's results of operations or financial position.
Shipping and Handling Fees and Costs
- -----------------------------------------
The Emerging Issues Task Force ("EITF") issued EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs", which was adopted during fiscal 2001. The
impact of adopting EITF No. 00-10 was to increase revenues and cost of sales by
approximately $19,489, $16,955, and $18,282 in fiscal 2001, 2000 and 1999,
respectively. All amounts in the accompanying Consolidated Statements of
Operations and Comprehensive Loss have been reclassified to reflect this
adoption
36
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements, which contemplate
continuation of the Company as a going concern, have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company has, however, sustained substantial operating losses in recent years
and has used substantial amounts of working capital in its operations. At
December 31, 2001, intangible assets comprise a material portion of the
Company's assets. The recovery of these intangible assets is dependent upon
achieving profitable operations. The ultimate outcome of these uncertainties
cannot presently be determined. Management is actively seeking additional
equity financing. Additionally, management believes that prior acquisitions and
the acquisition of Power Sources, Inc. technology will lead to the overall
structure necessary to fulfill the Company's current 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.
NOTE 4 - 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 2001, Simco was issued 262,500 shares of common stock for payment of
loans, interest and financing fees and consulting services.
During 2000, Simco converted $400,000 of its loans to the Company into 800,000
shares of the Company's common stock. See Note 11.
During 1999, the Company's directors received an annual payment of $2,500 for
directors' fees. After 1999, the directors were not compensated.
See Note 9 regarding loans from shareholders.
37
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5 - ACQUISITIONS
Acquisition of Heating and Air Conditioning System Technology
- --------------------------------------------------------------------
On December 1, 2000, the Company acquired the technology rights, patent rights,
and license agreement for integrated piping technology for a heating and air
conditioning system. This acquisition gave the Company exclusive,
non-transferable United States transfer rights to the technology and all related
assets. In this transaction, the Company paid $65,000 cash, assumed two lines
of credit (see Note 9), forgave a payment of $28,571 from projects in process,
issued 100,000 shares of its common stock (see Note 11), granted 150,000 of
stock options at $1.00 per share (see Note 12), and agreed to the payment of
royalties at no more than $3,000 per month for one year. In addition, the
Company hired the seller of the technology for an annual salary of $70,000, with
annual renewals, based upon performance as defined within the purchase
agreement. This technology was then placed into a newly formed, wholly owned
subsidiary of the Company, Ultimate Comfort Systems.
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.
Acquisition of Power Sources, Inc.
- -------------------------------------
On December 1, 2001, PowerCold acquired all of Power Sources, Inc. (hereinafter
"PSI"), a privately held firm engaged in the developing and marketing of
cogeneration systems technology. PSI was a wholly owned subsidiary of Utility
Metal Research Corp. (UMRC). The business activity of PSI had previously been
part of the activities of UMRC.
In the acquisition, PowerCold agreed to issue over a two-year period a total of
150,000 shares of PowerCold common stock and 150,000 common stock options to
UMRC. At December 31, 2001, the Company had issued 50,000 shares of its common
stock (valued at $108,500) and 50,000 of its common stock options (valued at
$66,500) to PSI, and had recorded a commitment of $227,000 for the future
issuance of the remaining stock and options. This acquisition was accounted for
under the purchase method of accounting.
Acquired in the transaction were trade receivables of $921,050, which were
December 31, 2001 revenues, with $721,392 accounts payable attached and
contracts in place of $331,175 with $281,499 accounts payable attached. The
Company also acquired technology rights valued at $222,666. The assets and
liabilities of PSI had been transferred to PSI by UMRC upon the creation of PSI.
PSI had no substantial operations prior to PowerCold's acquisition in the month
of December 2001.
38
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6 - INVENTORY
Inventories are stated at the lower of average cost or market. The cost of
finished goods includes the cost of raw material, direct and indirect labor, and
other indirect manufacturing costs.
Inventories at December 31, 2001, December 31, 2000 and 1999 consist of the
following:
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Materials inventory $ 133,432 $ 132,851 $ 34,993
Finished goods inventory 108,421 108,421 -
----------------- ----------------- -----------------
$ 241,853 $ 241,272 $ 34,993
================= ================= =================
Finished goods inventory consists of the specialized quick-freezing unit of the
Company's Channel Freeze Technology, Inc. subsidiary.
NOTE 7 - PROPERTY, EQUIPMENT AND INTANGIBLES
Property and equipment is summarized as follows:
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Machinery and equipment $ 93,272 $ 87,342 $ 32,877
Prototypes and molds 71,030 71,030 73,420
Furniture and fixtures 30,480 7,614 8,804
----------------- ----------------- -----------------
Total Property
and Equipment 194,782 165,986 115,101
Less: Accumulated
Depreciation 117,122 92,416 85,872
----------------- ----------------- -----------------
Net Property
and Equipment $ 77,660 $ 73,570 $ 29,229
================= ================= =================
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$24,706, $6,544 and $7,616, respectively.
The Company's intangible assets are summarized as follows:
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Patents and related
technology $ 1,907,567 $ 1,684,001 $ 1,532,486
Goodwill 105,269 105,269 168,033
----------------- ----------------- -----------------
Total Intangibles 2,012,836 1,789,270 1,700,519
Less: Accumulated
Amortization 713,033 566,251 418,567
----------------- ----------------- -----------------
Net Intangibles $ 1,299,803 $ 1,223,019 $ 1,281,952
================= ================= =================
Amortization expense for the years ended December 31, 2001, 2000 and 1999 was
$146,782, $147,684 and $133,868, respectively.
39
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 8 - INVESTMENTS
In 1996, as part of a planned merger, which never took place, the Company
invested $1,000,000 in Rotary Power International, Inc. (hereinafter "RPI") in
exchange for 2,000,000 shares of RPI's common stock. As the Company's
investment in RPI represented more than 20% but less than 50% of RPI's common
stock outstanding, the equity method was used to account for the Company's
interest. Although the Company advanced additional funds of $216,768 to RPI,
deteriorating financial conditions and increasing losses in RPI caused the
Company to write off its entire investment in RPI by the end of 1997.
During 2001, the Company's investment in RPI decreased to less than 20% of RPI's
stock outstanding. In view of the changed circumstances, the Company's
management elected to recognize its investment in RPI as available-for-sale
securities. As of December 31, 2001, the fair market value of these securities
was $970,000, which has been recognized as other comprehensive income in
accordance with SFAS No. 115.
NOTE 9 - NOTES PAYABLE
At December 31, 2001, notes payable consisted of the following:
A note payable to Southtrust Bank, secured by G. Briley, the Company's
president, for $1,940 with an annual interest rate of 14.99%. This unsecured
note is payable in March 2002.
Two lines of credit were assumed as part of the consideration for the December
2000 acquisition of a technology license and intellectual property. (See Note
5.) One line of credit is payable to Royal Bank of Canada for $34,014 U.S., and
the second to T. D. Bank for $1,001 U.S was repaid during the year ended
December 31, 2001.
In the year ended December 31, 2001, the Company received $165,000 in loan
proceeds from its shareholders. The loans, which bear interest at 10%, are
unsecured and have no stated maturity. The Company repaid $140,000 of these
loans with common stock and $25,000 with cash.
NOTE 10 - PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $0.001 par value
preferred stock, which contain no voting privileges. Shareholders are entitled
to cumulative dividends, and each share of preferred stock may be converted into
the Company's common stock.
At December 31, 1999, the Company had 1,250,000 shares of preferred stock issued
and outstanding. This stock was designated as Series "A" Convertible Preferred
Stock and was issued to a single investor.
On June 30, 2000, 100% of the Company's outstanding Series "A" Convertible
Preferred Stock was converted to the Company's common stock. The conversion
resulted in the issuance of 1,354,785 shares of the Company's common stock at an
approximate conversion rate of one share of preferred stock for 1.08 shares of
common stock. At December 31, 2000 and at December 31, 2001, the Company did
not have any shares of preferred stock outstanding.
40
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 11 - COMMON STOCK
Upon incorporation, the Company was authorized to issue 200,000,000 shares of
its $0.001 par value common stock.
During the year ended December 31, 2001, the Company issued for cash, 1,836,214
shares of common stock with 603,083 warrants attached. The stock was valued at
$1,284,020 and the warrants were valued at $405,480. These warrants have an
average exercise price of $1.10 and expire between May 31, 2002 and December 6,
2003. An additional 308,603 shares of common stock were issued for cash of
$150,833. The Company issued 85,679 shares of common stock as commissions to
various promoters for selling its stock. This stock was valued at the fair
market value of $148,503. The Company issued 385,500 shares of common stock for
consulting services valued at $115,000, general services valued at $25,000 and
compensation valued at $56,500. The Company issued 372,081 shares of common
stock to repay loans in the amount of $207,500 and 240,419 common stock shares
for interest and financing expenses of $122,250. Additionally 45,000 common
stock shares were issued for $22,500 in prepaid rent, 35,000 shares were issued
to satisfy $26,418 of accounts payable and 50,000 common stock shares valued at
$108,500 to acquire Power Sources, Inc. See Note 5.
During the year ended December 31, 2000, the Company issued 4,792,742 shares of
its common stock of which 1,329,602 shares were issued for cash of $1,158,000,
615,000 shares for prepaid consulting valued at $307,500, 593,355 for services
valued at $296,678, 100,000 shares for a technology license (see Note 5) valued
at $50,000, and 800,000 shares for debt valued at $400,000. Included in the
aforementioned issuances are a total of 1,480,000 shares issued to officers,
directors, or affiliates of the Company, which are subject to transfer
restrictions as defined by Rule 144 of the Securities Act of 1933. In addition,
1,354,785 shares were issued for the conversion of 100% of the Company's Series
"A" Convertible Preferred Stock. See Note 10.
During the year ended December 31, 1999, the Company issued 1,042,641 shares of
its common stock of which 483,641 shares were issued for services valued at
$162,110 and 559,000 shares were issued for cash of $348,750.
NOTE 12 - STOCK BASED COMPENSATION AND STOCK OPTIONS
During 2001, the Company authorized and issued 895,000 options at an average
exercise price of $0.96 for services, compensation and the acquisition of PSI.
See Note 5.
During 2000, the Company authorized and issued a total of 750,000 options at an
average exercise price of $1.20 for investment funding, and 250,000 options at
an average exercise price of $0.50 as compensation.
During 1999, the Company authorized and issued a total of 1,004,558 options at
an exercise price of $0.50 for employee compensation.
41
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - STOCK BASED COMPENSATION AND STOCK OPTIONS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for options and,
accordingly, recognized no compensation cost for its stock options in 2001, 2000
and 1999. The following reflects 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:
Pro forma net loss and earnings per share had the Company accounted for its
options under the fair value method of SFAS 123 are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
-------------- -------------- --------------
Net loss as reported $ (2,328,402) $ (1,319,195) $ (1,253,395)
Adjustment required by FAS 123 (345,277) (287,273) (524,890)
-------------- -------------- --------------
Pro forma net loss $ (2,673,679) $ (1,606,468) $ (1,778,285)
============== ============== ==============
Pro forma net loss per share,
Basic and diluted $ (0.18) $ (0.16) $ (0.25)
============== ============== ==============
Number of Shares Weighted Average
Under Option Exercise Price
----------------- -----------------
Outstanding, January 1, 1999 1,943,000 $ 1.36
Granted 1,004,558 0.50
Exercised - -
Forfeited - -
Expired - -
----------------- -----------------
Outstanding, December 31, 1999 2,947,558 $ 1.01
================= =================
Exercisable, December 31, 1999 2,947,558 $ 1.01
================= =================
42
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - STOCK BASED COMPENSATION AND STOCK OPTIONS (CONTINUED)
Number of Shares Weighted Average
Under Option Exercise Price
----------------- -----------------
Outstanding, January 1, 2000 2,947,558 $ 1.01
Granted 1,000,000 0.77
Exercised (450,000) 0.50
Forfeited - -
Expired (700,000) 2.29
----------------- -----------------
Outstanding, December 31, 2000 2,797,558 $ 0.74
================= =================
Exercisable, December 31, 2000 2,797,558 $ 0.74
================= =================
Outstanding January 1, 2001 2,797,558 $ 0.74
Granted 895,000 0.96
Exercised - -
Forfeited - -
Expired - -
----------------- -----------------
Outstanding December 31, 2001 3,692,558 $ 0.84
================= =================
Exercisable December 31, 2001 3,692,558 $ 0.84
================= =================
Weighted average fair value of
options granted during 2001 $ 0.39
=================
At December 31, 2001, exercise prices for outstanding options ranged from $0.50
to $1.36. The weighted average contractual life remaining of such options was
2.7 years.
In accordance with Statement on Financial Accounting Standard No. 123, the fair
value of the options granted was estimated using the Black-Scholes Option Price
Calculation. The following assumptions were made to value the stock options:
Risk-free Interest Rate 5%
Expected Life 1 to 5 years
Expected Volatility 75%
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 traded 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.
43
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13 - REPORTABLE SEGMENTS
PowerCold currently has seven reportable segments: Nauticon Inc., RealCold
Products, Inc., Technicold Services, Inc., Rotary Power Enterprise, Inc.,
Channel Freeze Technologies, Inc., Ultimate Comfort Systems, Inc. and Power
Sources, Inc. Nauticon Inc. offers a product line of evaporative heat exchange
systems for the HVAC and refrigeration industry. Technicold Services, Inc.
offers consulting engineering services, including process safety management
compliance and ammonia refrigeration technicians and supervisors. 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. Ultimate Comfort Systems, Inc. holds the technology rights,
patent rights and license agreement for an integrated piping technology for
heating and air conditioning systems. Ultimate Comfort Systems, Inc. also
provides consulting services related to this technology. Power Sources, Inc.
(PSI) holds the technology rights to design and engineer cogeneration systems
that use engine driven generators to produce both electrical and thermal energy.
PSI will also package and market this technology.
Segment information (after intercompany eliminations) for the year ended
December 31, 2001, 2000 and 1999 are as follows:
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
-------------- -------------- --------------
Revenues:
Ultimate Comfort Systems, Inc. $ 282,733 $ - $ -
Nauticon, Inc. - 3,754 91,006
RealCold Products, Inc. 531,605 309,111 212,596
Technicold Services, Inc. 67,751 82,175 50,611
Rotary Power Enterprise, Inc. - - 187,025
Channel Freeze Technologies, Inc. - - -
Power Sources, Inc. - - -
Corporate - - 21,165
-------------- -------------- --------------
TOTAL REVENUES $ 882,089 $ 395,040 $ 562,403
============== ============== ==============
Operating income (loss):
Ultimate Comfort Systems, Inc. $ (209,908) $ - $ -
Nauticon, Inc. (71,676) (33,331) (290,569)
RealCold Products, Inc. (944,997) (504,144) (243,429)
Technicold Services, Inc. 7,295 (109,771) 7,538
Rotary Power Enterprise, Inc. (190,834) (109,025) (8,454)
Channel Freeze Technologies, Inc. (80,120) (215,808) (313,801)
Power Sources, Inc. - - -
Corporate (769,792) (439,575) (351,227)
-------------- -------------- --------------
TOTAL OPERATING LOSS $ (2,260,002) $ (1,411,654) $ (1,199,942)
============== ============== ==============
44
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13 - REPORTABLE SEGMENTS (CONTINUED)
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
-------------- -------------- --------------
Identifiable assets:
Ultimate Comfort Systems, Inc. $ 150,429 $ 152,415 $ -
Nauticon, Inc. 239,853 280,375 385,927
RealCold Products, Inc. 336,398 132,371 144,650
Technicold Services, Inc. 26,318 120,833 122,137
Rotary Power Enterprise, Inc. 74,642 75,386 129,992
Channel Freeze Technologies, Inc. 683,232 848,777 797,531
Power Sources, Inc. 921,150 - -
Corporate 1,625,894 388,438 1,902
-------------- -------------- --------------
TOTAL IDENTIFIABLE ASSETS $ 4,057,916 $ 1,998,595 $ 1,582,139
============== ============== ==============
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
-------------- -------------- --------------
Depreciation and amortization:
Ultimate Comfort Systems, Inc. $ 10,593 $ - $ 96,761
Nauticon, Inc. 67,075 83,046 96,761
RealCold Products, Inc. 4,657 900 2,419
Technicold Services, Inc. 26,804 12,090 12,090
Rotary Power Enterprise, Inc. 530 334 365
Channel Freeze Technologies, Inc. 57,124 57,124 70,040
Power Sources, Inc. 1,865 - -
Corporate 16,667 - -
-------------- -------------- --------------
TOTAL DEPRECIATION AND
AMORTIZATION $ 185,315 $ 153,494 $ 181,675
============== ============== ==============
All of the Company's 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.
NOTE 14 -INCOME TAXES
Income taxes are provided based upon the liability method of accounting pursuant
to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred
income taxes are recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end. A valuation allowance is recorded against
deferred tax assets if management does not believe the Company has met the "more
likely than not" standard imposed by SFAS No. 109 to allow recognition of such
an asset.
45
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 -INCOME TAXES (CONTINUED)
At December 31, 2001, the Company had net deferred tax assets of $1,200,000,
principally arising from net operating loss carry forwards for income tax
purposes. As management of the Company cannot determine that it is more likely
than not that the Company will realize the benefit of the net deferred tax
asset, a valuation allowance equal to the net deferred tax asset has been
established at December 31, 2001.
The Company incurred accumulated net operating losses for income tax purposes of
approximately $3,400,000 for the year ended December 31, 2000. At December 31,
2001, the Company's net operating losses increased by approximately $2,200,000.
The Company's net operating loss carry forwards for income tax purposes are
approximately $5,600,000, which will expire on various dates through the year
2020.
The Company recorded approximately $341,000 paid by the issuance of common stock
for expenses in the year ended December 31, 2001.
NOTE 15 -LEASES
Capital Lease
- --------------
In 1999, the Company acquired a forklift, which was financed through a capital
lease. This capital lease is payable in monthly installments of $297, with
interest at 9.5%, through April 2004. Aggregate yearly maturities of this
capital lease for the years after December 31, 2001 are as follows:
Year Ending Amount
December 31,
------------ -------------
2002 $ 3,018
2003 3,298
2004 2,115
--------------
Total $ 8,431
==============
Operating Leases
- -----------------
The Company leases sales offices and plant space, in LaVernia, Texas under an
operating lease agreement, which expires March 30, 2004. Total rent expense for
the year ended December 31, 2001 was $89,999.
Future minimum rental commitments as of December 31, 2001 were as follows:
Year Ending Amount
December 31,
------------ -------------
2002 $ 36,000
2003 36,000
2004 12,000
--------------
Total $ 80,000
==============
46
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 15 -LEASES (CONTINUED)
The Company's subsidiary, Technicold Services, Inc. has a one-year lease for
office space in San Antonio, Texas. The rent is $675 per month and the lease
expires September 30, 2002.
NOTE 16 - LITIGATION
On August 31, 2000, Nauticon Inc. and its former president agreed upon a full
and final settlement of the lawsuit mentioned above. This settlement resulted
in a gain for the Company of $88,600, which was recorded as other income.
NOTE 17 - SUBSIDIARY - CHANNEL FREEZE TECHNOLOGIES, INC.
On May 18, 1998, Channel Freeze Technologies, Inc. (CFTI) was formed as a wholly
owned subsidiary of the Company to 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 patents) 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. After the Company made cash payments of $550,000 in 1998 and $100,000
in 1999, the remaining acquisition liability was $200,000 at December 31, 2001.
The agreement also required the Company to issue two-thirds 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. At
December 31, 2001, December 31, 2000 and 1999, no additional compensation was
paid or owed to SIR in connection with this purchase agreement.
Since 1999, the Company has maintained its investment in CFTI as a wholly owned
subsidiary. The patent and intellectual property owned by the subsidiary is
consolidated with the Company's other activities.
During 2002, Channel Freeze Technologies, Inc. may be dissolved as an operating
entity. The Company is negotiating with the previous owners of the technology.
Channel Freeze Technologies, Inc. was formed in September 1998, as a PowerCold
subsidiary, to acquire certain assets of Channel Ice Technologies. The
technology includes a proprietary patent for an economical multi-purpose
freezing system. Since the company is allocating all its resources into its
current product line, management has decided there is limited synergy with the
Channel Freeze technology and does not envision continuing development of these
products.
47
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Accounts Payable
- -----------------
The Company has trade accounts payable that date back to 1996. Management had
tried to contact these vendors to arrange settlement agreements. Included in the
caption Commitments and Contingencies on the Company's balance sheet are the
balances in the aggregate amount of $168,300 from vendors that could not be
contacted or did not respond to management's correspondence.
Royalty Agreement
- ------------------
See Note 5 regarding December 1, 2001 royalty agreement.
Additional Compensation
- ------------------------
See Note 17 regarding potential payments to SIR.
48
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
By: /s/ Francis L. Simola
------------------------
Francis L. Simola
President and Chief Executive Officer
Dated: March 27, 2002
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.
By: /s/ Francis L. Simola
------------------------
Francis L. Simola
Chairman and President
Chief Executive Officer
Dated: March 27, 2002
By: /s/ George C. Briley
-----------------------
George C. Briley
Director and Secretary
Chief Technology Officer
Dated: March 27, 2002
By: /s/ H. Jack Kazmar
-------------------------
H Jack Kazmar
Director and Treasurer
Chief Operating Officer
Dated: March 27, 2002