<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______________ to _____________
Commission File No. 0-20806
-------
ECO2, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 11-3087145
- --------------------------------- ---------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13902 N. Dale Mabry Highway, Suite 119, Tampa, Florida 33618
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(813)969-2002
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
20005 S.E. Hawthorne Road, Hawthorne, Florida 32604
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last year.)
Check whether the issuer: (1 filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 20, 1997, the Company had
35,847,750 shares of Common Stock outstanding, $0.01 par value.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 (Unaudited) and
September 30, 1996 2 - 3
Consolidated Statements of Operations,
for the three months ended March 31, 1997 4
Consolidated Statements of Operations,
for the six months ended March 31, 1997 5
Consolidated Statements of Cash Flows,
for the six months ended March 31, 1997 6 - 7
Consolidated Statements of Stockholders' Equity,
for the six months ended March 31, 1997 8
Notes to Consolidated Financial Statements 9 -
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations
PART II OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE> 3
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, September 30,
1997 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash (Including Restricted
cash of $47,133) $ 1,225 $ 1,251,849
Certificates of Deposit - Restricted - 950,000
Assets Available for Sale 5,021,132 3,967,670
Loans and Advances
Due from Stockholder - 99,414
Note receivable - 201,425
Other Current Assets 65,867 60,558
----------- ------------
Total current assets 5,088,224 6,530,916
----------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
(Net of Accumulated Depreciation of
$-0- and $452,515) 55,569 1,883,425
----------- ------------
OTHER ASSETS
Purchase Goodwill, net of amortization
of $26,108 1,527,767 -
Restricted Cash - 52,000
Deferred Loan Acquisition Costs 338,866 485,047
----------- ------------
Total other assets 1,866,633 537,047
----------- ------------
TOTAL ASSETS $ 7,010,426 $ 8,951,388
=========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE> 4
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
March 31, September 30,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 98,914 $ 153,526
Estimated Liability for
Closing Jet Ski Operations 564,981 855,000
Customer Deposits 100,000 100,000
Interest Payable 93,727 140,390
Accrued Expenses 1,004,000 143,765
Due to Related Party 85,500 -
------------ ------------
Total current liabilities 1,947,122 1,392,681
------------ ------------
LONG TERM LIABILITIES
Convertible Debentures 1,851,934 2,300,000
------------ ------------
TOTAL LIABILITIES 3,799,056 3,692,681
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock (No Par Value,
Authorized 1,000,000 Shares,
None Issued) - -
Common Stock (Par Value $.01 Per Share,
Authorized 45,000,000 Shares,
Issued 32,049,848) 320,498 251,036
Additional paid-in capital 24,926,137 25,287,230
Deficit Accumulated
During the Development Stage (21,751,216) (19,995,510)
Unrealized Loss on Securities
Held for Resale (250,000) (250,000)
10,000 Shares of Common Stock in
Treasury, at cost (34,049) (34,049)
------------ ------------
Total Stockholders' Equity 3,211,370 5,258,707
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,010,426 $ 8,951,388
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 5
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
(Oct 8, 1990)
to
March 31,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
REVENUE $ 299,553 $ 29,981 881,910
COST OF GOODS SOLD 429,856 25,998 455,854
----------- ----------- ------------
GROSS PROFIT (130,303) 3,983 426,056
OPERATING EXPENSES
Selling, General and
Administrative Expenses 286,234 2,033,806 13,639,923
Loss on Assets Held for Sale - - 4,706,354
Loss on Inventory Write Off - - 1,511,405
----------- ----------- ------------
Total Operating Expenses 286,234 2,033,806 19,857,682
----------- ----------- ------------
OPERATING LOSS (416,537) (2,029,823) (19,431,626)
----------- ----------- ------------
OTHER INCOME (EXPENSE)
Amortization of Deferred Costs
- Debentures - - (1,220,748)
Write Off of Note Receivable
for Exercise of Option - - (91,250)
Interest Income 50,553 114,968 680,641
Interest Expense (54,741) (167,090) (811,869)
Other 1,207 41,311 128,728
Contract Cancellation
Income (Expense) (800,000) - (460,000)
Reduction in Estimated Liability
to Complete Movie 550,000 - 550,000
Loss on Underwriting Deposit - (240,000)
Gain on Marketable Securities
and Other Investments - 12,117 49,377
Settlement Income (Expense) - (406,473)
Loss on Disposal of Assets (317,995) - (497,996)
----------- ----------- ------------
Total Other Income (Expense) (570,976) 1,306 (2,319,590)
----------- ----------- ------------
NET LOSS $ (987,513) $(2,028,517) (21,751,216)
=========== =========== ============
NET (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.04) $ (0.16)
=========== ===========
SHARES USED IN COMPUTATION OF
NET (LOSS) PER SHARE 27,047,732 12,969,232
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 6
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
(Oct 8, 1990)
to
March 31,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
REVENUE $ 300,446 $ 31,809 $ 881,910
COST OF GOODS SOLD 429,856 25,998 455,854
----------- ----------- ------------
GROSS PROFIT (LOSS) (129,410) 5,811 426,056
OPERATING EXPENSES
Selling, General and
Administrative Expenses 1,028,260 3,112,139 13,639,923
Loss on Assets Held for Sale - - 4,706,354
Loss on Inventory Write Off 4,812 - 1,511,405
----------- ----------- ------------
Total Operating Expenses 1,033,072 3,112,139 19,857,682
----------- ----------- ------------
OPERATING LOSS (1,162,482) (3,106,328) (19,431,626)
----------- ----------- ------------
OTHER INCOME (EXPENSE)
Amortization of Deferred Costs
- Debentures (48,236) - ( 1,220,748)
Write Off of Note Receivable
for Exercise of Option - - (91,250)
Interest income 76,068 202,463 680,641
Interest Expense (101,034) (205,925) (811,869)
Other 1,207 54,615 128,728
Contract Cancellation
Income (Expense) (800,000) - (460,000)
Reduction in Estimated Liability
to Complete Movie 550,000 - 550,000
Loss on Underwriting Deposit - - (240,000)
Gain on Marketable Securities
and Other Investments 46,766 22,611 49,377
Settlement Income - (406,473)
Loss on Disposal of Assets (317,995) (4,667) (497,996)
----------- ----------- ------------
Total Other Income (Expense) (593,224) 69,097 (2,319,590)
----------- ----------- ------------
NET LOSS $(1,755,706) $(3,037,231) (21,751,216)
=========== =========== ============
NET (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.06) $ (0.27)
=========== ===========
SHARES USED IN COMPUTATION OF
NET (LOSS) PER SHARE 27,594,734 11,126,182
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 7
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
(Oct 8, 1990)
to
March 31,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,755,706) $(3,037,231) $(21,751,216)
Adjustments to reconcile net loss
to net cash flows from (used in)
operating activities
Loss on Disposal of Assets 317,995 3,570 540,951
Inventory Write Off 4,812 - 1,511,405
Write Off of Note Receivable - - 91,250
Bad Debt Expense - 91,250 15,275
Depreciation and Amortization 128,326 1,144,116 1,054,794
Amortization of Deferred Costs
- Debentures 48,238 - 1,220,750
Settlement Expense (Income) - - 238,081
Compensation Expense - 312,544 1,904,860
Loss (Gain) on Assets Held for Sale (46,766) - 3,685,164
Accrued Interest Income on
Note Receivable (5,041) - (6,466)
Accrued Interest on Debentures - - 101,654
Receipt of Common Stock Dividend
Re: Gulf West Oil Co., Inc. - - (17,671)
Realized (Gain) Loss on
Marketable Securities - (22,611) 22,423
Unrealized (Gain) Loss on
Marketable Securities - - -
Adjustment of Carrying Value
of Film (300,000) - (300,000)
Issuance of Common Stock for:
Interest 46,663 - 289,132
Consulting Services - 200,000 511,250
Casino International Merger 1,093,750 - 1,093,750
Assets obtained on Acquisition
of Casino International (55,569) - (55,569)
Goodwill created for Acquisition
of Casin International (1,554,743) - (1,554,743)
Loss on Investment - - 20,000
Changes in Operating
Assets and Liabilities:
Accounts Receivable - (181,661) (7,939)
Inventory (4,812) (198,116) (896,863)
Deferred Loan Acquisition Costs 97,943 (1,333,924) (885,673)
Note Payable from Acquistion
of Casino International 500,000 - 500,000
Underwriting Deposit - - -
Other Current Assets (2,993) (50,906) (62,439)
Accounts Payable and
Accrued Interest (54,612) 1,328,990 157,372
Accrued Expenses and Other
Current Liabilities (125,114) 5,598 74,885
Estimated Liability for Closin
Jet Ski (290,018) - 564,982
Customer Deposits - - -
Interest Payable (46,663) 35,561 (11,102)
Due on Convertible Debentures (442,056) 558,622 116,566
Subscription Receivable - 62,500 62,500
Other Assets (2,316) (6,055) (8,371)
----------- ----------- ------------
Net cash flows used in
operating activities $(2,448,682) $(1,087,753) $(11,781,008)
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 8
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT CASH FLOWS - (CONTINUED)
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
(Oct 8, 1990)
March 31,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Fixed Assets (192,911) (538,432) (3,302,279)
Investment in Films - - (2,396,930)
Acquisition of Gulf West Oil
Company, Inc. Common Stock - (500,000) (500,000)
Acquisition of Spa Faucet, Inc.
Common Stock - (2,524,692) (2,100,000)
Purchase of Chapter 7 Assets - (1,840,000) (2,935,042)
(Purchase) Redemption of
Certificates of Deposit 950,000 75,000 (52,000)
Purchase of Marketable
Securities - (8,732,058) (3,556,267)
Note Receivable from Gulf West
Oil Company, Inc. - - (200,000)
Proceeds from Marketable Security
Maturities - 8,754,669 3,533,844
Proceeds from Sale of Spa Faucet
Stock 208,304 - 208,304
Payments of Commissions for
Financing - - (1,500,000)
Loans Made plus Accrued Interest 53,761 (1,719,055) 53,761
Borrowings by Shareholder plus
Accrued Interest 85,500 (3,375) (53,813)
Principal Repayments Shareholder
Loans 99,414 (12,500) (342,820)
Other Proceeds - - 87,350
----------- ----------- ------------
Net Cash Flows Used In Investing
Activities $ 1,204,068 $(7,040,443) $(13,055,892)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Convertible
Debentures - 6,480,769 13,127,148
Proceeds from Loans Payable - - 761,945
Principle Repayments of Loans,
Notes and Leases (22,569) (84,666) (874,231)
Net Proceeds from Sale of Common
Stock, Stock Options and Notes
Receivable for Exercise of
Options - - 11,840,753
Proceeds of Notes Payable 16,559 - 16,559
Purchase of Treasury Stock - - (34,049)
----------- ----------- ------------
Net Cash Flows Provided by
Financing Activities (6,010) 6,396,103 24,838,125
----------- ----------- ------------
Net Increase (Decrease) in Cash
and Cash Equivalents (1,250,624) (1,732,093) 1,225
Cash and Cash Equivalents -
Beginning of Period 1,251,849 5,457,938 -
----------- ----------- ------------
End of Period - Unrestricted 1,225 3,634,004 1,225
End of Period - Restricted - 91,841
End of Period - Total $ 1,225 $ 3,725,845 $ 1,225
=========== =========== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
7
<PAGE> 9
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED LOSS ON TOTAL
COMMON STOCK ADDITIONAL DURING SECURITIES STOCKHOLDERS'
----------------------- PAID-IN DEVELOPMENT AVAILABLE TREASURY EQUITY
SHARES AMOUNT CAPITAL STAGE FOR SALE STOCK (DEFICIT)
---------- -------- ----------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE,
September 30, 1996 25,103,655 $251,036 $25,287,230 $(19,995,510) $(250,000) $(34,049) $ 5,258,707
Issuance of Stock on
Conversion of Debentures
in Oct. 1996 Net of
Deferred Amortization
Costs through Date on
Conversion 1,846,193 18,462 423,594 - - - 442,056
Net loss - Period - - - (768,193) (768,193)
---------- -------- ----------- ------------ --------- -------- ------------
Balance,
December 31, 1996 26,949,848 269,498 25,710,824 (20,763,703) (250,000) (34,049) 4,932,570
Issuance of Stock in
Acquisition of Casino
Int'l, Inc. 5,000,000 50,000 1,043,750 - - - 1,093,750
Issuance of Stock
to Directors 100,000 1,000 14,600 - - - 15,600
Net Value of Distri-
bution of Assets in
Connection with the
Acquisition of Casino
Int'l, Inc. - - (1,843,037) - - (1,843,037)
Net Loss - Period - - - (987,513) - - (987,513)
---------- -------- ----------- ------------ --------- -------- ------------
Balance,
March 31, 1997 32,049,848 $320,498 $24,926,137 $(21,751,216) $(250,000) (34,049) $ 3,211,370
========== ======== =========== ============ ========= ======== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
8
<PAGE> 10
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE 1 - GENERAL
The financial statements of ECO2, Inc. ("ECO2" or the "Company") and its
subsidiaries as of March 31, 1997 and for the three and six months then ended
are unaudited and, in the opinion of ECO2 , reflect all adjustments necessary
for a fair presentation of such data and have been prepared on a basis
consistent with the September 30, 1996 audited financial statements. All such
adjustments made were of a normal recurring nature. The Company's significant
accounting policies are described in the notes to the September 30, 1996 Audited
Financial Statements and there have been no material changes in significant
accounting policies from those described therein.
ECO2 and its wholly owned subsidiary ERI Delaware, Inc. ("ERI Delaware") were
established to provide integrated solid waste tire management services to
governmental, commercial and industrial customers. ECO2 (formerly named Energy
Research International, Inc.) and ERI Delaware were incorporated in Delaware in
December 1991 and February 1992 respectively. In 1996, the Company formed a
wholly owned subsidiary, ECO2 Financial, Inc., a Delaware corporation ("ECO2
Financial"). ECO2 Financial's primary function is to seek additional investments
and financial opportunities for ECO2 and its subsidiaries.
During the fiscal year ended September 30, 1996, the Company ceased attempting
to use production and marketing efforts for the modular scrap tire resource
recovery system and related by-products. This decision was based on the
projected continued losses, the inability to consummate sales of systems and the
insignificant demand for the by-products. Accordingly, as of September 30, 1996,
inventory (primarily shredders and reactors) was written down to its estimated
net realizable value and results of operations for fiscal year ended September
30, 1996 includes a charge of $1,506,593.
On February 26, 1997, the Company along with a new formed, wholly owned
acquisition subsidiary, ECO2, Acquisition, Inc., a Florida corporation ("ECO2
Acquisition"), entered into an Agreement and Plan of Reorganization (the
"Agreement") by and among ECO2 and its subsidiary ECO2 Acquisition and Prentice
Capital, Inc., a Delaware corporation ("Prentice Capital") and its wholly owned
subsidiary Casinos International, Inc., a Florida corporation ("Casinos
International") to acquire 100% of the issued and outstanding shares of common
stock of Casinos International for 5,000,000 shares of ECO2's restricted common
stock ("ECO2 shares"), and a promissory note for $500,000 issued by ECO2
Acquisition and secured by all the shares of ECO2 Acquisition. As a part of the
Agreement, Casinos International and ECO2 Acquisition were merged, with ECO2
Acquisition being the surviving entity. Also pursuant to the Agreement, and
immediately prior to the closing of the Agreement, ECO2 conveyed to Energy Rec.
Systems of North Florida, Inc. ("Energy Systems"), all rights, title and
interest in certain patents owned by ECO2 with respect to its tire recycling
processes, and certain other assets as set forth in the Agreement. The Company
also agreed to forgive all indebtedness to the Company by Charles D. Ledford;
issue stock options at an exercise price of $0.80 per share enabling Charles
Ledford to acquire 300,000 shares, and enabling Vivian Ledford and Raymond
Ledford, to each acquire 200,000 shares; issue 50,000 shares each to Lark
Napier, Jr. and Russell MacElmurry, both directors of the Company at the time of
the plan of reorganization. The Company also terminated the employment
agreements of Charles, Vivian, and Raymond Ledford, and as consideration for
such termination, the Company agreed to pay Energy Systems $800,000, of which
$200,000 was paid at closing and the balance was to be paid in three
installments of $200,000 each, due April 12, May 12, and June 12 1997. The
obligation related to these payments was secured by ECO2's pledging of 600,000
shares of common stock of Spa Faucet, Inc. ("Spa Faucet") and 600,000 shares of
common stock of ECO2. As of the date of these statements, no installment
payments have been made.
The accompanying consolidated financial statement and related notes should be
read in conjunction with the audited financial statements of the Company, and
notes thereto, for the fiscal
9
<PAGE> 11
year ended September 30, 1996. The information furnished reflects, in the
opinion of management, all adjustments necessary for a fair presentation of the
results of the interim periods presented.
NOTE 2 - ASSETS AVAILABLE FOR SALE
In March 1996, the Company formed ECO Jet Systems, Inc., a Delaware corporation
("ECO Jet") to acquire, at a bankruptcy auction, the assets of a jet ski
manufacturer. The assets were purchased for approximately $1,932,000. In
December 1996, the Company decided to cease activity and sell the remaining
assets. Accordingly, the purchase has been treated as a temporary investment for
accounting purposes. As of March 31, 1997, the Company has recorded $1,000,000
as assets available for sale, and has recorded a provision for additional losses
of $564,982. On May 8, 1997, the Company entered into a agreement of purchase
and sale ("Purchase Agreement") by and between Industrial Assets Environmental
Remediation, Inc., a California corporation, d/b/a I. A. Machinery Co. ("IAM"),
ECO Jet and ECO2, whereby IAM agreed to purchase the assets of ECO Jet in
exchange for a cash payment of $425,000 and a percentage of the net amount
received by IAM from the sale of the assets of ECO Jet, in excess of $175,000 at
an auction to be conducted by IAM. At the date of this filing, the Company has
received $425,000 and is currently awaiting the occurrence of the auction.
In March 1996, the Company paid $2,100,000 to acquire 7,800,000 shares of
post-split restricted common stock of Spa Faucet. In October 1996, the Company
sold its interest in Spa Faucet for $2,500,000 net of commission of $500,000, to
an investment group led by Spa Faucet's president, Leonard Sudman. The agreement
provides for monthly payments of $208,333 commencing November 1, 1996. As of the
date of this filing, the Company received only one payment, provided notice
to the purchaser that the share purchase agreement was in default and notified
the escrow agent that was holding the shares as security for the payment of
the deferred purchase price that the agreement was in default and that the
Company was entitled to possession of the shares. The escrow agent deferred the
shares of Spa Faucet, Inc. back to the Company, however the shares are still
titled in the name of the purchaser, however, the Company is attempting to have
the shares put in its name.
In February 1996, the Company acquired 1,000 shares of convertible preferred
stock of Gulfwest Oil Company, Inc. ("Gulfwest Oil") for $500,000. In June 1996,
the Company converted the preferred stock into 142,857 shares of restricted
common stock. The Company's investment securities are classified as "assets
available for sale" in the accompanying financial statements. Accordingly,
unrealized gains and losses are excluded from earnings and reported as a
separate component of stockholders' equity. As of March 31, 1997, the common
stock investment in Gulfwest Oil, had a cost of $517,671 and a fair value of
$267,671. The Company has recorded a valuation allowance of $250,000. Such
amounts have been reflected in the accompanying financial statements. The
Company's former chairman, Charles D. Ledford is a director of Gulfwest Oil. In
September 1996, the Company issued a $200,000 promissory note to Gulfwest Oil
bearing interest at a rate of 10% per annum and payable in 60 days. At the date
of this filing, the promissory note has been paid in full.
During 1996, the Company loaned funds for the production of two motion picture
films pursuant to two letters of credit with maximum available funds of
$2,227,542 and $169,388. Outstanding funds accrue interest at the prime rate
plus two percent, are due on demand and are collateralized by all cash,
property, intangibles and instruments of each movie plus are personally
guaranteed by the signer on the notes. The primary shooting on one film (the
"Film") has been completed, however, this film has not been distributed and the
Company has exercised a lien to own the film. The Company has estimated that
$1,800,000 will be received through the sale of distribution rights less
$350,000 representing post production costs and distribution costs. During the
current period the Company recognized an additional $300,000 in revenue from the
sale of distribution rights for the Film. The Company entered into an agreement
whereby an unrelated third party is funding $300,000 of post production and
distribution costs in exchange for a percentage of the revenues from the
distribution rights of the Film not to exceed $700,000. Losses related to these
investments approximated $1,500,000.
NOTE 3 - CONVERTIBLE DEBENTURES
During the year ended September 30, 1995, the Company sold $5,705,000 of 9%
convertible debentures eligible at the option of the holder for conversion to
common stock 41 days after the issuance date. Upon conversion, the holder is to
receive the greater number of shares of the fraction having the dollar amount of
the note to be converted plus accrued interest as the numerator and 65% of the
average closing bid price of the common stock for the five business days
immediately preceding the conversion date or the fraction having the dollar
amount of the note to be converted plus accrued interest as the numerator and
65% of the average of the closing
10
<PAGE> 12
bid prices of the common stock for the five trading days prior to the date of
the subscription as the denominator. In no event shall the conversion price be
reduced below $1.30.
During the year ended September 30, 1996, the Company sold $10,375,000 of 9%
convertible debentures eligible at the option of the holder for conversion to
common stock 45 days after the issuance date at the defined market price of the
common stock. Market price shall be 65% of the average closing bid price of the
common stock for the five business days immediately preceding the conversion
date. The Company is entitled, at its option. to redeem all or part of the
debentures by paying the holder the excess of the market price and the higher
number of shares of common stock that would be issuable on conversion. The
Company is entitled to redeem, at its option, all or part of the debentures and
accrued interest being converted if at the time of such conversion, the market
price is $0.82 or less by paying the holder 110% of the face amount of the
debenture being converted.
As of March 31, 1997, 900,000 shares of common stock were held in escrow
anticipating conversion of the debentures, however, holders of convertible
debentures who have requested that these debentures be converted into stock are
entitled to a greater number of shares. The deferred loan acquisition costs
pertaining to each convertible debenture will be amortized to operations over
the one year and two year debenture term with all remaining unamortized costs
charged to additional paid in capital upon conversion. Subsequent to December
31, 1996, the outstanding debenture holders demanded shares aggregating
approximately 7,000,000 shares. The Company has not honored their request to
date.
On March 18, 1997, a convertible debenture holder filed a complaint against ECO2
and its sole director, Alan S. Lipstein challenging the Company's failure and
refusal to honor the convertible debenture holder's conversion of the $345,000
principal amount into 2,897,902 shares of common stock. A judgment was entered
against the Company and the Company has issued the shares to the former
debenture holder.
NOTE 4 - LITIGATION
On March 18, 1997, a convertible debenture holder filed a complaint against the
Company and its sole director, Alan S. Lipstein challenging the Company's
failure and refusal to honor the convertible debenture holder's conversion. (See
Note 3 - CONVERTIBLE DEBENTURES). Also included in the complaint was a demand
that the Company schedule its annual meeting of shareholders. A judgment was
issued against the Company requiring it to issue the shares in question
2,897,902 and to hold a shareholders meeting on or before June 13, 1997.
On January 23, 1997, a former employee filed suit against the Company certain
officers, and others in Orange County California Superior Court seeking damages
in excess of $250,000 under theories of breach of contract, breach of implied
covenant of good faith and fair dealing, tortious inducement of breach of an
employment contract, intention infliction of emotional distress and negligent
misrepresentation and for an accounting. The Company has not yet filed a
responsive pleading, but intends to vigorously defend the action.
On August 5, 1996, two entities filed suit against the Company in Orange County
California Superior Court seeking damages in the amount of $166,000. The Company
denies that any commission is due.
No amounts have been accrued for litigation.
11
<PAGE> 13
NOTE 5 - SUBSEQUENT EVENTS
On April 30, 1997, the Company along with Casinos International, entered into an
agreement and plan of reorganization (the "Riviera Agreement") with Riviera
International Casinos, Inc. ("Riviera"), a Florida corporation, and Richard
Garreffa to transfer 50% of the issued and outstanding shares of common stock of
Casinos International for 50% of the shares of Riviera's common stock (the
"Riviera shares").
Riviera is finalizing negotiations for leasing, from Europa Stardancer
Corporation, a 160 foot U.S. flag gaming vessel, known as the M/V Stardancer.
The term of the lease will be six months, with a six month renewal option.
Riviera also will have a purchase option for the Stardancer, on terms to be
negotiated. This gaming vessel will operate out of the port operated by Riviera,
located in Riviera Beach, Florida and will offer customers and guests full
casino gaming, once the vessel has traveled over three miles off the U.S. coast
into "international waters". It is anticipated that this lease agreement will be
executed on or before May 30, 1997, and that the M/V Stardancer will begin
operations in Riviera Beach Florida on or about July 1, 1997.
On May 5, 1997 the Company's Board of Directors effected a 1 for 50 reverse
split of the Company's common stock. This reverse split took effect on May 20,
1997. All references to shares of the Company's common stock do not reflect the
reverse stock split.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL OVERVIEW
ECO2, Inc. (the "Company" or "ECO2") was organized under the laws of the State
of Delaware on December 4, 1991, under the name of Energy Research International
Inc. and changed to ECO2 on May 7, 1992. Prior to December 4, 1991, the
Company's business was operated by two Florida corporations, Energy Research
International Inc. ("ERI Florida") formed on November 22, 1989, and Energy
Research International Sales, Inc. ("ERI Sales"), formed on October 17, 1991. On
February 19, 1992, ERI Delaware, Inc. ("ERI Delaware") was formed as a wholly
owned subsidiary of the Company under the laws of the State of Delaware. On July
1, 1992, ERI Florida and ERI Delaware merged, with ERI Delaware as the surviving
corporation, and the Company and ERI Sales merged, with the Company as the
surviving corporation. As a result of these mergers, ERA Sales and ERI Florida
are deemed, for accounting purposes, to have been the surviving entities.
The Company began operations on December 4, 1991 and has operated as a
development stage enterprise. During this time, the Company completed the
construction and implementation of an operational scrap tire resource recovery
facility at its headquarters in Hawthorne, Florida. Furthermore, as a
development stage enterprise, the Company has focused its efforts on financial
planning, raising capital, research and development, establishing sources of
supply, developing markets, organizing the corporation, and developing its
business plan.
During the fiscal year ended September 30, 1996, the Company ceased attempting
to use production and marketing efforts for the modular scrap tire resource
recovery system and related by-products. This decision was based on the
projected continued losses, the inability to consummate sales of systems and the
insignificant demand for the by-products. Accordingly, as of September 30, 1996,
inventory (primarily shredders and reactors) was written down to its estimated
net realizable value and results of operations for fiscal year ended September
30, 1996 includes a charge of $1,506,593.
13
<PAGE> 15
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited financial
statements and notes thereto appearing in this Form 10-QSB. The following is a
discussion of ECO2's results of operations for the three month and six month
period ended March 31, 1997 and 1996. ECO2's net loss decreased from $2,028,517
during the three months ended March 31, 1996 to $987,513 for the same period
ended March 31, 1997. ECO2's net loss decreased from $3,037,231 during the six
months ended March 31, 1996 to $1,755,706 for the same period ended March 31,
1997. Such changes are attributed to discontinuance of operations of its modular
scrap tire resource recovery system business. Net revenues for the six months
ended March 31, 1997 were $300,446 compared to $31,809 for the same period ended
March 31, 1996, while net revenues for the three months ended March 31, 1997
were $299,553 compared to $29,981 for the same period ended March 31, 1996. This
increase in revenues is a direct result of the Company's recognition of revenues
from the distribution rights of the Company's Film, referenced elsewhere herein.
Operating expenses for the six months ended March 31, 1997 were $1,033,072
compared to $3,112,139 for the same period ended March 31, 1996, while operating
expenses for the three months ended March 31, 1997 were $286,234 compared to
$2,033,806 for the same period ended March 31, 1996. This significant reduction
in expenses is a direct result of the Company's discontinuance of operations of
its modular scrap tire resource recovery system business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operational losses for years ended September 30, 1995
and 1996 and for the six months ended March 31, 1997 of $3,052,000, $10,877,000,
and $1,162,482, respectively, which have adversely reduced the Company's
liquidity and capital resources. The Company anticipates that operational losses
for the year ended September 30, 1997 will be significantly reduced based on the
Company's acquisition of Casinos International.
The Company's acquisition of Casinos International will require additional
capital to implement its business plan. The future success of the Company will
depend upon management's ability to attain and maintain profitable operations,
to obtain favorable financing arrangements and to raise additional capital. The
Company does not currently meet its operational cash flow requirements, and
anticipates losses for year ended September 30, 1997. The Company has sought to
raise capital to expand its business operations by the sale of its common stock
owned in two publicly traded companies, and the sale of inventory and equipment
held for sale as a result of a discontinuance of its jet ski operation. The
Company's cash requirements are also expected to be supported by the proceeds
from the issuance of its securities. The timing and nature of the proposed sale
of the Company's debt or equity securities are uncertain as the Company has not
yet received a commitment from a broker-dealer to underwrite the sale of its
securities. While the Company is negotiating with several broker-dealers to
underwrite the sale of its securities, there can be no assurance given that the
Company will be successful in negotiating an acceptable agreement with a
broker-dealer. If the Company is unable to reach an agreement with a
broker-dealer to underwrite its securities, the Company will likely attempt to
sell its securities without the assistance of a broker-dealer.
14
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and its subsidiaries are defendants in various legal actions which
arise in the normal conduct of business. In addition, the Company is a party in
the following legal proceedings:
On January 23, 1997, a former employee filed suit against the Company certain
officers, and others in Orange County California Superior Court seeking damages
in excess of $250,000 under theories of breach of contract, breach of implied
covenant of good faith and fair dealing, tortious inducement of breach of an
employment contract, intention infliction of emotional distress and negligent
misrepresentation and for an accounting. The Company has not yet filed a
responsive pleading, but intends to vigorously defend the action.
On August 5, 1996, two entities filed suit against the Company in Orange County
California Superior Court seeking damages in the amount of $166,000. The Company
denies that any commission is due.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Mr. Alan S. Lipstein, the current President and Mr. Donald R. Mastropietro, the
newly appointed Chief Financial Officer believe the information in this report
to be accurate however, due to the fact that they have recently become
affiliated with the Company, and due further to the fact that former management
compiled a portion of this information and has generally been uncooperative
current management will support this report if its investigation of the
financial condition of the Company is other than as reported.
15
<PAGE> 17
ITEM 6. EXHIBITS, REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT # DESCRIPTION OF DOCUMENT
3.01 Agreement and Plan of Reorganization by and among ECO2,
Casinos International, Inc., Riviera International Casinos,
Inc. and Richard Garreffa, dated April 30, 1997
27.1 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
None
16
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this 10-QSB report to be signed on its behalf by the undersigned thereunto duly
authorized.
ECO2, INC.
----------------------------------------
(Registrant)
Date May 22, 1997 /s/ Alan S. Lipstein
-------------------------------- ----------------------------------------
Alan S. Lipstein
Chairman, President &
Chief Executive Officer
Date May 22, 1997 /s/ Donald R. Mastropietro
-------------------------------- ----------------------------------------
Donald R. Mastropietro
Chief Financial Officer
17
<PAGE> 1
AGREEMENT
AND
PLAN OF REORGANIZATION
BY AND AMONG
RIVIERA INTERNATIONAL CASINOS, INC.
AND
RICHARD GARREFFA
AND
CASINOS INTERNATIONAL, INC.
AND
ECO2, INC.
Dated: April 30, 1997
<PAGE> 2
Agreement and Plan of Reorganization ("Agreement"), dated as of April
30, 1997, by and among ECO2, Inc., a Delaware corporation ("ECO"); Casinos
International, Inc., a Florida corporation ("Casinos International"); Riviera
International Casinos, Inc., a Florida corporation ("Riviera"); and Richard
Garreffa ("Garreffa").
BACKGROUND INFORMATION
Casinos International deems it advisable that Casinos International be
merged into Riviera pursuant to this Agreement and in accordance with the
applicable statutes of the States of Florida. ECO, Riviera and Casinos
International desire to adopt a plan of reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). Accordingly, in consideration of the promises contained herein, ECO,
Casinos International, Riviera and Garreffa adopt this plan of reorganization
and agree as follows:
OPERATIVE PROVISIONS
ARTICLE 1
MERGER
1.1 Transfer of Property and Liabilities. Upon the Effective Date (as
defined in Article 3 hereof) of the merger, the separate existence of Casinos
International shall cease; all of the outstanding shares of stock of Casinos
International shall be exchanged for and converted into shares of the common
stock of Riviera as hereinafter provided; and upon the filing of a Certificate
of Merger with the Secretary of State of the State of Florida, Riviera shall
possess all the rights, privileges, immunities, powers and purposes, and all
property, causes of action and every other asset of Casinos International and
shall assume and be liable for all the liabilities, obligations and penalties of
Casinos International, in accordance with Florida law.
1.2 Surviving Corporation. Following the merger, the existence of
Riviera shall continue unaffected and unimpaired by the merger, with all the
rights, privileges, immunities and powers, and subject to all the duties,
liabilities, of a corporation organized under the laws of Florida. The
Certificate of Incorporation and Bylaws of Riviera, as in effect immediately
prior to the Effective Date, shall continue in full force and effect and shall
not be changed in any manner by the merger. The Board of Directors of Riviera
immediately prior to the Effective Date shall be reconstituted as contemplated
in Section 4 below.
ARTICLE 2
CONVERSION OF SHARES.
2.1 Conversion Ratio. As a result of the merger contemplated by this
Agreement, ECO, the sole shareholder of Casinos International, will receive
1,000 shares, (which represents 50% of the total shares issued and outstanding
in Riviera) of the common
<PAGE> 3
capital stock of Riviera (the "Riviera Shares"). In order to effect such
conversion, the shares of Casinos International's common stock issued and
outstanding immediately prior to the Effective Date (the "Casinos International
Shares") shall be converted by the merger into the Riviera Shares.
2.2 Shares of Riviera. None of the issued shares of Riviera shall be
converted as a result of the merger and all of such shares shall remain issued
shares of capital stock of Riviera.
ARTICLE 3.
CLOSING; CERTIFICATE OF MERGER.
3.1 Closing. The closing contemplated by Section 1.1 (the "Closing")
shall be held at the offices of Casinos International's counsel, Bush Ross
Gardner Warren & Rudy, P.A., 220 South Franklin Street, Tampa, Florida 33602 on
May __, 1997, unless another place or date is agreed upon in writing by the
parties (the "Closing Date"). At the Closing, all documents called for by this
Agreement (the "Closing Documents") shall be executed by the respective parties.
Riviera shall deliver to ECO the stock certificate for the Riviera Shares. ECO
shall deliver to Riviera the stock certificate for the Casinos International
Shares and the books and records of Casinos International.
3.2 Certificate of Merger. After the Closing provided for in Section
3.1 above, the Certificate of Merger executed by the parties at Closing shall be
submitted for filing with the Secretary of State of Florida. The date of the
latter of such filing, or such other date as the parties may agree upon in
writing pursuant to applicable law, shall be the effective date of the Merger
(the "Effective Date").
ARTICLE 4.
RELATED TRANSACTIONS AND ADDITIONAL AGREEMENTS.
4.1 Board of Directors of Riviera. On the Effective Date the existing
members of the Board of Directors of Riviera shall appoint Alan S. Lipstein and
George Carapella as members to the Board of Directors of Riviera and,
immediately thereafter, all other members of the Board of Directors of Riviera,
other than Kevin Farley and Richard Garreffa shall resign. Additionally, all of
the existing officers of Riviera shall resign effective as of the Closing and
the officers of Riviera shall be those persons set forth on Schedule 4.1
attached hereto.
4.2 Option. ECO hereby grants to Alan Lipstein the irrevocable option
to redeem the shares of Riviera held by ECO in the event that it is determined
that the Agreement and Plan of Reorganization by and among ECO, ECO2
Acquisition, Inc., Casinos International and
-2-
<PAGE> 4
Prentice Capital, Inc., dated February 26, 1997, is rescinded or otherwise
cancelled, or in the event that the current board of directors of ECO are
replaced without the written consent of the existing board members of ECO. The
option price for the Riviera Shares held by ECO shall be 5,000,000 shares of the
common stock of ECO and the option may be exercised by Lipstein at any time
during the 30 day period following the occurrence of one of the above mentioned
events.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
CASINOS INTERNATIONAL
Casinos International represents and warrants to Riviera and Garreffa
as follows:
5.1 Organization, Power, Standing and Qualification. Casinos
International is a corporation duly organized, validly existing, and in good
standing under the laws in the State of Florida and has full corporate power and
authority to carry on its business as it is now being conducted and to own and
operate the properties and assets now owned and operated by it. Casinos
International is duly qualified to do business and is in good standing in each
and every jurisdiction where the failure to qualify or to be in good standing
would have an adverse effect upon its financial condition, the conduct of its
business or the ownership of its assets.
5.2 Authority. Casinos International has the power and authority to
execute, deliver and perform this Agreement; and this Agreement is a valid and
binding obligation of the Casinos International, enforceable in accordance with
its terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, moratorium, or similar laws affecting the enforcement of creditors'
rights generally.
5.3 Validity of Contemplated Transactions; Interference. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (a) contravene any
provision of the Certificate of Incorporation or Bylaws of Casinos
International; (b) violate, be in conflict with, constitute a default under,
cause the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, or effectiveness of any material agreement, contract,
indenture, lease, or mortgage to which Casinos International is a party; (c)
subject the assets of Casinos International to any indenture, mortgage,
contract, commitment, or agreement, other than this Agreement; (d) reasonably
interfere with any other agreement to which Casinos International is a party; or
(e) violate any material provision of law, rule, regulation, order, permit, or
license to which Casinos International is subject.
5.4 Capitalization of Casinos International. Casinos International's
authorized capital stock consists of 7,500 shares of common stock, $.001 par
value, 100 of which shares are presently outstanding, validly issued, fully paid
and non-assessable. There are no outstanding
-3-
<PAGE> 5
options, warrants, conversion privileges, subscriptions, calls, commitments or
rights of any character relating to any authorized but unissued capital stock of
Casinos International.
5.5 Assets of Casinos International. Casinos International owns no
assets other than a commitment from The Royal Bank of Scotland to loan Casinos
International $6,500,000 for the construction of a gaming vessel and an oral
commitment, which Casinos International is currently negotiating a written lease
agreement for, to lease a gaming vessel from Europa Cruise Corporation.
5.6 Absence of Undisclosed Liabilities. Casinos International has no
material liabilities or obligations except for those incurred in the ordinary
course of business. Except as otherwise provided in this Agreement, the term
"liabilities or obligations" as used in this Agreement shall include any direct
or indirect indebtedness, claim, loss, damage, deficiency (including deferred
income tax and other net tax deficiencies), cost, expense, obligation,
guarantee, or responsibility, whether accrued, absolute, or contingent, known or
unknown, fixed or unfixed, liquidated or unliquidated, secured or unsecured.
5.7 Litigation; Compliance with Laws. There is no suit, action, claim,
arbitration, administrative or legal or other proceeding, or governmental
investigation pending or, to the knowledge of Casinos International, threatened
against or related to Casinos International. There has been no failure to comply
with, nor any default under, any law, ordinance, requirement, regulation, or
order applicable to Casinos International or its business operations, nor any
violation of or default with respect to any order, writ, injunction, judgment,
or decree of any court or federal, state or local department, official,
commission, authority, board, bureau, agency, or other instrumentality issued or
pending against Casinos International which in any such case would reasonable be
expected to have a material adverse effect on the financial condition, its
business, results of operations, properties or assets of Casinos International.
5.8 Veracity of Statements. To the knowledge of Casinos International,
no representation or warranty by Casinos International contained in this
Agreement and no statement contained in any certificate, schedule or other
instrument furnished to Casinos International pursuant hereto or in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary to make it not
misleading.
5.9 Acquisition of Riviera Shares for Investment. The shareholder of
Casinos International, ECO, will execute this Agreement, in order confirm that
it is acquiring the common stock of Riviera for investment purposes, for its own
account and not with a view to the resale or distribution thereof in violation
of any state or federal securities laws. The shareholder shall not sell,
transfer, pledge or hypothecate any of the Riviera Shares in the absence of
registration under or pursuit to an applicable exception from, federal and all
applicable security law.
-4-
<PAGE> 6
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF RIVIERA AND GARREFFA
Riviera and Garreffa, jointly and severally, represent and warrant to
Casinos International, ECO and Lipstein as follows:
6.1 Organization, Power, Standing and Qualification. Riviera is a
corporation duly organized, validly existing and in good standing under the laws
in the State of Florida and has full corporate power and authority to carry on
its business as it is now being conducted and to own and operate the properties
and assets now owned and operated by it.
6.2 Capitalization of Riviera. Riviera's authorized capital stock
consists of _______ shares of common stock, $.01 par value, ___________ of which
shares are presently outstanding, validly issued, fully paid and non-assessable.
6.3 Financial Statements. Riviera has delivered to Casinos
International its consolidated balance sheet for its fiscal year ended December
31, 1996 (the "Riviera Balance Sheet") as well as its consolidated statement of
income and loss for the year ended December 31, 1996, which have been prepared
in accordance with the applicable books and records of Riviera and presents
fairly the financial condition of Riviera as of December 31, 1996, and there has
been no material change in such financial condition of Riviera since December
31, 1996.
6.4 Absence of Undisclosed Liabilities. Riviera has no liabilities or
obligations except for those (a) reflected on the Riviera Balance Sheet; (b)
reflecting contractual liabilities or obligations incurred in the ordinary
course of business that are not required by generally accepted accounting
principles to be reflected in a balance sheet; (c) incurred in the ordinary
course of business subsequent to the date of the Riviera Balance Sheet and not
required to be disclosed pursuant to the terms of this Agreement; and (d)
specifically disclosed in Schedule 6.4 attached hereto. Except as otherwise
provided in this Agreement, the term "liabilities or obligations" as used in
this Agreement shall include any direct or indirect indebtedness, claim, loss,
damage, deficiency (including deferred income tax and other net tax
deficiencies), cost, expense, obligation, guarantee, or responsibility, whether
accrued, absolute, or contingent, known or unknown, fixed or unfixed, liquidated
or unliquidated, secured or unsecured.
6.5 Certain Tax Matters. Riviera has duly filed all federal, state, and
local tax returns and reports required to be filed by Riviera for all periods
ending on or prior to March 31, 1997 and all taxes, including income, gross
receipts, and other taxes and any penalties with respect thereto, shown thereon
to be due and payable, have been paid, withheld, or reserved for or are
reflected as a liability in the Riviera Balance Sheet. The returns and reports
are, to the best knowledge of Riviera, correct and complete. Riviera has not
entered into any agreements for the extension of time for the assessment of any
tax or tax delinquency, has received no outstanding or unresolved notices from
the Internal Revenue Service or any taxing body of any proposed examination or
of any proposed deficiency or assessment, and has properly withheld
-5-
<PAGE> 7
all amounts required by law to be withheld for income taxes and unemployment
taxes, including without limitation social security and unemployment
compensation, relating to its employees, and remitted such withheld amounts to
the appropriate taxing authority as required by law.
6.6 Litigation; Compliance with Laws. There is no suit, action, claim,
arbitration, administrative or legal or other proceeding, or governmental
investigation pending or, to the knowledge of Riviera threatened against or
related to Riviera. There has been no failure to comply with, nor any default
under, any law, ordinance, requirement, regulation, or order applicable to
Riviera or its business operations, nor any violation of or default with respect
to any order, writ, injunction, judgment, or decree of any court or federal,
state or local department, official, commission, authority, board, bureau,
agency, or other instrumentality issued or pending against Riviera which might
have a material adverse effect on the financial condition, its business, results
of operations, properties or assets of Riviera.
6.7 No Changes. Since December 31, 1996 there has not been:
a. Any change in the financial or other condition, assets,
liabilities or business of Riviera, which individually or in the
aggregate has been materially adverse to Riviera;
b. Any damage, destruction or loss (whether or not covered by
insurance) or any condemnation by governmental authorities which has or
may adversely affect the business or assets of Riviera to a material
degree;
c. Any declaration, setting aside or payment of any dividend
or other distribution in respect of any of Riviera's shares or any
direct or indirect redemption, purchase or other acquisition of
Riviera's shares or any direct or indirect payment or incurring of
management fees or other transactions between the shareholders of
Riviera and Riviera; or
d. Any increase in the compensation payable or to become
payable by Riviera to any of its officers, employees or agents, or any
known payment or arrangement made to or with any thereof, except in the
ordinary course of business.
6.8 Veracity of Statements. No representation or warranty by Riviera or
Garreffa contained in this Agreement and no statement contained in any
certificate, schedule or other instrument furnished to Casinos International or
ECO pursuant hereto or in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary to make it not misleading.
6.9 Copies of Articles of Incorporation, Bylaws and Stock Records. A
copy of Riviera's Certificate of Incorporation, Bylaws and stock records
(certified by the Secretary of Riviera) have been delivered to Casinos
International and ECO and each is correct and in effect
-6-
<PAGE> 8
as at the date of this Agreement. Such books and records have been regularly and
properly kept and are complete, accurate and legally sufficient under applicable
law.
6.10 Directors and Officers. Schedule 6.10 attached hereto is a true
and complete list as of the date of this Agreement showing the names of
Riviera's directors and officers, each of whom has been duly elected.
ARTICLE 7
INDEMNIFICATION
7.1 ECO and Casinos Internationals Indemnification of Riviera and
Garreffa. From and after the Effective Date, ECO and Casinos International,
jointly and severally shall indemnify and hold harmless Riviera and Garreffa
(collectively, the " Riviera Indemnitees") from and against any and all damages,
losses, obligations, deficiencies, liabilities, claims, encumbrances, penalties,
costs, and expenses, including reasonable attorneys' fees (together, a "Loss")
which the Riviera Indemnitees may suffer or incur, resulting from, related to,
or arising out of: (a) the transactions contemplated by this Agreement; (b)
misrepresentation, breach of warranty, or nonfulfillment of any of the covenants
or agreements of Casinos International or ECO in this Agreement or from any
misrepresentation in or omission from any certificate or document furnished or
to be furnished to the Riviera Indemnitees hereunder and (c) any and all
actions, suits, investigations, proceedings, demands, assessments, audits,
judgments, and claims (including employment-related claims) arising out of any
of the foregoing; provided, however, that before the Riviera Indemnitees may
assert a claim for indemnity under this Section, the Riviera Indemnitees must
give or cause to be given written notice of such claim to ECO as provided in
Article 7.3.
7.2 Riviera and Garreffa Indemnification of ECO and Casinos
Internationals. From and after the Effective Date, Riviera and Garreffa, jointly
and severally shall indemnify and hold harmless ECO and Casinos International
(collectively, the "ECO Indemnitees") from and against any and all damages,
losses, obligations, deficiencies, liabilities, claims, encumbrances, penalties,
costs, and expenses, including reasonable attorneys' fees (together, a "Loss")
which the ECO Indemnitees may suffer or incur, resulting from, related to, or
arising out of: (a) the transactions contemplated by this Agreement; (b)
misrepresentation, breach of warranty, or nonfulfillment of any of the covenants
or agreements of Riviera or Garreffa in this Agreement or from any
misrepresentation in or omission from any certificate or document furnished or
to be furnished to the ECO Indemnitees hereunder and (c) any and all actions,
suits, investigations, proceedings, demands, assessments, audits, judgments, and
claims (including employment-related claims) arising out of any of the
foregoing; provided, however, that before the ECO Indemnitees may assert a claim
for indemnity under this Section, the ECO Indemnitees must give or cause to be
given written notice of such claim to Riviera and Garreffa as provided in
Article 7.3.
-7-
<PAGE> 9
7.3 Notice. Promptly after acquiring knowledge of any Loss or action,
suit, investigation, proceeding, demand, assessment, audit, judgment, or claim
against which the indemnitees have been indemnified, the applicable Indemnitee
shall give to the indemnitor written notice thereof. The applicable indemnitor
shall, at its own expense, promptly defend, contest or otherwise protect against
any Loss or action, suit, investigation, proceeding, demand, assessment, audit,
judgment, or claim against which it has indemnified the indemnitees, and the
indemnitor shall receive from the indemnitee all necessary and reasonable
cooperation in said defense including, but not limited to, the services of
employees of the other party who are familiar with the transactions out of which
any such Loss or action, suit, investigation, proceeding, demand, assessment,
audit, judgment, or claim may have arisen. The indemnitor shall have the right
to control the defense of any such proceeding unless relieved of its liability
hereunder with respect to such defense by the indemnitees. The Indemnitor shall
have the right, at its option, and, unless so relieved, to compromise or defend,
at its own expense by its own counsel, any such matter involving the asserted
liability of the indemnitees. In the event that the indemnitor shall undertake
to compromise or defend any such asserted liability, it shall promptly notify
the indemnitees of its intention to do so. In the event that the indemnitor,
after written notice from an indemnitee, fails to take timely action to defend
the same, the indemnitee shall have the right to defend the same by counsel of
its or his own choosing, but at the cost and expense of the indemnitor.
7.4 Money Damages. If the Loss indemnified against pursuant to the
provisions of Articles 7.1 or 7.2 hereof can be compensated by the payment of
money, the indemnitor shall, within 21 days after receipt of a written notice of
a claim pursuant to Articles 7.1 or 7.2 deliver to the indemnitee either: (a)
the amount of such claim by check or by wire transfer to the bank account of
that party's choosing, or (b) a written notice stating that it objects to the
validity of such claim and setting forth in reasonable detail the grounds on
which it is contesting the validity of the claim.
ARTICLE 8
SURVIVAL OF REPRESENTATIONS,
WARRANTIES, GUARANTEES, AND COVENANTS
8.1 Date Certain For Survival. All representations and warranties made
by ECO, Casinos International, Riviera or Garreffa in this Agreement or pursuant
hereto shall survive the closing hereunder for a period ending on the third
anniversary of the Effective Date.
ARTICLE 9
CONDUCT OF CASINOS INTERNATIONAL
ECO AND CASINOS INTERNATIONAL AFTER THE MERGER
9.1 Additional Actions and Cooperation. After the Effective Date, at
the request of either party and at the requesting party's expense, but without
additional consideration, the other
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<PAGE> 10
party shall execute and deliver from time to time such further instruments of
assignment, conveyance and transfer, shall cooperate in the conduct of
litigation and the processing and collection of insurance claims, and shall take
such other actions as may reasonably be required to convey and deliver more
effectively to Riviera the assets of Casinos International or to confirm and
perfect the interest of ECO in the common stock of Riviera, and otherwise to
accomplish the orderly transfer to Riviera of the business of Casinos
International as contemplated by this Agreement.
9.2 Audit Access. Each party hereto will preserve the books, records,
reports, documents and lists owned by it for a period of at least seven years
from the Effective Date, will not thereafter destroy or otherwise dispose of
such records without giving the other party notice and the opportunity to take
possession thereof, and, while in possession of such records, will permit
representatives of the other party to have access at reasonable times to such
books, records, reports, documents and files, to make such copies therefrom as
such representatives reasonably request. Each party shall, subject to applicable
law and regulation, and the terms of any confidentiality agreement, hold in
confidence any nonpublic information concerning the other party obtained
hereunder.
ARTICLE 10
BROKERAGE; EXPENSES
Except as set forth on Schedule 10, none of the parties has employed or
will employ any broker, agent, finder, or consultant (collectively, "Broker") or
has incurred or will incur any liability for any brokerage fees, commissions,
finders' fees, or other fees, in connection with the negotiation or consummation
of the transactions contemplated by this Agreement, except as herein set forth.
ECO and Casinos International are responsible for and hereby indemnify and hold
Riviera and Garreffa harmless against and in respect of any claim for brokerage
fees, commissions, or other finders' fees or commissions of any such Broker
employed by ECO or Casinos International and any additional such claims incurred
by Riviera and Garreffa relative to this Agreement and the transactions
contemplated hereby and any attorney fees incurred by any of the parties in
relation to any such claim by a Broker not otherwise disclosed herein.
Similarly, the Riviera and Garreffa are responsible for and hereby indemnify and
hold ECO harmless against and in respect of any claim for brokerage fees,
commissions, or other finders' fees or commissions of any such Broker employed
by Riviera and Garreffa and not disclosed herein and any additional such claims
incurred by ECO relative to this Agreement and the transactions contemplated
hereby and any attorney fees incurred by ECO in relation to any such claim by a
Broker.
-9-
<PAGE> 11
ARTICLE 11
CORPORATE NAMES
Riviera shall have the exclusive right to use the corporate name
"Casinos International" after the Effective Date.
ARTICLE 12
GENERAL
12.1 Entire Agreement; Amendments. This Agreement constitutes the
entire understanding among the parties with respect to the subject matter
contained herein and supersedes any prior understandings and agreements among
them respecting such subject matter. This Agreement may be amended,
supplemented, and terminated only by a written instrument duly executed by all
of the parties.
12.2 Headings. The headings in this Agreement are for convenience of
reference only and shall not affect its interpretation.
12.3 Gender; Number. Words of gender may be read as masculine,
feminine, or neuter, as required by context. Words of number may be read as
singular or plural, as required by context.
12.4 Exhibits and Schedules. Each Exhibit and Schedule referred to
herein is incorporated into this Agreement by such reference.
12.5 Severability. If any provision of this Agreement is held illegal,
invalid, or unenforceable, such illegality, invalidity, or unenforceability will
not affect any other provision hereof. This Agreement shall, in such
circumstances, be deemed modified to the extent necessary to render enforceable
the provisions hereof.
12.6 Notices. All notices and other communications hereunder shall be
in writing and shall be given to the person by sending a copy thereof by
certified mail or by telecopy. Notice shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or when
transmitted.
If to ECO or Casinos International, to:
Mr. Joseph Romano
ECO2, Inc.
13902 North Dale Mabry, Suite 119
Tampa, Florida 33618
-10-
<PAGE> 12
With a copy to:
John N. Giordano, Esq.
Bush Ross Gardner Warren Rudy, P.A.
220 S. Franklin St.
Tampa, Florida 33602
If to Riviera or Garreffa:
Mr. Richard Garreffa
Riviera International Casinos, Inc.
111 E. 14th Street
Riviera Beach, Florida 33404
With a copy to:
Notice of any change in any such address shall also be given in the manner set
forth above. Whenever the giving of notice is required, the giving of such
notice may be waived by the party entitled to receive such notice.
12.7 Waiver. The failure of any party to insist upon strict
performance of any of the terms or conditions of this Agreement will not
constitute a waiver of any of its rights hereunder.
12.8 Assignment. No party may assign any of its rights or delegate any
of its obligations hereunder without the prior written consent of the other
parties.
12.9 Successors and Assigns. This Agreement binds, inures to the
benefit of, and is enforceable by the successors and assigns of the parties, and
does not confer any rights on any other persons or entities.
12.10 Governing Law; Jurisdiction. The parties agree that, irrespective
of any wording that might be construed to be in conflict with this paragraph,
this Agreement is one for performance in Florida. The parties to this Agreement
agree that they waive any objection, constitutional, statutory or otherwise, to
a Florida court's taking jurisdiction of any dispute between them. By entering
into this agreement, the parties, and each of them understand that they might be
called upon to answer a claim asserted in a Florida court. This Agreement shall
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<PAGE> 13
be construed and enforced in accordance with law of the State of Florida. Venue
for any such action shall be deemed proper in Hillsborough County, Florida.
12.11 No Benefit to Others. The representations, warranties, covenants
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and their successors and assigns, and they shall not be construed
as conferring and are not intended to confer any rights on any other persons.
12.12 Publicity. Prior to the Effective Date, all notices to third
parties and all other publicity relating to the transactions contemplated by
this Agreement shall be jointly planned, coordinated and agreed to by the
Shareholder and ECO. Except as may be required by law, prior to the Effective
Date none of the parties hereto shall act unilaterally in this regard without
the prior approval of the Shareholder and ECO; provided, however, that such
approval shall not be unreasonably withheld.
12.13 Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. The execution of this Agreement by any party hereto will not become
effective until counterparts hereof have been executed by all the parties
hereto. It shall not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any of the other counterparts.
12.14 Limitations Upon Consent: Whenever, under the terms of this
Agreement, the parties hereto are called upon to give their written consent,
such written consent will not be unreasonably withheld.
12.15 Form of Consent: All consents of any kind required under this
Agreement shall be in writing. Whenever, under the terms of this Agreement, ECO,
and/or Casinos International are authorized to give consent, such consent may be
given and shall be conclusively evidenced by the Chairman of the Board of
Directors or the president of each respective corporation giving such consent.
Whenever, under the terms of this Agreement, any of the Shareholder is
authorized to give his consent, such consent may be given and shall be
conclusively evidenced in writing as certified by each of these persons
individually or by their duly appointed legal representative.
12.16 Attorneys' Fees and Court Actions: If a legal action is initiated
by any party to this Agreement against another, arising out of or relating to
the alleged performance or non-performance of any right or obligation
established hereunder, or any dispute concerning the same, any and all fees,
costs and expenses reasonably incurred by each successful party or his or its
legal counsel in investigating, preparing for, prosecuting, defending against,
or providing evidence, producing documents or taking any other action in respect
of, such action shall be the joint and several obligation of and shall be paid
or reimbursed by the unsuccessful party.
-12-
<PAGE> 14
12.17 Binding Effect: This Agreement shall inure to the benefit of and
be binding upon ECO and Casinos International, and their successors or assigns,
including but not limited to any corporation or other business entity which may
acquire all or substantially all of ECO's and/or Casinos International's assets
and business, or with, or into which Casinos International and/or any Casinos
International subsidiary may be consolidated or merged, and upon the executors,
administrators and legal representatives thereof.
In witness whereof, the parties have executed this Agreement on the
date first above written.
CASINOS INTERNATIONAL, INC.
By: /s/ Joseph Romano, President
-------------------------------------
Joseph Romano, President
ECO 2, INC.
By: /s/ Alan S. Lipstein, President
-------------------------------------
Alan S. Lipstein, President
RIVIERA INTERNATIONAL CASINOS, INC.
By: /s/ Richard Garreffa, President
-------------------------------------
Richard Garreffa, President
/s/ Kevin Farley, Secretary
----------------------------------------
Kevin Farley, Secretary
-13-
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