<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1998
REGISTRATION NO. 333-13287
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EARTHSHELL CONTAINER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2656 77-0322379
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
800 MIRAMONTE DRIVE
SANTA BARBARA, CALIFORNIA 93109
(805) 897-2294
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
SIMON K. HODSON
CHIEF EXECUTIVE OFFICER
EARTHSHELL CONTAINER CORPORATION
800 MIRAMONTE DRIVE
SANTA BARBARA, CALIFORNIA 93109
(805) 897-2294
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
WITH COPIES TO:
ROBERT K. MONTGOMERY PATRICK T. SEAVER
HILARY J. HATCH CHARLES K. RUCK
Gibson, Dunn & Crutcher LLP Latham & Watkins
2029 Century Park East, Suite 4000 650 Town Center Drive, 20th Floor
Los Angeles, California 90067 Costa Mesa, California 92626
(310) 552-8500 (714) 540-1235
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
<S> <C> <C>
Common Stock $.01 par value........................................... $318,780,000.00 $96,600.00(3)
</TABLE>
(1) Includes shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 23, 1998
PROSPECTUS
13,200,000 Shares
[LOGO]
Common Stock
---------
Of the 13,200,000 Shares offered hereby, 10,526,316 Shares are being sold by
the Company and 2,673,684 Shares are being sold by certain stockholders. None of
the officers or directors of the Company is selling any Shares of Common Stock
in the offering. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Shares of Common Stock by the
Selling Stockholders.
Of the Shares being offered, 10,560,000 Shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,640,000 Shares are being
offered in a concurrent International Offering outside the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offering"), subject to transfers between the U.S. Underwriters and the
International Managers. The Price to Public and Underwriting Discount per Share
will be identical for the U.S. Offering and the International Offering. See
"Underwriting." The closing of the U.S. Offering and International Offering are
conditioned upon each other.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $17.00 and $21.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Company's Common Stock has been approved for quotation on
The Nasdaq Stock Market's National Market under the symbol "ERTH."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $1,620,000.
(3) The Company and certain of the Selling Stockholders have granted to the
U.S. Underwriters and the International Managers 30-day options to purchase
up to an aggregate of 1,980,000 additional Shares of Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. See "Underwriting." If such options are exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively,
and total Proceeds to Selling Stockholders will be $ .
--------------------
The Shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the Shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
---------------
JOINT BOOK-RUNNING MANAGERS
Salomon Smith Barney Credit Suisse First Boston
, 1998.
<PAGE>
[EarthShell packaging logo and
picture of EARTHSHELL cups,
bowls, hinged-lid container,
tray, breakfast platter and plate
with quotes as follows,
" `Finally, fast food packaging
that Mother Earth can love!'
Essam Khashoggi, Chairman of the
Board" and "From the earth, back
to the earth..."]
--------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
EARTHSHELL-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY.
ALI-ITE-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF E. KHASHOGGI
INDUSTRIES, LLC. BIG MAC-REGISTERED TRADEMARK- AND QUARTER POUNDER-REGISTERED
TRADEMARK- ARE REGISTERED TRADEMARKS OF MCDONALD'S CORPORATION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD ALSO CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" AND ARE URGED TO READ
THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
EarthShell Corporation (the "Company") is a development stage company
engaged in the licensing and commercialization of a proprietary composite
material for the manufacture of disposable packaging for the food service
industry, such as cups, plates, bowls and hinged-lid containers. This new
composite material is made primarily from commonly available raw materials such
as limestone, natural potato, corn and other starch binders, natural fibers and
functional coatings. The Company believes that food service disposables made of
this material ("EARTHSHELL products") can be designed to have certain superior
performance characteristics, such as greater strength and rigidity and can be
commercially produced at a cost that is competitive with comparable paper and
polystyrene food service disposables. The Company has produced prototype cups,
plates, bowls and hinged-lid containers. To date, however, these prototypes have
not been produced on fully integrated, commercial production lines and,
therefore, their actual cost of manufacture is unproven. EARTHSHELL products
offer a number of attractive environmental features that are expected to appeal
to customers concerned about the environment.
According to industry studies, more than $8.3 billion was spent in the
United States in 1994 on the types of food service disposables that the Company
believes can be replaced by EARTHSHELL products, and the Company believes that
international markets represent additional significant opportunities for
EARTHSHELL products. Food service disposables are currently manufactured from a
variety of materials, including paper and polystyrene. The Company believes that
none of these materials fully addresses all three principal concerns of the food
service industry--performance, cost and environmental impact. The Company
believes that EARTHSHELL products will best address the combination of these
concerns and therefore will be able to achieve significant penetration of the
food service disposables market.
The Company's objective is to establish EARTHSHELL products as the preferred
disposable packaging for the food service industry. The Company's strategy
includes both working with major purchasers of food service disposables to build
consumer demand for EARTHSHELL products and licensing its technology to or joint
venturing with existing manufacturers of disposable packaging to market, produce
and distribute EARTHSHELL products. An additional component of the Company's
strategy is to utilize outside experts in their respective fields to assist in
the commercialization of EARTHSHELL products.
As the first step in this strategy, the Company has worked closely with
McDonald's Corporation ("McDonald's") in developing and testing prototype
sandwich containers. As a result of this work, McDonald's has approved the
EARTHSHELL Big Mac sandwich container for use in McDonald's restaurants in the
United States. McDonald's primary packaging purchaser, Perseco, has entered into
a supply agreement with the Company's licensee, Sweetheart Cup Company Inc.
("Sweetheart"), pursuant to which Perseco has committed to purchase not less
than 1.8 billion EARTHSHELL Big Mac sandwich containers over a three-year
period, subject to certain conditions. The Company currently expects its
licensee, Sweetheart, to make the first shipment of this commercial product for
use in McDonald's restaurants as early as the first quarter of 1999, although
development of the required manufacturing capacity could take longer than
currently anticipated. There is no binding commitment whatsoever between
McDonald's and the Company, the Company is not a party to any development
contract with McDonald's and McDonald's is free to discontinue its development
relationship with the Company at any time. See "Business-- Relationship with
McDonald's."
To accelerate the market penetration of EARTHSHELL products, the Company
will joint venture with or license its technology to existing manufacturers
experienced in the manufacture, sale and marketing of food service disposables.
To date, the Company has entered into licensing agreements with several of these
manufacturers, including Sweetheart, Genpak Corporation ("Genpak") and Dopaco,
Inc. ("Dopaco"),
3
<PAGE>
each of which has agreed to pay an effective royalty of 20% of the wholesale
price of EARTHSHELL products. To promote the rapid ramp-up of product
manufacturing capacity, the Company intends to contract with design engineers to
construct turnkey manufacturing lines for lease to licensees or contribution to
joint ventures. The Company intends to use $63.0 million of the proceeds of this
Offering to fund the initial engineering, development and construction of such
manufacturing lines, including the initial manufacturing equipment to be used at
Sweetheart's Owings Mills, Maryland facility for the production of EARTHSHELL
Big Mac sandwich containers. By the end of 1999, the Company expects to have
supplied equipment to licensees and joint venture partners at multiple
production sites for the manufacture of a broad range of EARTHSHELL products,
including cold cups, hot cups, plates, bowls, sandwich containers and other
hinged-lid containers.
The development of the composite material used to make EARTHSHELL products
("ALI-ITE composite material") is the result of more than 10 years of basic
materials science research by E. Khashoggi Industries, LLC and its predecessors
("EKI"). EKI is the Company's principal stockholder. As of February 17, 1998,
EKI had obtained 52 U.S. and 26 foreign patents and had 19 U.S. and 117 foreign
patent applications pending which are applicable to EARTHSHELL products
utilizing the EKI technology. The Company believes that these patents and patent
applications represent a strategic web of protection broadly covering EARTHSHELL
products, their material composition and the manufacturing processes used to
make them.
Since the Company's inception in November 1992, the Company has not
generated any revenues from operations and, as of December 31, 1997, had
incurred aggregate net losses of approximately $74.2 million. The Company has an
exclusive, worldwide, royalty-free license to use and license the EKI technology
to manufacture and sell disposable, single-use containers for packaging or
serving food or beverages intended for consumption within a short period of time
(less than 24 hours). The Company does not have the right to use the EKI
technology for any other purposes. See "Business--Relationship with EKI."
THE OFFERING
<TABLE>
<CAPTION>
Common Stock offered by:
<S> <C>
The Company..................... 10,526,316 shares
The Selling Stockholders........ 2,673,684 shares
----------------
Total......................... 13,200,000 shares
Common Stock offered for sale in:
U.S. Offering................... 10,560,000 shares
International Offering.......... 2,640,000 shares
----------------
Total......................... 13,200,000 shares
Common Stock to be outstanding
after the Offering.............. 100,045,166 shares (1)
Use of proceeds................... To engineer, develop and construct turnkey manufacturing
lines for lease to licensees or contribution to joint
ventures; expand EARTHSHELL's product development
center; repay indebtedness to EKI and bank borrowings;
market the introduction of EARTHSHELL products; pay
accrued dividends; secure additional patent protection;
and for general corporate purposes, including
anticipated operating losses.
Proposed Nasdaq National Market
symbol.......................... ERTH
</TABLE>
(1) Excludes options outstanding as of December 31, 1997 to purchase 1,158,040
shares of Common Stock and warrants to purchase 51,675 shares of Common
Stock (assuming an initial public offering price of $19.00 per share)
issuable upon completion of the Offering, and assumes that the 26,675 shares
of Series A Preferred Stock of the Company outstanding on the date hereof
will be converted into 6,988,850 shares of Common Stock.
4
<PAGE>
RISK FACTORS
As a development stage company, the Company faces numerous risks in
connection with the development, commercialization and introduction of
EARTHSHELL products, including risks related to the limited experience of the
Company and its licensees in manufacturing EARTHSHELL products, the need to
construct integrated manufacturing lines which can produce EARTHSHELL products
at competitive costs, delays in the development of EARTHSHELL products,
anticipated continuing operating losses until EARTHSHELL products achieve
significant market penetration, the reliance on third party licensees and joint
venture partners for the manufacture and distribution of EARTHSHELL products and
the right of certain of the Company's licensees to terminate their license
agreements at any time. For a description of certain risks to be considered
before making an investment in the Common Stock see "Risk Factors."
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO REFLECT (I) A RECAPITALIZATION AND STOCK SPLIT, TO BE EFFECTIVE
MARCH 23, 1998, IN WHICH EACH SHARE OF THE COMMON STOCK THEN OUTSTANDING WILL BE
CONVERTED INTO 262 SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, (II) THE
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS TO, AMONG
OTHER THINGS, CHANGE THE COMPANY'S NAME TO EARTHSHELL CORPORATION FROM
EARTHSHELL CONTAINER CORPORATION AND (III) THE ASSUMED CONVERSION OF THE 26,675
SHARES OF SERIES A PREFERRED STOCK OF THE COMPANY INTO 6,988,850 SHARES OF
COMMON STOCK (WHICH THE COMPANY INTENDS TO EFFECT FOLLOWING CONSUMMATION OF THE
OFFERING, SUBJECT TO THE BOARD OF DIRECTORS' APPROVAL). ADDITIONALLY, UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "DESCRIPTION OF CAPITAL STOCK" AND
"UNDERWRITING."
The Company was incorporated in Delaware on November 1, 1992. The Company's
principal executive offices are located at 800 Miramonte Drive, Santa Barbara,
California 93109, and its telephone number is (805) 897-2294.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------------------------- DECEMBER 31,
1993 (1) 1994 1995 1996 1997 1997
----------- --------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses........... $ 3,309 $ 10,930 $ 9,100 $ 10,159 $ 8,901 $ 42,400
General and administrative expenses......... 2,500 3,428 2,362 3,405 5,685 17,379
Interest (income) expenses, net............. (147) (290) 478 1,692 3,246 4,978
Depreciation and amortization............... 601 797 44 311 507 2,259
Patent expenses............................. 1,520 1,717 1,929 1,382 653 7,201
Net loss.................................... (7,783) (16,582) (13,914) (16,950) (18,992) (74,221)
Net loss available to common stockholders... (8,397) (18,716) (16,048) (19,084) (21,126) (83,371)
Basic and diluted net loss per common share
(2)....................................... (.10) (.23) (.19) (.23) (.26) (1.01)
Pro forma net loss per common share
(2)(3)(4)................................. (.17)
Weighted average number of shares used in
computing pro forma net loss per common
share (4)................................. 92,379,252
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (3) ADJUSTED (5)
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 8 $ 8 $ 131,660
Working capital (deficit).............................................. (48,308) (57,458) 128,513
Total assets........................................................... 3,778 3,778 135,430
Notes payable, payable to majority shareholder, accrued interest and
accrued dividends.................................................... 45,162 54,312 --
Deficit accumulated during development stage (6)....................... (74,221) (83,371) (83,406)
Stockholders' equity (deficit) (7)..................................... (44,567) (53,717) 132,248
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Basic and diluted net loss per share is calculated based on weighted average
shares outstanding of 82,530,000 shares for 1993, 1994, 1995, 1996 and 1997
and the addition of assumed annual preferred dividends to the net loss for
each of the respective years ($614,000 for 1993 and $2,134,000 for each of
1994, 1995, 1996 and 1997).
(3) Pro forma to give effect to the assumed conversion of the Series A Preferred
Stock of the Company into Common Stock and the accrual of preferred
dividends of approximately $9,150,000 payable upon such conversion.
(4) As a result of the pro forma changes in the capitalization of the Company,
pro forma net loss per share and weighted average shares outstanding
information are presented only for the most recent fiscal year. Pro forma
net loss per share has been calculated by dividing net loss less interest
expense and amortization of loan discount by the sum of (i) weighted average
of common stock issued and outstanding (82,530,000 shares); (ii) common
stock issuable related to the assumed conversion of Series A Preferred Stock
(6,988,850 shares); (iii) the number of shares (priced at $19.00 per share)
the proceeds from which will be used to fund dividends payable (481,573
shares); and (iv) the number of shares (priced at $19.00 per share) the
proceeds from which will be used to repay the $33,319,000 indebtedness owed
to majority stockholder and approximately $11,879,000 notes payable to banks
(an aggregate of 2,378,829 shares).
(5) Adjusted to give effect to the receipt of the net proceeds of $186,000,000
from the sale of shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $19.00 per share and after
deducting underwriting discounts and estimated offering expenses) and the
application of the estimated net proceeds therefrom for the repayment of the
$33,319,000 indebtedness to EKI, $11,879,000 notes payable to banks and the
payment of preferred dividends of $9,150,000. See "Use of Proceeds" and
"Capitalization."
(6) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(7) No cash dividends were declared or paid in any of the periods presented
except as noted in note (3) above.
6
<PAGE>
RISK FACTORS
INVESTMENT IN THE SHARES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES.
GOING CONCERN AUDITOR'S OPINION; HISTORY OF OPERATING LOSSES
The Company has not had any sales of EARTHSHELL products to date. One of the
Company's primary use of proceeds is to procure and install equipment for its
licensees and joint ventures to manufacture EARTHSHELL products. At least until
the development of manufacturing capacity is complete and EARTHSHELL products
are sold, the Company will continue to incur losses. From its inception in
November 1992 through December 31, 1997, the Company had incurred aggregate net
operating losses of approximately $74.2 million. At December 31, 1997, the
Company had a working capital deficit of approximately $48.3 million and a
stockholders' deficit of $44.6 million. Since February 1995, the Company's
operations have been financed through loans from EKI, its principal stockholder,
and Imperial Bank. EKI and Imperial Bank, however, are under no obligation to
make additional loans or capital contributions to the Company. At December 31,
1997, the Company's outstanding borrowings from EKI and Imperial Bank totaled
$33.3 million and $11.9 million, respectively. The Imperial Bank line of credit
was increased to $14.0 million in December 1997 and is due and payable on April
15, 1998. Amounts owed to EKI are payable on demand. Because EARTHSHELL products
have not been sold commercially, the Company's history of operating losses and
its reliance on its principal stockholder to provide cash to sustain operations,
there is substantial doubt about the Company's ability to continue as a going
concern unless the Company is able to obtain equity financing through the
Offering, additional loans from its principal stockholder or other funding. In
the absence of a significant level of sales of EARTHSHELL products, the Company
will continue to generate significant losses, and, in this regard, the Company's
independent accounting firm has issued a "going concern" qualification to its
opinion on the Company's financial statements included herein. There is no
assurance that the Company's operations will be successful or will result in a
profit in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAIN PRODUCTION COSTS
The Company's success depends, in substantial part, on the ability of the
Company to produce EARTHSHELL products at a competitive cost. EARTHSHELL
products are currently in various stages of development and have yet to be
produced on a fully integrated production line. The EARTHSHELL sandwich
containers tested by McDonald's were produced on a pilot manufacturing line. The
actual cost of manufacturing EARTHSHELL products therefore is unproven and no
assurance can be given that they will be manufactured at competitive costs. As
licensees and joint ventures begin commercial production of EARTHSHELL products,
difficulties may be encountered that cause costs of production to exceed those
currently anticipated by the Company. No assurance can be given that EARTHSHELL
products can be manufactured at commercially competitive costs, and the failure
to manufacture EARTHSHELL products at competitive costs would have an adverse
effect on the business, financial condition and results of operations of the
Company. See "Business--Manufacturing of EARTHSHELL Products."
ENVIRONMENTAL PERCEPTION OF EARTHSHELL PRODUCTS
The Company's success depends, in substantial part, on the ability of the
Company to design, develop and manufacture food service disposables having a
reduced environmental impact as compared to disposable food service containers
made from paper, plastic and polystyrene. While the Company believes that
EARTHSHELL products offer a number of environmental advantages, they may also
possess certain characteristics which may be perceived as negative for the
environment. In particular, EARTHSHELL products may result in more solid waste
by weight and, in a dry environment, by volume, and their
7
<PAGE>
manufacture and distribution may result in the release of greater amounts of
some pollutants (and lesser amount of other pollutants). Whether, on balance,
EARTHSHELL products are better for the environment is a qualitative judgment
based in large part on the importance given to various criteria, and is not
determinable solely on objective bases. For instance, certain environmental
groups initially opposed the introduction of the EARTHSHELL sandwich container.
However, the Company believes that it has addressed the major concerns of these
groups with respect to the EARTHSHELL Big Mac sandwich container by agreeing to
lower the weight of the container, to use reclaimed starch from sources not
currently being reclaimed for commercial uses, to use 100% post-consumer
recycled fiber, and to continue its efforts to reduce the environmental impact
of the EARTHSHELL Big Mac sandwich container. In addition, McDonald's has agreed
to undertake certain other packaging modifications. No assurance can be given
that environmental groups, regulators, customers or consumers will agree that
EARTHSHELL products have an environmental advantage over conventional packaging.
In addition, there can be no assurance that all future EARTHSHELL products, some
of which may require unique material formulations and coatings, will have or
will be recognized as having a reduced environmental impact. If EARTHSHELL
products do not have or are not recognized as having a reduced environmental
impact, market acceptance of these products, and the business, financial
condition and results of operations of the Company, would be adversely affected.
See "Business--The EARTHSHELL Solution."
RISK OF ADVERSE PERFORMANCE CHARACTERISTICS
While the Company believes that EARTHSHELL products can be engineered to
meet the critical performance requirements of the marketplace, individual
products may have one or more adverse performance characteristics when compared
to conventional food service disposables. Many EARTHSHELL products are under
development and their performance characteristics have not yet been fully
evaluated. The Company's failure to develop EARTHSHELL products with comparable
performance characteristics when compared to conventional food service
disposables would have an adverse effect on market acceptance of such EARTHSHELL
products and on the business, financial condition and results of operations of
the Company. See "Business--The EARTHSHELL Solution."
DEVELOPMENT STAGE COMPANY; NEED FOR ADDITIONAL PRODUCTS
To date, the Company's activities have been primarily focused on product
development. There have been no revenues from the sales of EARTHSHELL products.
The Company is a development stage company with no commercial operating history
and is therefore subject to the risks inherent in the establishment of a new
business enterprise. While the Company has developed a number of prototype
products, such as cups, plates and bowls, these prototypes remain subject to
further development and customer specific modification. The Company must, among
other things, fully develop these and additional products, achieve market
acceptance of EARTHSHELL products, develop manufacturing processes and capacity,
respond to competitive developments, attract, retain and motivate qualified
personnel and develop systems to effectively manage its growth. The Company
currently expects that the first commercial EARTHSHELL product, the EARTHSHELL
Big Mac sandwich container, will be introduced as early as the first quarter of
1999. However, due to the uncertainties inherent in product development, market
acceptance of newly-developed products and reliance on the Company's licensees
and joint venture partners to manufacture, distribute and sell EARTHSHELL
products, the Company is unable to predict when it will receive significant
revenues from any EARTHSHELL product. The Company expects to continue to incur
substantial operating losses until sales of multiple EARTHSHELL products achieve
significant market penetration. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF DELAY
There are substantial risks of delay, some of which are beyond the Company's
control, associated with the development of the Company's products and related
manufacturing processes, market acceptance of
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and demand for the Company's products and the development of sufficient
production capacity for the production of EARTHSHELL products. For example, the
Company has experienced significant delays in the initial pilot production of a
sandwich container for McDonald's. These delays resulted from, among other
things, difficulties in the integration of manufacuring equipment. The Company
has not yet produced EARTHSHELL products on a fully integrated production line.
Future delays may result in financial obligations for the Company under the
operating agreement with Sweetheart. There can be no assurance that the Company
or its licensees or joint venture partners will not experience similar or other
problems in start-up or ongoing operations. Delays in the introduction or market
acceptance of one or more EARTHSHELL products would have an adverse effect on
the business, financial condition and results of operations of the Company. See
"--No Existing Manufacturing Capacity," "--Dependence on Licensee and Joint
Venture Partners," "--Reliance on Few Customers," "--Raw Material Supplies" and
"Business--License and Joint Venture Relationships."
NO EXISTING MANUFACTURING CAPACITY
EARTHSHELL products have not been manufactured on a fully integrated
production line or at the continuous manufacturing throughput required to
successfully commercialize EARTHSHELL products. The integration of this
equipment in a coordinated manufacturing line producing at commercial
efficiencies could require greater time and effort than anticipated by the
Company. In addition, there can be no assurance that adequate manufacturing
equipment will be available when needed to permit a timely roll-out of
EARTHSHELL products. The Company has engaged two engineering consulting firms to
assist in the engineering and design of, and intends to also engage such firms
to assist in constructing, turnkey manufacturing lines for lease to its
licensees or contribution to its joint ventures. There can be no assurance that
the Company will be successful in building such manufacturing facilities on a
timely basis or at expected cost. The failure of adequate manufacturing
equipment to be available and properly working in an integrated manner when
needed to permit a timely roll-out of EARTHSHELL products could have an adverse
effect on market acceptance of EARTHSHELL products and on the business,
financial condition and results of operations of the Company. See "--Risks of
Delay" and "Business--Manufacturing of EARTHSHELL Products."
DEPENDENCE ON LICENSEES AND JOINT VENTURE PARTNERS
The Company has no experience in the commercial manufacture, distribution
and marketing of food service disposables. The Company will be dependent on its
licensees and joint venture partners for the manufacture and distribution of
EARTHSHELL products. The Company has entered into nonexclusive license
agreements with a number of existing manufacturers of food service disposables,
including Sweetheart, Genpak and Dopaco, permitting the manufacture and sale of
certain food service disposable packaging products and the Company intends to
enter into additional license agreements as well as joint venture relationships
in the future. None of the licensees has commercially produced or distributed
any EARTHSHELL products. Licensee manufacturers are not obligated to achieve
minimum sales quotas and have the right to terminate their respective license
agreements at any time without penalty. Many of the Company's licensees and
joint venture partners manufacture paper or polystyrene packaging which will
compete with EARTHSHELL products. There can be no assurance that the Company's
licensees and joint venture partners will devote sufficient resources or
otherwise be able to successfully manufacture, distribute or market EARTHSHELL
products, and the failure of such persons to do so would have an adverse effect
on the business, financial condition and results of operations of the Company.
DEVELOPMENT OF MANUFACTURING PLANTS
The Company anticipates that it will provide manufacturing equipment by
leasing or contributing the equipment to licensees or joint venture partners and
that it may be necessary to guarantee the performance of its equipment in order
to induce existing manufacturers of food service disposables to begin
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production of EARTHSHELL products during their initial commercial introduction.
Under the Company's operating agreement with Sweetheart and letter of intent
with Prairie, the Company will be required to fund negative operating cash flow
prior to the date on which the turnkey manufacturing lines first meet certain
efficiency criteria and additional costs incurred as a result of the equipment
not continuing to satisfy these criteria for a two-year period following such
date. The Company's obligation to guarantee performance of manufacturing lines,
fund negative operating cash flows of its licensees or failure of the Company to
receive an adequate return on its investment in the equipment, may adversely
affect the business, financial condition and results of operations of the
Company. See "Business--License and Joint Venture Relationships."
RELIANCE ON FEW CUSTOMERS
McDonald's will be the first food service operator using EARTHSHELL
products. Under the terms of a non-binding letter agreement between McDonald's
and the Company, the terms of which are incorporated into the supply agreement
between Sweetheart and Perseco, it is contemplated that McDonald's will have the
right, under certain circumstances, to purchase the first commercial production
available for any subsequently developed EARTHSHELL products in the quick-serve
restaurant industry and to require that EARTHSHELL or its licensees satisfy
McDonald's demand for any quick-serve packages prior to sale to any other
organizations. The Company is not a party to any development contract with
McDonald's, and McDonald's is therefore free to discontinue its development
relationship with the Company at any time. The loss of McDonald's or any other
initial purchasers of the Company's products, or the exercise of McDonald's
priority rights under certain circumstances, could delay the introduction and
market acceptance of one or more EARTHSHELL products and have an adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Relationship with McDonald's."
RELIANCE ON EKI
The Company does not own the technology necessary for the manufacture of
EARTHSHELL products and is dependent upon its royalty-free, exclusive license
from EKI for the use of the technology. The Company's use of the technology is
limited to the development, manufacture and sale of certain specified food
service disposables for use in the food service industry and the Company has no
right to exploit opportunities for the application of this technology or
improvements outside this field of use. EKI may terminate the license at any
time if the Company is in breach of any material obligations under the Amended
and Restated License Agreement between the Company and EKI (the "License
Agreement") and does not cure such breach within a specified period. If EKI were
to file for or be declared bankrupt, the Company would likely be able to retain
its rights under the License Agreement with respect to U.S. patents; however, it
is possible that steps could be taken to terminate its rights under the License
Agreement with respect to international patents. The Company shares certain key
management personnel with EKI, relies on EKI and EKI's scientific and technical
personnel for substantially all of its scientific and technical services and
leases its office and research and development space from EKI. Scientific and
technical services are provided to the Company by EKI pursuant to an Amended and
Restated Technical Services and Sublease Agreement (the "Technical Services
Agreement"), terminating on December 31, 2002, for the design and development of
EARTHSHELL products and the operation of its product development center. The
Company is also dependent on EKI for further development and refinement of the
basic technology used in EARTHSHELL products, although EKI is not obligated to
complete any further development or refinement under the terms of the License
Agreement. Any disruptions in the operations or financial condition of EKI or
the failure by EKI to perform services required by the Company could have an
adverse effect on the business, financial condition and results of operations of
the Company. See "Business--Relationship with EKI."
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POTENTIAL CONFLICTS WITH EKI
The Company and EKI are both controlled by a common indirect, majority
equity owner, Essam Khashoggi, and they share certain directors and officers,
including Mr. Khashoggi, who is also the Chairman of the Board of the Company,
and Simon Hodson, the Vice Chairman of the Board, Chief Executive Officer and
President of the Company. Certain conflicts may arise between EKI and the
Company, particularly with respect to corporate opportunities, including, the
development of new markets and uses for products based on the ALI-ITE composite
material, the allocation of research and development resources, the devotion of
the common directors' and officers' time to the respective businesses and the
performance by EKI and the Company of their respective obligations under the
License Agreement, the Technical Services Agreement and the Amended and Restated
Agreement for Allocation of Patent Costs (the "Patent Allocation Agreement").
Under the Patent Allocation Agreement, the Company is obligated to pay or
reimburse EKI for all costs and expenses associated with filing, prosecuting,
acquiring and maintaining certain patents or patent applications. The costs and
expenses incurred in connection with these patents and patent applications will
be controlled by EKI. Any patents granted will be the property of EKI, and EKI
may obtain a benefit therefrom other than under the License Agreement, including
the utilization and/or licensing of the patents and related technology in a
manner or for uses unrelated to the license granted to the Company. See
"Business--Relationship with EKI" and "--The Technology."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of the Offering, Essam Khashoggi, the Chairman of the Board
of the Company, will be the beneficial owner of approximately 73.4% of the
outstanding shares of Common Stock directly or indirectly through various
entities that he controls, including EKI. Thus, Mr. Khashoggi will have the
ability to elect all of the directors of the Company, to control the direction
and policies of the Company, to determine the outcome of corporate transactions
requiring the approval of the Company's stockholders, including mergers,
consolidations and the sale of all or substantially all of the assets of the
Company, and to prevent or cause a change in control of the Company. Mr.
Khashoggi also will have the power to control the Company's relationship with
EKI, which he also controls, and upon which the Company is dependent, among
other things, for its research and development efforts. See "--Reliance on EKI",
"--Potential Conflicts with EKI" and "Principal and Selling Stockholders."
CERTAIN FEDERAL TAX CONSEQUENCES
The Company intends to take appropriate measures to avoid being classified
as a personal holding company, including primarily entering into joint venture
relationships to reduce its royalty and other passive type income to less than
60% of its "adjusted ordinary gross income" (generally, ordinary gross income,
as distinguished from capital gains income, adjusted to reflect certain
statutory exclusions and deductions) for any given year. If the Company were to
be classified as a personal holding company for federal income tax purposes, the
Company would be subject to an additional federal tax equal to 39.6%, generally,
of its undistributed after tax earnings for each taxable year in which it is so
classified. There can be no assurance that the Company will be successful in its
effort to avoid classification as a personal holding company. In the event that
the Company is unsuccessful in these efforts, the Company intends to make
distributions to its stockholders of all or part of its after tax earnings for
the applicable taxable year to minimize its liability for the personal holding
company tax. There can be no assurance, however, that the Company will have
adequate cash reserves to make such distributions. If made, such distributions
would likely be treated as dividends taxable as ordinary income for federal and
state income tax purposes. The application of the personal holding company tax
to the Company's undistributed after tax earnings would have an adverse effect
on the business, financial condition and results of operations of the Company.
See "Dividends" and "Certain United States Federal Tax Considerations."
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PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of the licensed technology. Although
the Company and EKI seek to protect the licensed technology through, among other
things, U.S. and foreign patents, there can be no assurance that the patent and
patent applications licensed to the Company are sufficient to protect the
Company's technology or that any patent obtained by EKI and licensed to the
Company will not be held invalid, circumvented or infringed by others. The
Company also relies on trade secrets and proprietary know-how that it seeks to
protect in part by confidentiality agreements with its licensee manufacturers,
proposed joint venture partners, employees and consultants. These agreements
have limited terms (typically five years or less) and there can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by the Company's competitors.
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Although the Company knows of no infringement of patents held by others,
it is always possible that a third party may assert infringement. Patent and
patent applications on formulations of ALI-ITE composite material are based in
part on specific proportional mixtures of the components of the material. The
Company continues to undergo testing and modification of the components and
their proportional mixtures to balance environmental, economic and performance
concerns. There can be no assurance that the mixture that is ultimately
determined to be optimal will be protected under the Company's patents or that
it will not be subject to a patent held by others. If the optimal mixture is not
protected under the Company's patents or is subject to a patent held by others
and a third party asserts patent infringement, it would have an adverse effect
on the Company's business, financial condition and results of operations. The
Company is aware of at least one other patent held by others which protects
materials and methods for manufacturing materials containing some similar
components as are found in ALI-ITE composite material. EKI has entered into an
agreement to purchase this technology, subject to certain conditions. See
"Business--Patents, Proprietary Rights and Trademarks."
The Company believes that it owns or has the rights to use all technology
expected to be incorporated into its products, but an adverse determination in
any such proceedings or in other litigation or infringement proceedings to which
the Company may become a party could subject the Company to significant
liabilities and costs to third parties or require the Company to seek licenses
from third parties. The Company could incur substantial costs in seeking
enforcement of its licensed patents against infringement or the unauthorized use
of its trade secrets and proprietary know-how by others or in defending itself
against claims of infringement by others. Accordingly, an adverse determination
in a judicial or administrative proceeding or failure to obtain necessary
licenses would prevent the Company from manufacturing or licensing others to
manufacture certain of its products, which could have an adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Patents, Propriety Rights and Trademarks."
DEVELOPMENT OF EARTHSHELL PAPER PRODUCTS
The Company's sandwich container is, and certain other EARTHSHELL products
will be, made out of the proprietary ALI-ITE composite material which is formed
into a moldable, foamed material. EKI has also licensed to the Company
technology to develop a paper-like, sheet application of ALI-ITE composite
material which the Company has formed into prototype food service disposables,
such as paper cups, french fry scoops and paper plates. EKI and the Company have
not completed the development of EARTHSHELL paper roll stock or related
manufacturing processes. If the Company decides to continue the development of
the paper-like sheet application of ALI-ITE composite material, such development
would require substantial time, effort and expense. No assurance can be given
that EKI or the Company will be successful in developing EARTHSHELL paper roll
stock, related manufacturing processes, or specific
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EARTHSHELL paper products, that such technology will be protected under the
Company's patents, or when such products might be commercially introduced. See
"Business--Food Service Disposables Market."
RAW MATERIAL SUPPLIES
While the Company believes that sufficient quantities of all raw materials
used in EARTHSHELL products are generally available, the unavailability of any
raw materials could result in delays in the commercial introduction and could
hinder acceptance of EARTHSHELL products, thereby adversely affecting the
Company's business, financial condition and results of operations. In addition,
the Company and its licensees may become significant consumers of certain key
raw materials, such as starch, and if such consumption is substantial in
relation to the available resources, raw materials prices may increase which in
turn may increase the cost of EARTHSHELL products. See "Business--Manufacturing
of EARTHSHELL Products" and "--Raw Materials."
COMPETITION; RISK OF TECHNOLOGICAL ADVANCEMENT
Competition among existing food and beverage container manufacturers in the
food service industry is intense. At present, most of these competitors have
substantially greater financial and marketing resources at their disposal than
does the Company, and many have well-established supply, production and
distribution relationships and channels. Companies producing competitive
products may reduce their prices or engage in advertising or marketing campaigns
designed to protect their respective market shares and impede market acceptance
of EARTHSHELL products.
Recently, a number of paper and plastic disposable packaging manufacturers
and converters and others have made efforts to increase the recycling of these
products. Increased recycling of paper and plastic products could lessen their
negative environmental impact, one significant basis upon which the Company
intends to compete. A number of companies have introduced starch-based materials
or are attempting to develop plastics that they claim are biodegradable and
other specialty polymers as potential environmentally superior packaging
alternatives. It is expected that many existing packaging manufacturers may
actively seek competitive alternatives to the Company's products and processes.
The development of competitive, environmentally attractive, disposable food
service containers, whether or not based on the Company's products and
technology, could render the Company's technology obsolete and could have an
adverse effect on the business, financial condition and results of operations of
the Company. See "--Dependence on Licensee and Joint Venture Partners."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
At present the Company is largely dependent upon obtaining and retaining the
services of qualified scientific and technical personnel, many of whom are
employees of EKI and whose services are provided pursuant to an Amended and
Restated Technical Services Agreement (the "Technical Services Agreement"). In
addition, the Company is highly dependent upon its Vice Chairman of the Board,
Chief Executive Officer and President, Simon Hodson. The loss of Mr. Hodson or
the services of certain key EKI technical personnel could adversely affect the
Company. Mr. Hodson has entered into a two-year employment agreement with the
Company that expires on September 30, 1999, subject to the Company's right to
renew the contract for one additional year. The Company does not hold keyman
insurance on any of its personnel. See "Management--Executive Officers and
Directors."
FDA REGULATION
The manufacture, sale and use of EARTHSHELL products is subject to
regulation by the U.S. Food and Drug Administration (the "FDA"). The FDA's
regulations are concerned with substances used in food packaging materials, not
with specific finished food packaging products. Thus, food or beverage
containers will be in compliance with FDA regulations if the components used in
the food and beverage containers:
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(i) are approved by the FDA as indirect food additives for their intended uses
and comply with the applicable FDA indirect food additive regulations; or (ii)
are generally recognized as safe ("GRAS") for their intended uses and are of
suitable purity for those intended uses. Each of the components of the
EARTHSHELL BigMac sandwich container and all other current prototype products is
either approved by the FDA as an indirect food additive for its intended use,
codified in the FDA's regulations as GRAS for its intended use, or a commonly
recognized food ingredient regarded by the Company and its consultants as GRAS
for its intended use. The Company, however, has not sought the concurrence of
the FDA in this determination. The Company intends to ensure that the raw
materials used in the EARTHSHELL Big Mac sandwich container are of suitable
purity for their intended uses by specifying standards to be met by suppliers of
raw materials and by material and product testing. There is no requirement that
the Company or a manufacturer of EARTHSHELL products seek FDA concurrence that
certain components are GRAS for their intended uses or that the raw materials
are of suitable purity for their intended uses. As a result, the Company
believes that the EARTHSHELL Big Mac sandwich container and other current
prototype products will be in compliance with all requirements of the FDA and do
not require FDA approval. There can be no assurance, however, that the FDA would
agree with these conclusions.
If the FDA were to disagree with the Company's determinations with respect
to the EARTHSHELL sandwich container or future products, the FDA could ask the
Company to voluntarily withdraw the products from the marketplace. They could
also initiate legal action to remove the products from the marketplace and, if
appropriate, pursue additional sanctions against the Company and its management.
Such actions by the FDA could have an adverse effect on the business, financial
condition and results of operations of the Company. See "Business--Government
Regulation."
BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS
Certain stockholders of the Company will receive substantial benefits from
the sale of Common Stock offered hereby. Specifically, (i) the Company intends
to use approximately $36.9 million of the net proceeds of the Offering to repay
certain indebtedness to its principal stockholder, EKI, (ii) upon the intended
repayment of approximately $14.0 million of Company borrowings under a line of
credit with Imperial Bank, EKI and the Chairman of the Board of the Company, Mr.
Essam Khashoggi, will be released from personal guarantees with respect to such
borrowings, and (iii) the Company intends to use approximately $9.1 million (as
of December 31, 1997) to pay accrued dividends on the Series A Preferred Stock.
In addition, the Selling Stockholders will sell 2,673,684 shares of Common Stock
in the Offering and receive approximately $47.6 million in net proceeds
(4,653,684 shares and $82.9 million in net proceeds if the over-allotment option
is exercised in full and all the option shares are sold by the Selling
Stockholders), based upon an initial public offering price of $19.00 per share
(the midpoint of the estimated initial public offering price range) after
deducting the estimated underwriting discounts, but excluding any expenses to be
reimbursed. See "Certain Transactions."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The stock market from time to time
has experienced extreme price and volume fluctuations which often have been
unrelated to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, development or disputes concerning proprietary rights, changes in
earnings estimated by analysts, and economic and other external factors, as well
as period-to-period fluctuations in financial results of the Company, may have a
significant impact on the market price and marketability of the Common Stock.
Fluctuations or decreases in the trading price of the Common Stock may adversely
affect the liquidity of the trading market for the Common Stock and the
Company's ability to raise capital through future equity financing. The initial
public offering price of the Common Stock in the Offering will be determined by
negotiations among the Company, the Selling
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Stockholders and the Representatives of the Underwriters based on several
factors and may not be indicative of prices that will prevail in the trading
market. See "Underwriting."
DILUTION AND ABSENCE OF DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the net tangible book value per share of the Common Stock. Accordingly, the
purchasers of shares of Common Stock in the offering will experience immediate
and substantial dilution of net tangible book value per share of $17.68. To
date, the Company has not paid any dividends on its Common Stock. Although the
Company currently intends to retain all available funds for use in its business
to the extent possible, the Company will be required to pay accrued dividends,
which were approximately $9.1 million as of December 31, 1997, on its Series A
Preferred Stock, upon conversion of the Series A Preferred Stock, which is
expected to occur following completion of the Offering. If necessary, upon
achieving positive net income, the Company intends to make distributions of its
earnings to stockholders in order to minimize the personal holding company tax
levied on its undistributed personal holding company income, if any. See
"--Certain Federal Tax Consequences," "Dividend Policy" and "Certain United
States Federal Tax Considerations."
EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the 13,200,000 shares offered hereby
(15,180,000 shares if the over-allotment option is exercised in full) will be
eligible for immediate sale in the public market without restriction unless they
are held by affiliates of the Company. The 86,845,166 outstanding shares not
sold in the Offering will be "restricted securities" within the meaning of Rule
144 ("Rule 144") promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemptions contained in Rule 144. Of these shares, approximately 85,260,852
shares held by current stockholders will be eligible for sale pursuant to Rule
144 beginning 90 days after the completion of the Offering, subject to the
volume and manner of sale limitations of Rule 144. All stockholders who are not
Selling Stockholders (other than one stockholder who owns 262 shares of Common
Stock), including the directors, officers, EKI and certain principal
stockholders of the Company, beneficially holding (upon completion of the
Offering) an aggregate of 78,397,674 shares, have agreed, subject to certain
exceptions, not to sell or otherwise dispose of any such shares for at least 180
days after the date of the Underwriting Agreement relating to the Offering
without the prior written consent of the Representatives of the Underwriters.
All Selling Stockholders of the Company beneficially holding (upon completion of
the Offering) an aggregate of 8,447,230 shares (or 6,467,230 shares if the
over-allotment option is exercised in full and all the option shares are sold by
the Selling Stockholders) have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any such shares for at least 270 days after the
date of the Underwriting Agreement relating to the Offering without the prior
written consent of Salomon Brothers Inc. The Company has granted certain
"demand" and "piggy-back" registration rights to all of the Company's current
stockholders, including EKI, with respect to the shares of Common Stock owned by
them. No predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market, particularly by directors and officers of the
Company, or the perception that such sales could occur, could have an adverse
impact on the market price. See "Certain Transactions" and "Shares Eligible for
Future Sale."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law include provisions that may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company and
preventing certain changes of control. See "Description of Capital Stock--
Anti-Takeover Law and Charter Provisions."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 10,526,316 shares
offered by the Company are estimated to be approximately $186.0 million, based
upon an assumed offering price of $19.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders. The Company currently intends to use the net proceeds of
the Offering to: (i) facilitate the development of manufacturing capacity for
EARTHSHELL products by engineering, developing and constructing turnkey
manufacturing lines for lease to licensees or contribution to joint ventures
(approximately $63.0 million); (ii) expand the EARTHSHELL product development
center (approximately $10.0 million); (iii) launch an initial public relations
and advertising campaign (approximately $10.0 million); (iv) pay accrued
dividends on the Series A Preferred Stock (approximately $9.1 million as of
December 31, 1997); (v) secure additional patent protection for its licensed
technology; and (vi) establish a fund for the enforcement and protection of
patents ((v) and (vi) together, approximately $7.4 million).
In addition, approximately $50.9 million of the net proceeds of the Offering
will be used by the Company to repay certain indebtedness owed to its principal
stockholder, EKI (approximately $36.9 million in principal, accrued interest and
accounts payable as of the date hereof), and Imperial Bank (approximately $14.0
million as of the date hereof). The debt owed to EKI, which was incurred at
various times between February 1995 and the date hereof, bears interest at the
prime rate published in THE WALL STREET JOURNAL as adjusted on the first day of
each calendar quarter, and is due and payable upon demand by EKI. At December
31, 1997, this indebtedness bore interest at an annual rate of 8.5%. The
indebtedness to Imperial Bank, which was incurred at various times between June
1996 and the date hereof bears interest at an annual rate of 1% in excess of the
Bank's prime lending rate as announced from time to time. At December 31, 1997,
this indebtedness bore interest at an annual rate of 9.5%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The remaining net proceeds (approximately $35.6 million) will be used by the
Company for general corporate purposes, including the employment of additional
personnel, the continued design and development of EARTHSHELL products and
anticipated operating losses. Except as indicated, the Company cannot presently
determine the specific amounts of funds, and the timing of any payments, that
may be required in connection with the use of the portion of the net proceeds
allocated to general corporate purposes. The Company's management will have
broad discretion in applying the net proceeds, and the Company reserves the
right to change the use of proceeds if unanticipated developments in the
Company's business or changes in economic or competitive conditions make shifts
in the allocation of net proceeds necessary or desirable. Pending application of
the net proceeds for the above purposes, the Company intends to invest the net
proceeds from the Offering in investment-grade, short-term, interest-bearing
securities.
DIVIDEND POLICY
Upon conversion of the Series A Preferred Stock (which the Company expects
to effect following consummation of the Offering, subject to the Board of
Directors' approval), the Company will be required to pay accrued dividends
thereon (approximately $9.1 million as of December 31, 1997). Other than these
contemplated dividends, the Company has never paid dividends on its capital
stock. The Company currently intends to retain all available funds for use in
its business; provided, however, that if the Company is subject to personal
holding company tax on its undistributed income, the Company intends to make
distributions of all or part of its after tax earnings to stockholders if
necessary to minimize this tax liability. See "Risk Factors--Certain Federal Tax
Consequences."
16
<PAGE>
CAPITALIZATION
The following table sets forth, at December 31, 1997, the actual
capitalization of the Company (adjusted for the 262-for-one stock split), and
the pro forma capitalization of the Company (i) as if the conversion of the
Company's outstanding Series A Preferred Stock had occurred as of such date, and
(ii) as further adjusted to give effect to the sale of the 10,526,316 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $19.00 per share and the application of the estimated net proceeds
thereof as described under "Use of Proceeds." This table should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Financial Statements and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (1) ADJUSTED (1)(2)
---------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Note payable, accounts payable, and accrued interest to majority
stockholder........................................................ $ 33,319 $ 33,319 $ --
Notes payable to banks (2)(3)........................................ 11,843 11,843 --
Dividends payable.................................................... -- 9,150 --
---------- ------------- ---------------
Total indebtedness and dividends payable......................... $ 45,162 $ 54,312 $ --
---------- ------------- ---------------
---------- ------------- ---------------
Preferred Stock, par value $.01 per share: 10,000,000 shares
authorized; 9,170,000 Series A shares designated; 6,988,850 Series
A shares issued and outstanding; no shares outstanding pro forma
and as adjusted (4)................................................ $ 70 $ -- $ --
Common stock, par value $.01 per share: 200,000,000 shares
authorized; 82,530,000 shares issued and outstanding actual;
89,518,850 pro forma; 100,045,166 shares issued and outstanding pro
forma as adjusted (5).............................................. 825 895 1,000
Additional paid-in capital (preferred and common).................... 28,759 28,759 214,654
Deficit accumulated during the development stage..................... (74,221) (83,371)(6) (83,406)(3)(6)
---------- ------------- ---------------
Total stockholders' equity (deficit)............................. $ (44,567) $ (53,717) $ 132,248
---------- ------------- ---------------
---------- ------------- ---------------
Total capitalization............................................. $ (89,729) $ (108,029) $ 132,248
---------- ------------- ---------------
---------- ------------- ---------------
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the assumed conversion of the 26,675 shares of
Series A Preferred Stock of the Company outstanding into 6,988,850 shares of
Common Stock and the accrual of $9,150,000 in dividends on such preferred
stock which are payable upon such conversion.
(2) Pro forma as adjusted to give effect to the receipt of the net proceeds of
approximately $186,000,000 from the sale of shares of Common Stock offered
by the Company hereby (at an assumed initial public offering price of $19.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated net
proceeds therefrom for the repayment of the $33,319,000 indebtedness to EKI,
$11,879,000 in notes payable to banks, and the payment of preferred
dividends of $9,150,000. See "Use of Proceeds" and "Capitalization."
(3) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(4) Assumes the application of the 262-for-one stock split to the Company's
26,675 shares of Series A Preferred Stock issued and outstanding at December
31, 1997.
(5) Excludes 1,158,040 shares issuable upon exercise of outstanding stock
options. See "Management--Stock Option Plans."
(6) Gives effect to $9,150,000 of dividends payable upon conversion of shares of
Series A Preferred Stock to shares of Common Stock.
17
<PAGE>
DILUTION
The pro forma net tangible deficit of the Company as of December 31, 1997
was $53.7 million, or $.60 per share, assuming the conversion of the Company's
outstanding Series A Preferred Stock into 6,988,850 shares of Common Stock as of
such date. Net tangible deficit per share is determined by dividing the tangible
deficit of the Company (tangible assets less total liabilities) by the number of
shares outstanding. Without taking into account any changes in such pro forma
net tangible deficit after December 31, 1997 other than to give effect to the
sale of the 10,526,316 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $19.00 per share, pro forma net
tangible book value of the Company as of December 31, 1997 would have been
approximately $132.2 million, or $1.32 per share (after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company). This represents an immediate increase in pro forma net tangible
book value of $1.92 per share to existing stockholders and an immediate dilution
of $17.68 per share to new stockholders. Dilution to new stockholders is
determined by subtracting the pro forma net tangible book value per share after
the Offering from the initial public offering price per share. The following
table illustrates this per-share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 19.00
Pro forma net tangible deficit per share before Offering
(1)..................................................... $ (.60)
Increase per share attributable to new stockholders....... 1.92
---------
Pro forma net tangible book value per share after
Offering.................................................. 1.32
---------
Dilution per share to new stockholders...................... $ 17.68
---------
---------
</TABLE>
- ------------------------------
(1) The table excludes shares issuable and proceeds that would be received upon
exercise of options outstanding on December 31, 1997. See "Management--Stock
Option Plans" and "Description of Capital Stock."
The following table summarizes, as of December 31, 1997, the number of
shares purchased from the Company, the total investment made and the average
price per share invested by existing stockholders and new stockholders.
<TABLE>
<CAPTION>
SHARES
PURCHASED (1)(2) TOTAL INVESTMENT AVERAGE
----------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 89,518,850 89.5% $26,685,000 11.8% $ .30
New stockholders.............. 10,526,316 10.5 200,000,000 88.2 19.00
------- ------- ----------- ------- ---------
Total..................... 100,045,166 100% $226,685,000 100% $ 2.27
------- ------- ----------- ------- ---------
------- ------- ----------- ------- ---------
</TABLE>
- ------------------------------
(1) Includes shares of Common Stock issuable upon conversion of the 26,675
shares of Series A Preferred Stock of the Company outstanding into 6,988,850
shares of Common Stock. Excludes 1,158,040 shares issuable upon the exercise
of outstanding stock options. See "Management--Stock Option Plans" and
"Description of Capital Stock."
(2) Sales by the Selling Stockholders in the Offering will reduce the number of
shares held by existing stockholders to 86,845,166 or approximately 86.8%
(or approximately 84.8% if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares purchased by new
stockholders to 13,200,000 shares (or approximately 15.2% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the Offering.
18
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below at December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997 and from
November 1, 1992 (inception) through December 31, 1997, are derived from the
financial statements of the Company, audited by Deloitte & Touche LLP,
independent auditors, included elsewhere in this Prospectus. The balance sheet
information for the years ended December 31, 1993, 1994, and 1995 and statements
of operations data for 1993 and 1994 are derived from audited financial
statements that are not included elsewhere in this Prospectus. The financial
data for the year ended December 31, 1993 also includes the Company's results of
operations for the period from November 1, 1992 (inception) through December 31,
1992.
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------------------------- DECEMBER 31,
1993 (1) 1994 1995 1996 1997 1997
----------- --------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses....................... $ 3,309 $ 10,930 $ 9,100 $ 10,159 8,901 $ 42,400
General and administrative expenses..................... 2,500 3,428 2,362 3,405 5,685 17,379
Interest (income) expenses, net......................... (147) (290) 478 1,692 3,246 4,978
Depreciation and amortization........................... 601 797 44 311 507 2,259
Patent expenses......................................... 1,520 1,717 1,929 1,382 653 7,201
Net loss................................................ (7,783) (16,582) (13,914) (16,950) (18,992) (74,221)
Net loss available to common stockholders............... (8,397) (18,716) (16,048) (19,084) (21,126) (83,371)
Basic and diluted net loss per common share (2)......... (.10) (.23) (.19) (.23) (.26) (1.01)
Pro forma net loss per common share (2)(3)(4)........... (.17)
Weighted average number of shares used in computing pro
forma net loss per common share (4)................... 92,379,252
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 ACTUAL PRO FORMA (3)
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 16,170 $ 2,885 $ 266 $ 21 $ 8 $ 8
Working capital (deficit)......................... 15,230 (124) (14,569) (31,489) (48,308) (57,458)
Total assets...................................... 17,640 3,250 2,228 2,817 3,778 3,778
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... 624 3,267 13,560 29,873 45,162 54,312
Deficit accumulated during development stage...... (7,783) (24,365) (38,279) (55,229) (74,221) (83,371)
Stockholders' equity (deficit) (7)................ 16,700 118 (12,678) (28,732) (44,567) (53,717)
<CAPTION>
PRO FORMA AS
ADJUSTED
(5)(6)
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 131,660
Working capital (deficit)......................... 128,513
Total assets...................................... 135,430
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... --
Deficit accumulated during development stage...... (83,406)
Stockholders' equity (deficit) (7)................ 132,248
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Basic and diluted net loss per share is calculated based on weighted average
shares outstanding of 82,530,000 shares for 1993, 1994, 1995, 1996 and 1997
and the addition of assumed annual preferred dividends to the net loss for
each of the respective years ($614,000 for 1993 and $2,134,000 for each of
1994, 1995, 1996 and 1997).
(3) Pro forma to give effect to the assumed conversion of the Series A Preferred
Stock of the Company into Common Stock and the accrual of preferred
dividends of approximately $9,150,000 payable upon such conversion.
(4) As a result of the pro forma changes in the capitalization of the Company,
pro forma net loss per share and weighted average shares outstanding
information are presented only for the most recent fiscal year. Pro forma
net loss per share has been calculated by dividing net loss less interest
expense and amortization of loan discount by the sum of (i) weighted average
of common stock issued and outstanding (82,530,000 shares); (ii) common
stock issuable related to the assumed conversion of Series A Preferred Stock
(6,988,850 shares); (iii) the number of shares (priced at $19.00 per share)
the proceeds from which will be used to fund dividends payable (481,573
shares); and (iv) the number of shares (priced at $19.00 per share) the
proceeds from which will be used to repay the $33,319,000 indebtedness owed
to majority stockholder and approximately $11,879,000 notes payable to banks
(an aggregate of 2,378,829 shares).
(5) Adjusted to give effect to the receipt of the net proceeds of approximately
$186,000,000 from the sale of shares of Common Stock offered by the Company
hereby (at an assumed initial public offering price of $19.00 per share and
after deducting underwriting discounts and estimated offering expenses) and
the application of the estimated net proceeds therefrom for the repayment of
the $33,319,000 indebtedness to EKI, $11,879,000 in notes payable to banks
and the payment of preferred dividends of $9,150,000. See "Use of Proceeds"
and "Capitalization."
(6) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(7) No cash dividends were declared or paid in any of the periods presented
except as noted in note (3) above.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AUDITED FINANCIAL STATEMENTS AND UNAUDITED FINANCIAL STATEMENTS AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
The Company was organized in November 1992 as a Delaware corporation and
remains a development stage enterprise. The Company's principal stockholder,
EKI, has been involved since July 1985 in the development of various new
material technologies including the ALI-ITE composite material. The Company was
formed to develop, license and commercialize food service disposables made of
the ALI-ITE composite material ("EARTHSHELL products"). The Company has an
exclusive, worldwide, royalty-free license from EKI to use certain technology
for this purpose. The Company intends to license or joint venture with existing
manufacturers of food service disposables for the manufacture and distribution
of EARTHSHELL products. The Company expects to derive revenues primarily from
license royalties, income from joint ventures and lease payments from equipment
leased to manufacturers of EARTHSHELL products.
The Company has incurred aggregate net losses of approximately $74.2 million
from its inception in November 1992 through December 31, 1997. The Company has
been unprofitable to date and expects to continue to suffer operating losses
until its products are commercially introduced and achieve widespread market
acceptance and significant market penetration. Since its inception, the Company
has not generated any revenues from operations. Successful future operations
will depend upon the ability of the Company, its licensees and joint venture
partners to commercialize multiple EARTHSHELL products.
The Company has financed its operations from inception primarily through the
private placement of preferred stock and loans from its principal stockholder,
EKI, and Imperial Bank. The Company's principal activities to date have included
material and product development, development of commercial manufacturing
processes, demonstration of the licensed technology, licensing the technology to
key manufacturers and producers and seeking patent protection of the licensed
technology. The Financial Statements reflect the costs and expenses related to
the development of the licensed technology as it relates to food service
disposables since the Company's formation in 1992.
Since inception, the Company has relied on EKI to provide extensive
administrative, management and technical support. The Company and EKI entered
into the Technical Services Agreement which continues through December 31, 2002.
Under the terms of the Technical Services Agreement, the Company pays EKI for
all direct project labor hours incurred by technical personnel and direct
expenses incurred on approved projects. In addition, under the Patent Allocation
Agreement, the Company reimburses EKI for the costs and expenses of filing,
prosecuting, acquiring and maintaining certain patents and patent applications
relating to the technology licensed to the Company under the License Agreement.
The Technical Services Agreement superseded a Technical Services and Sublease
Agreement which terminated on September 30, 1997 (the "Prior Technical Services
Agreement") and the Patent Allocation Agreement superseded an Agreement for
Allocation of Patent Costs which terminated on September 30, 1997 (the "Prior
Patent Allocation Agreement"). See "Business--Relationship with EKI."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's net loss increased $2.0 million from $17.0 million for the
year ended December 31, 1996 to $19.0 million for the year ended December 31,
1997.
20
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL products decreased $1.3 million
from $10.2 million for the year ended December 31, 1996 to $8.9 million for the
year ended December 31, 1997. The amount of research and development services
billed by EKI to the Company decreased $1.6 million from $9.1 million for the
year ended December 31, 1996 to $7.5 million for the year ended December 31,
1997. In 1996, the Company incurred higher research and development expenses
primarily due to development and operation of the Company's sandwich container
pilot line at a research facility in Rock Hill, South Carolina operated by
Genpak, one of the Company's licensees. The Company completed its development
efforts with Genpak near the end of 1996 and relocated the pilot line to Santa
Barbara, California in the fourth quarter of 1996 and, accordingly, costs
related to this off-site manufacturing effort were not incurred during 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $2.3 million from $3.4 million for the year ended December
31, 1996 to $5.7 million for the year ended December 31, 1997. This increase was
primarily due to the recognition of compensation expense of $3.1 million
resulting from the extension of the terms of certain option agreements in
October 1997 that have been deemed as re-grants and, therefore, have been
treated as stock options granted at prices below market. Similarly in 1996, the
Company recognized compensation expense of $650,000 related to executive stock
options.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $196,000 from $311,000 for the year ended December 31, 1996 to
$507,000 for the year ended December 31, 1997. The increase in depreciation
expense was mainly a result of the purchase of pilot manufacturing equipment
formerly located at the Genpak, Rock Hill, South Carolina facility for the
Company's Santa Barbara product development center.
PATENT EXPENSES. Legal fees under the Patent Allocation Agreement with EKI
decreased $729,000 from $1.4 million for the year ended December 31, 1996 to
$653,000 for the year ended December 31, 1997. The decrease was primarily a
result of filing fewer new patent applications.
INTEREST (INCOME) EXPENSES, NET. Total interest expense increased $1.5
million from $1.7 million for the year ended December 31, 1996 to $3.2 million
for the year ended December 31, 1997. The increase in interest expense during
1997 was due to additional borrowings from EKI and additional borrowings against
the Company's line of credit.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net loss increased $3.0 million from $14.0 million for the
year ended December 31, 1995 to $17.0 million for the year ended December 31,
1996.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL products increased $1.1 million
from $9.1 million for the year ended December 31, 1995 to $10.2 million for the
year ended December 31, 1996. The increase for the year ended December 31, 1996
compared to 1995, was primarily due to the Company's development manufacturing
efforts on the EARTHSHELL sandwich container pilot line at the Genpak research
facility in South Carolina and its relocation near the end of 1996 to Santa
Barbara. Also, in preparation for the Offering, the Company increased its
efforts in the environmental science and marketing areas related to the
EARTHSHELL sandwich container resulting in increased expenses from $543,000 to
$914,000 for the years ended December 31, 1995 and 1996, respectively. The
Company was billed by EKI for research and development services totaling $9.1
million and $8.4 million for the years ended December 31, 1996 and 1995,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $1.0 million from $2.4 million for the year ended December
31, 1995 to $3.4 million for the year ended
21
<PAGE>
December 31, 1996. This increase was primarily due to the recognition of
compensation expense of $650,000 related to one executive's stock options which
vested during 1996, a severance payment of $75,000, and legal and filing fees
related to the Offering of $427,000.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $267,000 from
$44,000 for the year ended December 31, 1995 to $311,000 for the year ended
December 31, 1996. The increase was primarily due to purchase of commercial
scale pilot manufacturing equipment for EARTHSHELL sandwich containers which
totaled $1.2 million in 1996.
PATENT EXPENSES. Legal fees under the Prior Patent Allocation Agreement
with EKI decreased $547,000 from $1.9 million for the year ended December 31,
1995 to $1.4 million for the year ended December 31, 1996. The decrease was
primarily a result of filing fewer patent applications.
INTEREST (INCOME) EXPENSES, NET. Total interest expense increased $1.2
million from $510,000 for the year ended December 31, 1995 to $1.7 million for
the year ended December 31, 1996. The increase in interest expense was due to
additional borrowings from EKI of $9.2 million and borrowings against the line
of credit of $7.1 million for the year ended December 31, 1996. Due to the
reduction of excess cash for investment purposes in 1996, interest income
decreased $29,000 from $32,000 for the year ended December 31, 1995 to $3,000
for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net loss decreased $2.7 million from $16.6 million for the
year ended December 31, 1994 to $13.9 million for the year ended December 31,
1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures
for the development of EARTHSHELL products decreased $1.8 million from $10.9
million for the year ended December 31, 1994 to $9.1 million for the year ended
December 31, 1995. The decrease was primarily due to the change in the billing
structure between the Company and EKI under the Prior Technical Services
Agreement and a reduction in project costs related to the development and
testing of a commercial scale paper line totaling $1.2 million. The Company was
billed by EKI for technical services totaling $8.4 million and $9.5 million for
the years ended December 31, 1995 and 1994, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses decreased $1.0 million from $3.4 million for the year ended December
31, 1994 to $2.4 million for the year ended December 31, 1995. This decrease was
due primarily to the elimination in 1995 of the $1.2 million in administrative
fees which were paid to EKI in 1994. Other significant but largely offsetting
changes in general and administrative expenses in 1995 compared to 1994 included
an increase in salary expense. In the latter part of 1994, the Company hired key
executives to position itself for commercial product introduction. As a result,
the Company's compensation expense increased $251,000 from $861,000 for the year
ended December 31, 1994 to $1.1 million for the year ended December 31, 1995. In
addition, general legal fees increased $168,000 from $380,000 for the year ended
December 31, 1994 to $548,000 for the year ended December 31, 1995. The Company
recorded a $51,000 write down of assets in the first quarter of 1994. In 1995,
surplus research materials and equipment were sold for $89,000. In total, these
equipment expense related transactions resulted in a reduction in miscellaneous
income and expense of $140,000.
PATENT EXPENSES. Legal fees under the Prior Patent Allocation Agreement
with EKI increased $212,000 from $1.7 million for the year ended December 31,
1994 to $1.9 million for the year ended December 31, 1995. The increase was due
primarily to the filing of additional patent applications in foreign countries.
DEPRECIATION AND AMORTIZATION. Depreciation expense decreased $753,000 from
$797,000 for the year ended December 31, 1994 to $44,000 for the year ended
December 31, 1995. The decrease was largely due to the sale on December 31, 1994
of substantially all of the Company's laboratory equipment and leasehold
22
<PAGE>
improvements to EKI at their original acquisition price. In addition, the
Company sold commercial process equipment originally purchased for a pilot
manufacturing line to a third party in March 1995. During 1995, the Company
purchased additional commercial processing equipment. As of December 31, 1995,
the Company's fixed assets consisted of office equipment and deposits on
equipment related to the sandwich container production line with a net book
value of $1.9 million, whereas at December 31, 1994 the Company's fixed assets
had a net book value of $242,000.
INTEREST (INCOME) EXPENSES, NET. Interest income for the year ended
December 31, 1995 totaled $32,000 compared to $291,000 for the year ended
December 31, 1994. The reduction in interest income was due to the reduced level
of excess cash available for investment purposes. During 1995, the Company
obtained working capital loans from EKI which totaled $6.2 million. Intercompany
charges payable to EKI under the Prior Technical Services Agreement and Prior
Patent Allocation Agreement totaling $8.6 million were converted to demand notes
in 1995. Accordingly, interest expense for 1995 was $510,000.
LIQUIDITY AND CAPITAL RESOURCES
As a development stage company, since its inception in November 1992, the
Company has had no operating revenues and does not expect to have any revenues
until at least the fiscal quarter ending June 30, 1999. Through December 31,
1997, the Company had incurred aggregate net operating losses of approximately
$74.2 million.
Funds to finance the operation of the Company through December 31, 1997 have
been obtained primarily from a private placement of its Series A Preferred Stock
and borrowings from EKI and Imperial Bank. In September 1993, the Company raised
$25.7 million from the private placement of Series A Preferred Stock with
issuance costs of $1.2 million. From inception through December 31, 1997, the
Company borrowed approximately $10.8 million from EKI (excluding the
intercompany payables owed to EKI) and $11.9 million from Imperial Bank under a
line of credit. In connection with the line of credit, the Company executed a
general security agreement that grants Imperial Bank a security interest in the
Company's License Agreement with EKI. From inception through December 31, 1997,
the Company received approximately $45.6 million in cash from financing
activities. Outstanding loans from, and payables owed to, EKI totaled $33.3
million as of December 31, 1997. Credit extended under the Imperial Bank line of
credit as of December 31, 1997 totaled $11.9 million. The Imperial Bank line of
credit was increased to $14.0 million in December 1997 and the Company has fully
drawn down the line.
From inception through December 31, 1997, the Company had used approximately
$39.0 million of cash for operating activities and approximately $6.6 million of
cash in investing activities. Net cash used in investing activities has
consisted primarily of manufacturing and lab equipment purchases. Since
inception, capital expenditures have amounted to $7.2 million.
Primarily because of the Company's history of operating losses and its
reliance on its stockholders to provide cash flow to sustain operations, there
is substantial doubt about the Company's ability to continue as a going concern
unless the Company is able to obtain equity financing through the Offering,
loans from its principal stockholder or otherwise. Without the proceeds of the
Offering or other funding, the Company would run out of cash to fund its
operations. The report of independent accountants on the Company's financial
statements included herein includes an explanatory paragraph to this effect.
The Company anticipates that it will borrow from third-party lenders a
portion of the funds required to purchase equipment and construct turnkey
manufacturing lines for its licensee and joint venture partners. The Company
believes that the net proceeds of the Offering (estimated to be approximately
$186 million, based on assumed offering price of $19.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses) together with such third-party financing will be sufficient to meet
its foreseeable working capital requirements through at least the next two
years. The Company currently intends to use the net proceeds to facilitate the
development of manufacturing capacity for EARTHSHELL products by directly
purchasing manufacturing equipment for lease to licensees or
23
<PAGE>
contribution to joint ventures, to expand the Company's product development
center, to repay certain indebtedness to its principal stockholder, EKI, and
Imperial Bank, to launch an initial public relations and advertising campaign
for EARTHSHELL products, to prosecute additional patent applications for its
licensed technology and to establish a fund for the enforcement and protection
of patents, to pay accrued dividends on the Series A Preferred Stock, and for
general corporate purposes, including anticipated operating losses. Of the $63.0
million that the Company intends to use in the engineering, development and
construction of initial manufacturing lines, the Company expects that
approximately $19 million will be expensed as development and engineering costs.
In addition, the Company has agreed to reimburse EKI, pursuant to the Patent
Allocation Agreement, up to $6.5 million in connection with the purchase of
certain technology, subject to amounts expended on the purchase of manufacturing
equipment and the use of such technology. See "Certain Transactions--License
Agreement and Patent Allocation Agreement." Proceeds available for working
capital are currently estimated to be approximately $35.6 million.
The Company has no commitments for any additional financing, and there can
be no assurance that any such commitments can be obtained on favorable terms, if
at all. If the Company is unable to obtain additional financing as needed, the
Company may be required to reduce the scope of its anticipated manufacturing
ramp-up and products introduction, which could have an adverse effect on the
Company's business, financial condition and results of operations.
NET OPERATING LOSS TAX CARRYFORWARDS
The Company has sustained net operating losses ("NOLs") for federal income
tax purposes in the aggregate amount of approximately $47.2 million from its
inception through December 31, 1997. Under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company generally is entitled to reduce its future
federal income tax liabilities by carrying unused NOLs forward for a period of
15 years to offset future taxable income earned.
In the event that the Company is subject to the federal personal holding
company tax in any taxable year, the Company can only use its NOLs, if any, from
the immediately preceding taxable year to offset its income subject to the
personal holding company tax for such year. See "Certain United States Federal
Tax Considerations."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and "Business," as well as within
the Prospectus generally. Actual results could differ materially from those
anticipated in the forward-looking statements as a result of the risk factors
set forth herein and the matters set forth in the Prospectus generally.
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<PAGE>
BUSINESS
EarthShell Corporation (the "Company") is a development stage company
engaged in the licensing and commercialization of a proprietary composite
material for the manufacture of disposable packaging for the food service
industry, such as cups, plates, bowls and hinged-lid containers. This new
composite material is made primarily from commonly available raw materials such
as limestone, natural potato, corn and other starch binders, natural fibers and
functional coatings. The Company believes that food service disposables made of
this material ("EARTHSHELL products") can be designed to have certain superior
performance characteristics, such as greater strength and rigidity and can be
commercially produced at a cost that is competitive with comparable paper and
polystyrene food service disposables. The Company has produced prototype cups,
plates, bowls and hinged-lid containers. To date, however, these prototypes have
not been produced on fully integrated, commercial production lines and their
actual cost of manufacture is unproven. EARTHSHELL products offer a number of
attractive environmental features that are expected to appeal to customers
concerned about the environment.
According to industry studies, more than $8.3 billion was spent in the
United States in 1994 on the types of food service disposables that the Company
believes can be replaced by EARTHSHELL products, and the Company believes that
international markets represent additional significant opportunities for
EARTHSHELL products. Food service disposables are currently manufactured from a
variety of materials, including paper and polystyrene. The Company believes that
none of these materials fully addresses all three principal concerns of the food
service industry--performance, cost and environmental impact. The Company
believes that EARTHSHELL products will best address the combination of these
concerns and therefore will be able to achieve significant penetration of the
food service disposables market.
The Company's objective is to establish EARTHSHELL products as the preferred
disposable packaging for the food service industry. The Company's strategy
includes both working with major purchasers of food service disposables to build
consumer demand for EARTHSHELL products and licensing its technology to or joint
venturing with existing manufacturers of disposable packaging to market, produce
and distribute EARTHSHELL products. An additional component of the Company's
strategy is to utilize outside experts in their respective fields to assist in
the commercialization of EARTHSHELL products.
As the first step in this strategy, the Company has worked closely with
McDonald's Corporation ("McDonald's") in developing and testing prototype
sandwich containers. As a result of this work, McDonald's has approved the
EARTHSHELL Big Mac sandwich container for use in McDonald's restaurants in the
United States. McDonald's primary packaging purchaser, Perseco, has entered into
a supply agreement with the Company's licensee, Sweetheart Cup Company Inc.
("Sweetheart"), pursuant to which Perseco has committed to purchase not less
than 1.8 billion EARTHSHELL Big Mac sandwich containers over a three-year
period, subject to certain conditions. The Company currently expects its
licensee, Sweetheart, to make the first shipment of this commercial product for
use in McDonald's restaurants as early as the first quarter of 1999, although
development of the required manufacturing capacity could take longer than
currently anticipated. There is no binding commitment whatsoever between
McDonald's and the Company, the Company is not a party to any development
contract with McDonald's and McDonald's is free to discontinue its development
relationship with the Company at any time. See "--Relationship with McDonald's."
To accelerate the market penetration of EARTHSHELL products, the Company
will joint venture with or license its technology to existing manufacturers
experienced in the manufacture, sale and marketing of food service disposables.
To date, the Company has entered into licensing agreements with several of these
manufacturers, including Sweetheart, Genpak Corporation ("Genpak") and Dopaco,
Inc. ("Dopaco"), each of which has agreed to pay an effective royalty of 20% of
the wholesale price of EARTHSHELL products. To promote the rapid ramp-up of
product manufacturing capacity, the Company intends to contract with design
engineers to construct turnkey manufacturing lines for lease to licensees or
contribution to joint ventures. The Company intends to use $63.0 million of the
proceeds of this Offering to fund the initial engineering, development and
construction of such manufacturing lines, including the initial
25
<PAGE>
manufacturing equipment to be used at Sweetheart's Owings Mills, Maryland
facility for the production of EARTHSHELL Big Mac sandwich containers. By the
end of 1999, the Company expects to have supplied equipment to licensees and
joint venture partners at multiple production sites for the manufacture of a
broad range of EARTHSHELL products, including cold cups, hot cups, plates,
bowls, sandwich containers and other hinged-lid containers.
The development of the composite material used to make EARTHSHELL products
("ALI-ITE composite material") is the result of more than 10 years of basic
materials science research by E. Khashoggi Industries, LLC and its predecessors
("EKI"). EKI is the Company's principal stockholder. As of February 17, 1998,
EKI had obtained 52 U.S. and 26 foreign patents and had 19 U.S. and 117 foreign
patent applications pending which are applicable to EARTHSHELL products
utilizing the EKI technology. The Company believes that these patents and patent
applications represent a strategic web of protection broadly covering EARTHSHELL
products, their material composition and the manufacturing processes used to
make them.
Since the Company's inception in November 1992, the Company has not
generated any revenues from operations and, as of December 31, 1997, had
incurred aggregate net losses of approximately $74.2 million. The Company has an
exclusive, worldwide, royalty-free license to use and license the EKI technology
to manufacture and sell disposable, single-use containers for packaging or
serving food or beverages intended for consumption within a short period of time
(less than 24 hours). The Company does not have the right to use the EKI
technology for any other purposes. See "--Relationship with EKI."
BACKGROUND
Disposable food and beverage containers used in the food service industry
are currently manufactured from a variety of materials, including paper, plastic
and polystyrene. The Company believes that no disposable packaging material has
been developed, however, which addresses all of the three principal concerns of
the food service industry--performance, cost and environmental impact.
For example, while polystyrene products are relatively inexpensive and
provide good insulation, their manufacture and disposal have been shown to have
adverse environmental consequences. Production of polystyrene products results
in the depletion of certain non-renewable resources, such as crude oil and
natural gas, and also results in the release of significant amounts of
hydrocarbons into the atmosphere, which can contribute to the formation of smog.
Because polystyrene does not easily degrade, polystyrene litter can accumulate
and remain visible on beaches, lake shores and roadways. Environmentally
concerned consumers have actively lobbied against the use of polystyrene
packaging, and a number of communities have banned polystyrene disposables.
Because of environmental concerns, a number of quick-serve restaurant chains
have reduced their use of polystyrene products in favor of paper.
Paper products in many instances are more expensive than polystyrene
products, may offer reduced functional performance and have their own set of
adverse environmental consequences. The paper industry uses the wood from
millions of trees each year, and the manufacture of paper products requires
substantial amounts of energy and releases significant amounts of pollutants
into both the air and water. Corrugated paper-plastic laminate sandwich
containers and paper wraps have both been used as replacements for polystyrene
sandwich containers, but are generally less rigid and offer inferior heat
insulation. Similarly, paper hot cups are much less effective at heat insulation
than polystyrene foam cups, resulting in "double cupping" in some instances.
A number of companies have introduced plastic and starch-based materials as
potential environmentally superior packaging alternatives. To date, many of
these materials have suffered from either unacceptable performance limitations
or have not proven to be economically viable as disposable packaging.
26
<PAGE>
THE EARTHSHELL SOLUTION
The Company believes that EARTHSHELL products will best address the
combination of the three principal concerns of the food service
industry--performance, cost and environmental impact.
PERFORMANCE CHARACTERISTICS. The Company has produced prototype cups,
plates, bowls and hinged-lid containers that the Company believes meet the
critical performance requirements of the marketplace, including rigidity,
graphic capabilities, insulation, shipping and handling and stacking
performance. In addition, the Company believes that EARTHSHELL products can be
designed to have certain superior performance characteristics. For example, the
EARTHSHELL Big Mac Sandwich container has been designed to have greater strength
and rigidity than conventional food service disposables. In addition, the
prototype EARTHSHELL hot cup has been designed to have a more desirable hand and
mouth feel than polystyrene cups and better insulating performance than paper
cups. EARTHSHELL prototype sandwich containers and hot cups were preferred over
comparable conventional products in consumer focus groups.
COST COMPETITIVE. The Company believes that EARTHSHELL products can be
manufactured at costs which are competitive with comparable existing food
service disposables. While EARTHSHELL products have not yet been produced
commercially on fully integrated production lines and there can be no assurance
as to their actual cost when so produced, based on material and machinery costs
received from vendors and suppliers, the Company believes that the total cost of
EARTHSHELL cups, plates, bowls and sandwich containers (including the Company's
royalty) will be approximately equal to or less than the cost of comparable
paper and polystyrene products. The Company expects that the cost of producing
EARTHSHELL products will decrease over time as the technology and initial
production processes are further refined.
ENVIRONMENTAL IMPACT. EARTHSHELL products offer a number of attractive
environmental features which are expected to appeal to customers concerned about
the environment. Through the use of a "cradle-to-grave" environmental assessment
and in consultation with leading environmental experts, EARTHSHELL cups, plates,
bowls and sandwich containers have been designed to reduce certain environmental
burdens of rigid packaging through the careful selection of raw materials,
processes and suppliers. EARTHSHELL products are made primarily from limestone,
natural starch binders, natural fibers (including in many instances
post-consumer recycled fiber which does not require the cutting of trees),
biodegradable polymer and wax coatings, and water.
According to research on the performance of various formulations of the
EARTHSHELL sandwich container commissioned by the Company and performed by Cal
Recovery Inc., an international waste management consulting company, when
crushed or broken, such EARTHSHELL sandwich containers were shown to be
biodegradable in a composting environment and observed to physically dissolve in
water. As a result, the Company believes that EARTHSHELL products substantially
reduce the risk to wildlife when compared to polystyrene food service
disposables and may help mitigate the litter concern created by their improper
disposal.
EARTHSHELL products can be compostable and, as a result, they can offer a
disposal alternative not available with polystyrene packaging. Research
performed by Cal Recovery Inc. on various formulations of the EARTHSHELL
sandwich container shows that such EARTHSHELL sandwich containers can be
composted in a typical backyard compost pile and the compost can be used as a
soil conditioner. The State University of New York, Stony Brook has completed a
field test commissioned by the Company, using the Town of Easthampton composting
facility on Long Island, New York to demonstrate that EARTHSHELL sandwich
containers can be composted commercially. While food service disposables are not
commonly recycled through composting, the ability of EARTHSHELL products to be
composted may be a significant advantage if this method of recycling becomes
more widely used.
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<PAGE>
BUSINESS STRATEGY
The Company's objective is to establish EARTHSHELL products as the preferred
disposable packaging for the food service industry throughout the world. A
component of the Company's strategy is to utilize outside experts to assist in
the commercialization of EARTHSHELL products. The key elements of the Company's
strategy for attaining this objective are:
CREATE CONSUMER DEMAND FOR EARTHSHELL PRODUCTS. The Company will continue
to work with the major purchasers of food service disposables in the development
and testing of prototype hot and cold cups, plates, bowls and trays to
demonstrate product performance and cost benefits and to build demand for
EARTHSHELL products. The Company believes that the use of EARTHSHELL products by
influential food service operators will accelerate the acceptance of EARTHSHELL
products by other users. The Company intends to use $10.0 million of the
proceeds of the Offering to expand its product development center at which it
produces prototype EARTHSHELL products for commercial testing by food service
operators. In connection with the commercial introduction of its products, the
Company plans to use a portion of the proceeds of the Offering to launch public
relations and advertising campaigns. The Company also intends to promote the
environmental benefits of EARTHSHELL products to environmental groups, policy
makers, legislators, the media and the general public through student media
packages, network television and print advertising. Pursuant to the terms of its
license agreements, the Company also expects that the EARTHSHELL brand name will
appear on most EARTHSHELL products. See
"--Marketing."
LICENSE EXISTING MANUFACTURERS OF FOOD SERVICE DISPOSABLES. The Company's
strategy includes licensing its technology to or joint venturing with existing
manufacturers of disposable packaging for the manufacture and distribution of
EARTHSHELL products. By licensing its technology to or entering into joint
venture relationships on a non-exclusive basis with such companies as
Sweetheart, Genpak and Dopaco, the Company believes it can take advantage of the
manufacturing experience and distribution networks of existing manufacturers,
thereby accelerating the market penetration of EARTHSHELL products. The Company
intends to provide its licensees and joint venture partners with technical and
ongoing support designed to facilitate the application of EARTHSHELL technology,
further refine manufacturing processes and reduce production costs. The Company
will also monitor licensee and joint venture operations to ensure product
quality.
DEVELOP PRODUCTION CAPACITY. The Company is working with an engineering and
construction firm to deliver manufacturing lines at the licensee's or joint
venture partner's facilities in order to ensure that manufacturing equipment is
properly installed, integrated and producing EARTHSHELL products to meet
anticipated market demands. The Company intends to use $63.0 million of the
proceeds of the Offering to fund the initial engineering, development and
construction of turnkey manufacturing lines for lease to licensees or
contribution to joint ventures. As early as the end of 1998, the Company expects
that the construction of a multi-line manufacturing operation at Sweetheart's
Owings Mill, Maryland plant to supply containers for McDonald's Big Mac sandwich
will be completed. Subsequent lines for sandwich containers and other EARTHSHELL
products will be constructed at strategic locations determined in conjunction
with the Company's licensees. By the end of 1999, the Company expects to have
supplied equipment to licensees at multiple production sites for the manufacture
of a broad range of EARTHSHELL products including cold cups, hot cups, plates,
bowls, sandwich containers and other hinged-lid containers.
DEVELOP INTERNATIONAL MARKETS. The Company's international strategy is to
introduce EARTHSHELL products in foreign markets through quick-serve restaurant
industry leaders who will have already introduced EARTHSHELL food service
disposables in the United States. The Company intends to enter into strategic
licenses or joint ventures with key international packaging suppliers. The
Company does not expect to begin building overseas manufacturing capability
before the end of 1999.
PROTECT EARTHSHELL TECHNOLOGY. The Company, together with EKI, will
continue to seek to develop and maintain a web of patent protection covering
EARTHSHELL products, the material composition and the
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manufacturing processes used to make them. As of February 17, 1998, EKI had
received 52 U.S. and 26 foreign patents with regard to the compounds,
manufacturing processes and product designs applicable to EARTHSHELL products
and had 19 U.S. and 117 foreign patent applications pending. The Company and EKI
intend to continue to seek domestic and international patent protection for
further developments in the technology and intend to vigorously enforce their
rights against any person infringing the technology.
FOOD SERVICE DISPOSABLES MARKET
According to industry studies, more than $8.3 billion was spent in the
United States during 1994 on the types of food service disposables that the
Company believes can be manufactured using EARTHSHELL proprietary material. In
addition, according to an industry study commissioned by the Company,
approximately $4.4 billion was spent in the United Kingdom, France, Germany,
Belgium, the Netherlands, Japan, Australia and Brazil on such products. The
Company believes that the remaining unquantified international markets also
present significant opportunities for EARTHSHELL products.
The following data details the $8.3 billion of U.S. sales of those food
service disposables targeted for replacement by EARTHSHELL products:
<TABLE>
<CAPTION>
EARTHSHELL TARGET MARKET
1994 U.S. PURCHASES
(DOLLARS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
AMOUNT OF
PRODUCT TYPE PURCHASES PERCENT
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cold cups................................................................ $ 1,460 17.6%
Hot cups................................................................. 850 10.2
Cups for home use........................................................ 440 5.3
Plates and bowls......................................................... 1,640 19.8
Containers, trays and carriers........................................... 1,230 14.8
Pizza boxes.............................................................. 680 8.2
Beverage lids............................................................ 620 7.5
Cutlery.................................................................. 600 7.2
Hinged-lid containers.................................................... 500 6.0
Wrap replacements........................................................ 280 3.4
----------- -----
Total................................................................ $ 8,300 100.0%
----------- -----
----------- -----
</TABLE>
According to industry studies on the U.S. market, approximately 55% of the
total food service disposables purchased in 1994 were purchased by quick-serve
restaurants, 39% by other institutions, such as hospitals, stadiums, airlines,
schools and restaurants (other than quick-serve restaurants), and the remaining
6% by retail stores. Of the food service disposables purchased in the United
States by quick-serve restaurants and other institutions, approximately 50% were
made of paper and 50% were made of plastic, polystyrene or foil.
THE TECHNOLOGY
The new composite material used to make EARTHSHELL products ("ALI-ITE
composite material") is the result of more than 10 years of basic research by
EKI in the materials science of natural minerals (such as limestone and sand)
and natural binders (such as starch). EKI has employed materials science
methodologies and state-of-the-art analytical equipment and research methods to
develop this proprietary composite material and related manufacturing processes.
EKI has carefully considered the environmental impact in the selection of these
materials and processes.
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<PAGE>
EKI made several significant discoveries that led to the commercial
potential of this new composite material. For example, EKI developed a method of
using a high percentage of natural, low-cost fillers (such as limestone and
sand) in the composite. These fillers reduce cost and provide rigidity, thermal
stability and environmental benefits to the materials, without significantly
compromising strength, flexibility and moldability. EKI also developed a
manufacturing process to disperse fibers into the material at a lower water
content than paper processing, resulting in a reduction in the amount of natural
fibers necessary to give the material flexibility and toughness. EKI also
modified the ALI-ITE composite material to allow the manufacturing of EARTHSHELL
products using known processes such as heated mold forming systems. The result
of these discoveries is a new composite material which can be made from low-cost
materials, which can be processed using known manufacturing processes and
equipment and which the Company has engineered for specific product applications
and performance characteristics. The EKI technology also allows the use of a
broad range of locally available sources of raw materials, specifically
limestone, fiber and starch. The product composition is readily tailored to use
widely available raw materials while maintaining product properties and
performance.
The Company's initial research and development efforts have focused on
EARTHSHELL products made from a moldable foam-like formulation of ALI-ITE
composite material. The EARTHSHELL sandwich container and the Company's current
prototype products are made of this formulation. There is also a paper-like
application of ALI-ITE composite material that the Company believes can also be
formulated into EARTHSHELL food service disposables in the future. See "Risk
Factors--Development of EARTHSHELL Paper Products."
Although the initial development of ALI-ITE composite material was conducted
by EKI, the Company has incurred substantial expenses in connection with the
commercial application of this technology for the food service packaging market
since the Company's formation in 1992. The Company's research and development
expenses in the years ended December 31, 1995, 1996 and 1997 were approximately
$9.1 million, $10.2 million and $8.9 million, respectively. The Company's
research and development efforts are ongoing and the Company expects to continue
to incur substantial research and development expenses in the future.
MANUFACTURING OF EARTHSHELL PRODUCTS
While the Company's pilot manufacturing line utilizes commercial equipment,
EARTHSHELL products have not been manufactured on a fully integrated production
line or at the consistent manufacturing throughputs which will be required to
successfully manufacture EARTHSHELL products at the costs and in the quantities
necessary for their commercial introduction. Based on the limited production of
the EARTHSHELL sandwich containers and other prototype products by the Company,
the Company believes that EARTHSHELL products can be manufactured on known
commercial processing equipment, subject to certain application specific
modifications. The EARTHSHELL manufacturing process consists of blending the
component ingredients of ALI-ITE composite material in a mixer, depositing the
mixture into heated cavity molds, heating the molded mixture for approximately
one minute, removing the product, trimming excess material, spraying on
functional coatings and printing any desired graphics. The Company estimates
that the cost of the machinery and installation required for a fully integrated
commercial manufacturing line with annual production capability of 150 million
sandwich containers or 550 million cups is approximately $2.0 million.
The Company has identified multiple equipment manufacturers that produce
machinery on which the Company believes that EARTHSHELL products can be
produced, subject to application specific modifications. The Company believes
that these and other equipment manufacturers can produce a sufficient amount of
equipment to support the projected commercial introduction of EARTHSHELL
products. The Company believes that the design, construction and start up of the
first commercial plant to produce the EARTHSHELL Big Mac sandwich container will
take approximately 12 months, and that the design, construction and start up of
the first commercial plant for other EARTHSHELL product lines, such as hot
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<PAGE>
and cold cups, hinged-lid containers, plates and bowls will take a similar
period of time. The Company believes that the design, construction and start up
of subsequent manufacturing lines for previously introduced product lines will
take approximately nine months. There can be no assurance that delays will not
be encountered in the construction and operation of commercial production lines.
See "Risk Factors-- Risks of Delay" and "--No Existing Manufacturing Capacity."
The Company intends to rely on its licensees and joint venture partners for
the manufacture and distribution of EARTHSHELL products. As part of the
Company's strategy of supporting the development of sufficient production
capacity to meet anticipated customer demand for EARTHSHELL products, the
Company intends to use $63.0 million of the proceeds of the Offering to
engineer, develop and construct turnkey manufacturing lines in cooperation with
its licensees and joint ventures, of which the Company believes approximately
$19.0 million will be expensed as development and engineering costs. The Company
expects that the construction of a multi-line manufacturing operation at
Sweetheart's Owings Mill, Maryland plant to supply containers for McDonald's Big
Mac sandwich will be completed as early as the end of 1998. In addition, the
Company intends to expand its product development center in Santa Barbara,
California by adding mold design capacity and pilot manufacturing lines to
support the development, testing and introduction of new products in each major
product category. Subsequent lines for producing additional sandwich container
and other EARTHSHELL products will be built at strategic locations determined in
conjunction with licensees. By as early as the end of 1999, the Company expects
to have supplied equipment to licensees and joint venture partners at multiple
production sites for the manufacture of a broad range of EARTHSHELL products,
including cold cups, hot cups, plates, bowls, sandwich containers and other
hinged-lid containers. The Company intends to engage design engineering firms to
deliver manufacturing lines on a turnkey basis in order to ensure that enough
manufacturing equipment is properly installed, integrated and producing
EARTHSHELL products to meet the ramp-up demands. See "Risk Factors--Dependence
on Licensees and Joint Venture Partners" and "--Development of Manufacturing
Plants."
Most EARTHSHELL products will require one or more product specific coatings
to deliver specific performance characteristics. The EARTHSHELL Big Mac sandwich
container has an interior (food contact side) wax coating which serves
principally as a moisture barrier. The container also has an exterior coating
which contributes to the flexibility and stability of the product. The Company
intends to identify and develop other product specific coatings and additives
for use with its products on an ongoing basis.
EARTHSHELL products use commonly available raw materials, such as limestone,
natural potato and corn starch, natural fiber and functional coatings. The
Company and certain of its licensees believe that these raw materials are
currently available from multiple existing suppliers in amounts sufficient to
satisfy projected demand. The Company and its licensees have identified multiple
qualified suppliers of raw materials for the manufacture of EARTHSHELL products.
See "Risk Factors--Raw Material Supplies."
MARKETING
The Company's primary marketing strategies are to develop consumer awareness
of the brand name EARTHSHELL and the environmental advantages of EARTHSHELL
products and to work directly with major users and distributors of food service
disposables to encourage the purchase of EARTHSHELL products. In working with
significant food service operators, the Company has developed prototype products
designed to meet operator specifications. These operators are able to use the
prototype products to perform market tests and determine product performance and
cost. The Company believes that the adoption of EARTHSHELL products by
influential users will accelerate market penetration of EARTHSHELL products, as
well as promote the interest of existing container manufacturers in producing
and distributing EARTHSHELL products.
The Company intends to use a portion of the proceeds of the Offering to
expand its product development center at which it intends to develop and produce
sample EARTHSHELL products for commercial testing by food service operators. The
product development center will enable Company
31
<PAGE>
engineers to computer design and produce sample products and make sample product
machine molds. The facility is also expected to include one or more
demonstration commercial production lines at which the laboratory produced molds
can be used to produce prototype products in sufficient quantities to permit in-
store testing for potential customers and training of new licensees. The Company
intends to hire approximately 13 employees, including product development
engineers, and technical support staff in the first year following the Offering
to staff this facility.
In order to introduce EARTHSHELL products to the public, the Company intends
to use a portion of the proceeds of the Offering to launch an advertising
campaign which will include school education packets, network television and
print advertising describing the benefits of EARTHSHELL products. This
advertising campaign will be designed to develop a high level of consumer
awareness of the brand name EARTHSHELL and the environmental benefits of
EARTHSHELL products. As an additional part of the Company's strategy of
establishing brand name recognition, most licensees will either be required to
place the EARTHSHELL logo on all EARTHSHELL products or will be required to pay
an additional 2% royalty.
Distribution of EARTHSHELL products is expected to be accomplished through
the established product distribution networks of existing manufacturers and
distributors of food service disposables who become licensees of or joint
venture partners with the Company. Because these manufacturers have extensive
experience in the marketing and distribution of food service disposables, the
Company does not expect to employ substantial numbers of sales or marketing
personnel.
RELATIONSHIP WITH MCDONALD'S
Since 1991, the Company has worked closely with McDonald's in developing and
testing two products, the Big Mac sandwich container and a sandwich container
for the Quarter Pounder with Cheese sandwich ("QPC"). While McDonald's primary
packaging purchaser, Perseco, has entered into a supply agreement to purchase
EARTHSHELL Big Mac sandwich containers from a Company licensee, the Company is
not a party to any development contract with McDonald's and McDonald's is free
to discontinue its development relationship with the Company at any time.
McDonald's is a stockholder in the Company.
Extensive testing of the EARTHSHELL QPC sandwich container by McDonald's
included a market test in approximately 40 Las Vegas area restaurants from
September to November 1996. The Company's QPC sandwich container experienced
certain product performance shortcomings during this Las Vegas test, including
excess breakage and the need of McDonald's employees to use two hands to close
and latch the container. In part in response to these test results, the Company
has made ongoing improvements to the EARTHSHELL sandwich container, including
the redesign of the container's original tab and slot latch design to permit
one-handed closing, the reconfiguration of the secondary packaging used to ship
the container to reduce breakage in shipping, and improvement in the container's
exterior coating to reduce breakage in shipping and use. As a result of this
process, McDonald's has approved the EARTHSHELL Big Mac sandwich container for
use in McDonald's restaurants in the United States. This approval is expressed
in a non-binding letter agreement which sets forth various terms and conditions
for the use of the EARTHSHELL sandwich container in McDonald's restaurants,
including many of the terms and conditions included in the Perseco-Sweetheart
supply agreement described below. In addition, as part of an agreement with
McDonald's and a leading environmental group, the Company has agreed to make
certain improvements to the EARTHSHELL Big Mac Sandwich container, including
lowering the weight, and McDonald's has agreed to undertake certain other
packaging modifications. The Company anticipates that McDonald's will require a
limited regional verification of the EARTHSHELL Big Mac sandwich container
manufactured on a fully-integrated commercial production line prior to the
national roll-out of the product.
McDonald's primary packaging supplier, Perseco, has entered into a supply
agreement with Sweetheart, a leading manufacturer of disposable packaging (the
"Perseco--Sweetheart Supply Agreement"), pursuant to which Perseco is expected
to purchase not less than 1.8 billion EARTHSHELL Big Mac sandwich containers
over a three-year period. Perseco's agreement to purchase EARTHSHELL Big Mac
sandwich
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containers is subject to a number of terms and conditions, including compliance
with product specifications, favorable market acceptance of the EARTHSHELL
sandwich container as determined at McDonald's reasonable discretion, continued
improvement of the environmental characteristics of the EARTHSHELL Big Mac
sandwich container, assurance of non-infringement of the patent or other
intellectual property rights of others, most favored nation pricing, certain
limited early termination rights and, the right of McDonald's to purchase the
first commercial production available for any subsequently developed EARTHSHELL
products applicable to the quick-serve restaurant industry and satisfaction of
McDonald's demand for any quick-serve package prior to the sale to any other
organizations. The Company has entered into a license agreement and an operating
agreement with Sweetheart which contemplates that the Company will fund and
build, at Sweetheart's Owings Mills, Maryland facility, the manufacturing
capacity necessary to produce the EARTHSHELL Big Mac sandwich containers to be
sold to Perseco. See "--License and Joint Venture Relationships."
LICENSE AND JOINT VENTURE RELATIONSHIPS
The Company intends to grant licenses to, and enter into joint venture
relationships with, a broad group of companies throughout the world to
manufacture and distribute EARTHSHELL products. The Company expects both license
agreements and joint venture relationships will typically be on a non-exclusive
basis (except in some foreign countries where an exclusive relationship may be
appropriate) with a specific geographic and product scope.
The Company and Sweetheart have entered into a license agreement (the
"Sweetheart License Agreement") pursuant to which the Company has licensed, on a
non-exclusive basis, its technology to Sweetheart for the manufacture and
distribution of hinged-lid sandwich containers to Perseco for use in McDonald's
restaurants in the United States and Canada. The Sweetheart License Agreement
provides for a 20% royalty payable to the Company on the price paid by Perseco
for the containers. The pre-existing license agreement between the Company and
Sweetheart was terminated as a result of the parties entering into the
Sweetheart License Agreement. Under the Sweetheart License Agreement, the 20%
royalty will commence to accrue at the time certain efficiency and cost levels
relating to the equipment provided by the Company to Sweetheart are met (the
"Start Date"). The Company and Sweetheart also entered into an Operating
Agreement (the "Operating Agreement"), pursuant to which the Company has agreed,
at its expense, to purchase, install and make available to Sweetheart at
Sweetheart's Owings Mills, Maryland facility approximately four lines of
equipment for the production of the EARTHSHELL Big Mac sandwich containers in
return for the Company's right to receive certain equity distributions in
addition to the royalty. Pursuant to the Operating Agreement, the Company will
fund certain operating costs prior to the Start Date and certain incremental
costs incurred by Sweetheart if the equipment does not meet certain efficiency
and cost criteria for a two-year period following the Start Date.
Pursuant to the Sweetheart License Agreement, the Company has agreed that it
will not enter into a more favorable license agreement with any third party to
sell sandwich containers to Perseco or McDonald's. The Company has also agreed,
under certain circumstances, to reimburse Sweetheart for certain freight costs
charged by Perseco pursuant to the Perseco--Sweetheart Supply Agreement. The
Sweetheart License Agreement also provides that any improvements developed by or
for Sweetheart will be owned by Sweetheart, but will be subject to an
irrevocable, non-exclusive license to the Company. In addition, under the
Operating Agreement, the Company has agreed to indemnify Sweetheart for, among
other things, claims relating to the safety of the operating equipment,
intellectual property matters and compliance of the McDonald's containers with
FDA regulations. The Operating Agreement terminates at the end of 10 years,
subject to earlier termination upon the occurrence of certain events. Upon
termination, Sweetheart has reserved the right, under certain conditions, to
purchase the equipment from the Company at a price equal to the Company's
unrecovered cost basis.
The Company has also entered into a letter of intent with Prairie Packaging
Inc. ("Prairie") which contemplates that the Company and Prairie will enter into
definitive agreements for the manufacture and
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distribution of various EARTHSHELL products that will contain terms that are
comparable to those contained in the Sweetheart License Agreement and Operating
Agreement. There can be no assurance that such definitive agreements with
Prairie embodying the terms of the letter of intent will be finalized.
Currently, the Company also has license agreements with, among others,
Genpak and Dopaco for the manufacture and sale of specific EARTHSHELL products
in the United States, Canada, Mexico, Central America and the Caribbean. Genpak
and Dopaco are required to pay to the Company a royalty of 22% (less a 2%
discount if EARTHSHELL products produced by the licensees bear the EARTHSHELL
logo) of the gross sales price of EARTHSHELL products sold by either of them.
Under the terms of these agreements, the manufacturers are not obligated to
achieve minimum sales quotas and have the right to terminate the license
agreements at their election without penalty. Unless sooner terminated, each
license continues in effect until the expiration of the Company's license from
EKI. Each of the Genpak and Dopaco license agreements also provides that, during
the first three years of its term, if the licensee experiences an adverse
material change in circumstances, such as a significant and unexpected increase
in the cost of necessary raw materials, the Company and the licensee will
negotiate appropriate adjustments in the terms of the license. Under the
agreements, all domestic licenses (within the United States) granted by the
Company are required to contain substantially the same terms and conditions so
that no domestic licensee will gain a material advantage over another licensee
by virtue of the license agreement. None of the licensees are currently
producing or distributing any products under the terms of these license
agreements.
In addition, the Company expects to enter into joint venture or combined
joint venture and license relationships in which it would expect to derive joint
venture and license revenues of not less than 20% of the wholesale price of the
EARTHSHELL products sold by the joint venture. The terms of such joint ventures
may include the contribution by the Company of turnkey manufacturing lines, the
grant of exclusive or non-exclusive licenses for defined territories and
products and, may provide during the initial commercial introduction of
EARTHSHELL products, guarantees of manufacturing line efficiency for a limited
period of time and, funding to meet the joint venture's start-up costs. The
Company anticipates, however, that the terms of such relationships may vary
significantly between joint ventures.
The Company intends to provide ongoing assistance and technical support to
its licensee manufacturers and joint venture partners. This support will be
designed to facilitate the application of the licensed technology, further
develop manufacturing processes, reduce production costs and allow the Company
to monitor product quality. Support will be provided by the Company primarily
through EKI technical personnel working on behalf of the Company pursuant to the
Technical Services Agreement and through outside independent consulting firms
which have assisted the Company in developing its products.
Although it has no current intention of doing so, in addition to license
agreements and joint venture relationships, the Company may also decide to
construct its own commercial production facilities and manufacture and
distribute EARTHSHELL products directly. See "Risk Factors--Dependence on
Licensees and Joint Venture Partners."
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The Company's licensed technology is the subject of numerous issued and
pending patents in both the United States and foreign countries. The Company
believes that these patent and patent applications represent a strategic web of
patent protection broadly covering the EARTHSHELL products, their material
composition and the manufacturing processes used to make them. The Company has a
license from EKI to the rights to 52 U.S. and 26 foreign patents, as well as 19
U.S. and 117 foreign pending patent applications (as of February 17, 1998)
relating to the compositions, products and manufacturing processes used to
produce EARTHSHELL food and beverage containers. The patents currently issued in
the United States and internationally expire between 2012 and 2014. Pending
patents, if granted, would give the Company additional patent protection through
2016. Seventeen of the issued U.S. patents relate specifically to molded food
and beverage containers manufactured from ALI-ITE composite material, the
formulation of ALI-ITE composite material used in the EARTHSHELL Big Mac
sandwich container and substantially all of
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the EARTHSHELL products currently under development. EKI has also received six
notices of allowance with respect to U.S. patent applications relating
specifically to molded products and the formulations used to make such products.
While the Company and EKI intend to continue to seek broad patent protection,
there can be no assurance that the pending patents relating to the Company's
products or other additional patents will be issued or that the Company or EKI
will develop new technology that is patentable. Moreover, there can be no
assurance that patents and patent applications licensed to the Company are
sufficient to protect the Company's technology or that any patent issued to EKI
and licensed to the Company will not be held invalid, circumvented or infringed
by others. Patent and patent applications on formulations of ALI-ITE composite
material are based in part on specific proportional mixtures of the components
of the material. The Company continues to undergo testing and modification of
the components and their proportional mixtures to improve environmental profile,
reduce materials and processing cost and improve product performance. There can
be no assurance that the mixture that is ultimately determined to be optimal
will be protected under the Company's patents or that it will not be subject to
a patent held by others. If the optimal mixture is not protected under the
Company's patents or is subject to a patent held by others and a third party
asserts patent infringement, it would have an adverse effect on the Company's
business, financial condition and results of operations. The Company has
identified at least one other series of patents held by a third party which
protect materials and methods for manufacturing materials containing some
similar components as are found in ALI-ITE composite material. EKI has entered
into an agreement to purchase this technology, subject to certain outstanding
rights, and to license it back to its current owner for limited purposes on a
royalty-free, perpetual basis. The Company's license from EKI will include a
license to this technology. For a period of five years following the
introduction of EARTHSHELL products, EKI has agreed that it will cause the
Company to purchase a minimum of 70% of the manufacturing equipment to be used
by EARTHSHELL licensees (up to $70 million) from the current owner of the
patents, provided such equipment can obtain certain performance levels. The
Company has agreed to reimburse EKI, pursuant to the Patent Allocation
Agreement, up to $6.5 million in connection with the purchase of certain
technology, subject to amounts expended on the purchase of manufacturing
equipment and the use of such technology. See "Certain Transactions--License
Agreement and Patent Allocation Agreement."
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Although the Company knows of no infringement by its products of patents
held by others, it is always possible that a third party may assert
infringement. The Company believes that it owns or has the rights to use all
technology incorporated into its products, but an adverse determination in any
such proceedings or in other litigation or infringement proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties or require the Company to seek licenses from third parties.
Although patent and intellectual property disputes have often been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses would prevent the Company from manufacturing or
licensing others to manufacture certain of its products, which could have an
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies on proprietary know-how and trade secrets which are
not the subject of patents. Some of this proprietary information is licensed
from EKI and some has been developed by the Company. To protect its rights in
proprietary know-how and trade secrets, both the Company and EKI require certain
licensees, joint venture partners, employees, consultants, advisors and
collaborators to enter into confidentiality agreements. These confidentiality
agreements, however, have limited terms (typically, five years or less), and
there can be no assurance that these agreements will provide meaningful
protection for the Company's and EKI's trade secrets, know-how or other
proprietary information in the
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event of any unauthorized use or disclosure. In addition, the Company's business
may be adversely affected by competitors who independently develop competing
technologies.
The Company owns the trademark EARTHSHELL and certain other trademarks, and
has been licensed by EKI to use the trademark ALI-ITE.
COMPETITION
Competition among existing food and beverage container manufacturers in the
food service industry is intense. Currently, a small number of large U.S. and
Canadian manufacturers have a dominant share of the market for paper roll stock
and expanded polystyrene resin. A large number of manufacturers worldwide
convert paper roll stock and expanded polystyrene resin into paper and
polystyrene food service disposables. Most of these competitors currently have
substantially greater financial and marketing resources than the Company, and
many have well-established supply, production and distribution relationships and
channels. To be successful, EARTHSHELL products must be recognized as being
superior, in either or both their performance and environmental impact, to
existing products and must be capable of commercial production at prices
competitive with those of existing products. There can be no assurance that the
EARTHSHELL products can be manufactured at cost-competitive prices or that they
will be able to achieve such recognition, nor can there be any assurance that
companies producing competitive products will not reduce their prices or engage
in advertising or marketing campaigns designed to protect their respective
market shares and impede market acceptance of EARTHSHELL products. Additionally,
some of the Company's licensees and joint venture partners manufacture paper,
plastic and foil packaging which will compete with EARTHSHELL products. See
"Risk Factors--Uncertain Production Costs."
Recently, a number of paper and plastic disposable packaging manufacturers
and converters and others have made efforts to increase the recycling of these
products. Increased recycling of paper and plastic products could lessen their
negative environmental impact, one significant basis upon which the Company
intends to compete. A number of companies have introduced starch-based materials
as potential environmentally superior packaging alternatives, although, to date,
the Company believes that many of these products have suffered from performance
limitations and they have not proven to be economically viable methods of
packaging. A number of companies are developing composites or other materials
which may be used to manufacture food service disposables with reduced
environmental impact. To date, the Company believes that much of the packaging
that is claimed to be biodegradable has also suffered from cost and performance
limitations. It is expected that many existing packaging manufacturers may
actively seek competitive alternatives to the Company's products and processes.
The development of competitive, environmentally attractive, disposable food
service containers could render the Company's technology obsolete and could have
a material adverse effect on the business, financial condition and results of
operations of the Company. See "Risk Factors--Competition; Risk of Technological
Advancement."
GOVERNMENT REGULATION
The U.S. Food and Drug Administration (the "FDA") administers the Federal
Food, Drug and Cosmetic Act, which regulates food packaging substances that may
migrate from packaging material to food. The FDA's regulations are concerned
with substances used in food packaging materials, not with specific finished
food packaging products. Thus, food or beverage containers will be in compliance
with FDA regulations if the components used in the food and beverage containers:
(i) are approved by the FDA as indirect food additives for their intended uses
and comply with the applicable FDA indirect food additive regulations; or (ii)
are generally recognized as safe ("GRAS") for their intended uses and are of
suitable purity for those intended uses.
The manufacture, sale and use of EARTHSHELL products are subject to
regulation by the FDA. Each of the components of the EARTHSHELL Big Mac sandwich
container and all other current prototype products is either approved by the FDA
as an indirect food additive for its intended use, codified in the FDA's
regulations as GRAS for its intended use, or a commonly recognized food
ingredient regarded by
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the Company and its consultants as GRAS for its intended use. The Company has
not sought the concurrence of the FDA in this determination. The Company intends
to ensure that the raw materials used in the EARTHSHELL Big Mac sandwich
container are of suitable purity for their intended uses by specifying standards
to be met by suppliers of raw materials and by material and product testing.
There is no requirement that the Company or a manufacturer of EARTHSHELL
products seek FDA concurrence that certain components are GRAS for their
intended uses or that the raw materials are of suitable purity for their
intended uses. As a result, the Company believes that the EARTHSHELL Big Mac
sandwich container and other current prototype products will be in compliance
with all requirements of the FDA and do not require FDA approval. There can be
no assurance, however, that the FDA would agree with these conclusions.
Other EARTHSHELL products under development may use components that are not
approved by the FDA as indirect food additives, or that cannot reasonably be
considered GRAS for their intended uses. If such a component is used, it will be
necessary for the manufacturers of the product, or the Company on their behalf,
to: (i) obtain an FDA indirect food additive approval covering the component and
its intended uses; (ii) obtain an informal determination from the FDA stating
that the substance will not be regulated as an indirect food additive because
the amount of the substance migrating to food is considered insignificant by the
FDA and therefore below the FDA's "threshold of regulation", or (iii) submit a
notification to the FDA regarding a food contact substance. A food additive
petition must be supported by detailed information concerning the composition
and manufacture of the food additive, as well as by the results of testing to
establish the safety of the additive. Typically, safety testing at exaggerated
doses in several species of laboratory animals is required. The testing required
to support a food additive petition could take a considerable length of time to
perform. According to FDA data, from October 1994 to March 1995, the average
time for FDA review and approval of a food additive petition was 48 months from
the date of submission. A request to the FDA for an informal determination that
a substance need not be the subject of an indirect food additive petition must
be supported by a more limited amount of data than needed to support an indirect
food additive petition. The FDA has announced that it anticipates being able to
respond to these informal determination requests within three to four months.
The Food and Drug Administration Modernization Act of 1997, which became
effective February 19, 1998, adds a new provision to the Federal Food, Drug, and
Cosmetic Act that permits the manufacturer or supplier of a food contact
substance to notify the FDA at least 120 days before beginning distribution of
the substance. The notification would have to set forth the manufacturer's or
supplier's rationale for why the substance is safe. Unless the FDA notifies the
submitter within the 120-day period that it disagrees with the submitter's
conclusion that the food contact substance is safe, the substance could be
lawfully distributed in commerce. The FDA is required to adopt regulations to
implement this provision. At this time, it is not possible to determine whether
the notification procedure, as implemented by the FDA, will be suitable for any
of the Company's products. See "Risk Factors--FDA Regulation."
RELATIONSHIP WITH EKI
EKI is the Company's principal stockholder and, upon consummation of the
Offering, will own approximately 63.7% of the Company's outstanding Common
Stock. EKI has licensed certain of its technology to the Company and has entered
into various other agreements with the Company pursuant to which it provides
technical and other services upon the Company's request. See "Risk
Factors--Reliance on EKI," "--Potential Conflicts with EKI" and "--Control by
Principal Stockholder."
LICENSE AGREEMENT
The Company's principal asset is a world-wide, exclusive, royalty-free
license (the "License") to use and license others the right to use EKI's
proprietary technology in manufacturing, selling, and otherwise commercially
developing EARTHSHELL "Food Service Disposables."
Pursuant to the License Agreement, the Company is authorized and empowered
to grant licenses to manufacturers of food and beverage containers and also to
enter into joint ventures with or invest in other
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domestic or foreign entities which will utilize EKI's technology for "Food
Service Disposables." The license grants the Company exclusive rights to current
and future issued patents, pending patents, patents based on issued or pending
patents, patent improvements and trade secrets to the extent that they relate to
"Food Service Disposables" produced from inorganic-based materials. "Food
Service Disposables" are generally defined as disposable, single use containers,
for packaging, serving or dispensing food or beverages intended for consumption
within a short period of time (less than 24 hours) which incorporate in whole or
in part any portion of the technology. "Food Service Disposables" do not include
(i) sealed containers for the long-term storage of liquids whether for single or
multiple portions (E.G., soft drink cans, milk cartons, sealed juice or drink
containers), except that single service (E.G., 16 oz. or less) milk-containing
cartons are within the scope of "Food Service Disposables," (ii) boxes or
containers for the long-term storage of single or multiple servings of foods or
which are designed to extend the shelf life of foods beyond same-day consumption
(E.G., dry cereal boxes, egg cartons, pre-packaged frozen food containers and
packaging, dairy product containers, produce containers, condiment packaging,
and meat and deli trays), (iii) aseptic or sealed packaging, (iv) secondary
packaging (E.G., corrugated containers and paper bags) and (v) wrapping products
for consumer use.
The License Agreement expires in the United States on the date the last U.S.
patent of EKI (including any extensions or subsequently filed additional
patents) relating to the licensed technology expires, and expires outside the
United States on the date the last patent of EKI issued anywhere in the world
relating to the licensed technology expires. EKI currently has patents granted
in the United States that would extend protection of the licensed technology
through 2014 and anticipates that it will file additional patent applications
that would extend this protection to a later date. Following the expiration of
these patents and the License, the technology will no longer be subject to
patent protection and can be used by the Company and others without license from
EKI.
Under the terms of the License Agreement, the Company is required to use
commercially reasonable efforts to diligently exploit the License by actively
and aggressively manufacturing, marketing, advertising or selling "Food Service
Disposables" and granting sublicenses or entering into joint ventures to do the
same. If the Company develops or acquires any improvements to the "Food Service
Disposables," under the terms of the License Agreement the Company must assign
its rights in the improvement to EKI, and EKI will grant a license to such
improvement to the Company.
TECHNICAL SERVICES AGREEMENT
The Company's research and development activities are currently carried on
by EKI personnel pursuant to the terms of certain intercompany agreements which
are described below. The Company anticipates that following completion of the
Offering it will employ its own product design personnel who will be responsible
for the research and development of EARTHSHELL products for use in the
quick-serve restaurant and food service industries, while EKI will continue
broad research and development efforts with respect to the materials science of
inorganic materials and the specific use of ALI-ITE composite material in other
types of packaging.
Effective October 1, 1997, the Company and EKI entered into the Technical
Services Agreement and the Patent Allocation Agreement which supersede,
respectively, the Prior Technical Services Agreement and the Prior Patent
Allocation Agreement. Under the Technical Services Agreement, the Company has a
first priority right to the services of certain EKI technical personnel. The
Company is required to pay EKI for technical services requested by the Company
based on established hourly billing rates and reimburse EKI for its
out-of-pocket expenses related to specific research projects commissioned by the
Company. A leading technical consulting firm reviewed the hourly rates and
concluded that they were comparable to industry standards. EKI is not entitled
to receive compensation or reimbursement for services performed by non-technical
personnel, such as administrative staff, or for indirect and other overhead
charges that are not specifically related to a Company project. The Technical
Services Agreement expires on December 31, 2002. The agreement also extends the
sublease of the Company's headquarters through March 31, 2001,
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subject to the Company's right to terminate the sublease on 30 days notice.
Pursuant to the Prior Technical Services Agreement and its predecessor
agreement, the Company became obligated to pay EKI approximately $8.4 million,
$9.1 million and $7.5 million in 1995, 1996, and 1997, respectively.
PATENT ALLOCATION AGREEMENT
Under the Prior Patent Allocation Agreement (which terminated on September
30, 1997), the Company became obligated to pay or reimburse EKI for all costs
and expenses for technology which was directly related to food and beverage
containers within the field of use licensed to the Company under the License
Agreement or which had significant teachings with respect to such containers,
even though outside of the field of use. These patents are the property of EKI,
and EKI may obtain a benefit therefrom other than under the License, including
the utilization and/or licensing of the patents and related technology in a
manner or for uses unrelated to the License. Pursuant to the Prior Patent
Allocation Agreement, the Company became obligated to reimburse EKI a total of
$1.9 million, $1.4 million and $653,000 in 1995, 1996, 1997, respectively.
Under the Patent Allocation Agreement, the Company will pay and reimburse
EKI for all costs and expenses associated with filing, prosecuting, maintaining
and acquiring patents and patent applications in connection with technology (and
associated improvements) that directly relate to Food Service Disposables (as
defined in the License Agreement), including the process of manufacturing such
articles. Following the second anniversary of the Patent Allocation Agreement,
the Company will pay and reimburse EKI for all costs and expenses associated
with filing, prosecuting, acquiring and maintaining patents and patent
applications in connection with technology that primarily benefits Food Service
Disposables licensed to the Company, including the process of manufacturing such
articles. EKI will pay for all other costs and expenses associated with patents
and patent applications relating to the technology licensed to the Company under
the License Agreement. The Company has agreed to reimburse EKI up to $6.5
million pursuant to the Patent Allocation Agreement in connection with the
purchase of certain technology, subject to amounts expended on the purchase of
manufacturing equipment and the use of such technology.
INDEBTEDNESS OWED TO EKI
Subsequent to December 31, 1994, the Company's operations have been funded
with loans from, and accounts payables owed to, EKI. As of December 31, 1997,
the indebtedness owed to EKI totaled $33.3 million, including a note payable in
the amount of $32.1 million, $636,000 in accrued interest and $622,000 in
accrued payables under the Prior Patent Allocation Agreement and Prior Technical
Services Agreement. The promissory note is payable on demand and provides for
interest at an initial annual rate of 8.50% compounded quarterly. The interest
rate on the note payable to EKI is adjusted quarterly to equal the current prime
rate as published in THE WALL STREET JOURNAL. Although the indebtedness owed to
EKI was incurred by the Company to fund its ongoing operations, EKI is under no
obligation to make additional loans or capital contributions to the Company.
GUARANTEES OF CREDIT AGREEMENT
EKI, Mr. Essam Khashoggi, the Chairman of the Board and an indirect
controlling stockholder of the Company, and a trust controlled by Mr. Khashoggi
guaranteed the borrowings under the $14.0 million line of credit provided by
Imperial Bank to the Company. The Imperial Bank credit facility will be paid in
full upon the consummation of the Offering and the guaranty will be released.
PERSONNEL
As of December 31, 1997, the Company had seven employees. In addition,
pursuant to the terms of the Technical Services Agreement, the Company has a
priority right to the services of 27 technical personnel serving as employees of
EKI as of December 31, 1997. The Company anticipates that during the one-year
period following completion of the Offering, the Company will add an additional
20 employees,
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of whom approximately 13 will be involved in product development, approximately
five will be involved in administration and at least two will be involved in
management. None of the Company's employees is represented by a labor union and
the Company believes that its relationship with its employees is good.
PROPERTY
The Company's executive offices are located in Santa Barbara, California.
The Company subleases 1,600 square feet of office and research and development
space from EKI. This sublease expires upon the earlier of March 31, 2001 or 30
days after notice by the Company. The Company's monthly lease payments with
respect to this space are $5,600. The Company leases 24,000 square feet of space
on a month-to-month basis for its product development center in Goleta,
California. The Company's monthly lease payments with respect to this space are
$14,400.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Essam Khashoggi (1)(2)................. 58 Chairman of the Board
Simon K. Hodson (2).................... 43 Chief Executive Officer, President and Vice Chairman of the Board
Richard K. Hulme....................... 42 Executive Vice President and Chief Operating Officer
D. Scott Houston....................... 43 Chief Financial Officer
David H. Kennedy....................... 44 General Counsel
John Daoud (2)(3)...................... 62 Secretary and Director
James P. Argyropoulos (1)(5)........... 54 Director
Ellis B. Jones (3)(4).................. 44 Director
Layla Khashoggi........................ 40 Director
William Marquard (3)................... 78 Director
Graham H. Phillips..................... 59 Director
Jerold H. Rubinstein (1)(4)(5)......... 59 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Executive Committee.
(3) Member of the Audit Committee.
(4) Member of the Stock Option Committee.
(5) Member of the Conflicts Committee.
ESSAM KHASHOGGI has served as Chairman of the Board of the Company since its
organization in November 1992. Mr. Khashoggi has also served as Chairman of the
Management Committee and Chief Executive Officer of EKI from its inception in
June 1991. Since August 1987, Mr. Khashoggi has served as Chairman of the Board
of Concrete Technology Corporation ("CTC"), a member of EKI. Mr. Khashoggi has
also served as a director and officer of a number of domestic and foreign
companies engaged in manufacturing, real estate and design and has served as a
Trustee at the University of California Santa Barbara Foundation since August
1995.
SIMON K. HODSON has served as Chief Executive Officer and Vice Chairman of
the Board of the Company since its organization in 1992 and President of the
Company since October 15, 1997. Mr. Hodson also served as President of the
Company from December 1995 until May 1996. He also has served as President and
on the Management Committee of EKI from its inception in June 1991 and as
President and director of CTC since August 1987. Mr. Hodson was President of
National Cement & Ceramics Laboratories, Inc. ("NCCL"), a company previously
engaged in materials science research, from June 1990 through 1995. He is a
co-inventor of 58 issued U.S. patents and 29 issued foreign patents, as of
February 17, 1998, all belonging to EKI.
RICHARD K. HULME has served as an Executive Vice President since September
1996, and Chief Operating Officer since December 1995, as well as from February
1995 to May 1995. Mr. Hulme also served as a Director of the Company from
September 1994 through January 1997. Mr. Hulme served as President from
September 1994 until December 1995. From February 1991 until joining the
Company, Mr. Hulme was a Project Director and later a Vice President of JLW
Realty Advisors, an international real estate firm. From February 1986 through
January 1991, Mr. Hulme served as Vice President, Marketing/ Operations for CTC
and was involved in organizing and managing NCCL.
D. SCOTT HOUSTON has served as Chief Financial Officer of the Company since
July 1993. From August 1986 until joining the Company, Mr. Houston served EKI
and its affiliates in various positions, including as Chief Financial Officer
and Vice President of CTC from 1986 to 1990, as an officer and
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Director of NCCL from 1989 to 1991, and as a consultant from 1991 to 1993. Prior
to August 1986, Mr. Houston operated Houston & Associates, a consulting firm
working with start-up and troubled companies and real estate projects, which he
founded in September 1983. From July 1980 until September 1983, Mr. Houston held
various positions with the Management Information Consulting Division of Arthur
Andersen & Co., an international accounting and consulting firm.
DAVID H. KENNEDY will become General Counsel of the Company upon
consummation of the Offering. From 1992 until the consummation of the Offering,
he served as Of Counsel to Gibson, Dunn & Crutcher LLP and as an associate
attorney of such firm since 1982. Mr. Kennedy has practiced corporate
transactional law with a principal focus on technology transactions, including
licensing and joint ventures.
JOHN DAOUD has served as Assistant Secretary and a Director of the Company
since its organization in 1992 and became its Secretary in May 1996. Mr. Daoud
has served as Chief Financial Officer and Secretary of EKI since its inception
in June 1991. Mr. Daoud has also served as President of Condas International
since 1987, and in such capacity and in his individual capacity has advised Mr.
Essam Khashoggi and his affiliated entities on certain financial matters since
1972. From 1970 to 1972, Mr. Daoud was a Senior Auditor with Price Waterhouse
and Company.
JAMES P. ARGYROPOULOS has served as a Director of the Company since January
1997. From 1989 to present, Mr. Argyropoulos has been a private investor in the
consumer goods industry and real estate. Mr. Argyropoulos has also been the
Chairman of the Board and Chief Executive Officer of The Walking Company, a
lifestyle specialty retailer, since August 1991. Mr. Argyropoulos acted as the
Chairman of the Board and Chief Executive Officer of The Cherokee Group Inc., a
shoe manufacturing and apparel business, between 1972 and 1989. Mr. Argyropoulos
is also a director of Corporate Express Inc., a delivery service company.
ELLIS B. JONES has served as a Director of the Company since December 1995.
Mr. Jones has been a Managing Director of Wasserstein Perella & Co., Inc. since
February 1995. Mr. Jones was also a Managing Director, from 1993 until February
1995, and a Director, from 1990 to 1992, in Corporate Finance of Salomon
Brothers Inc. Prior to that time, Mr. Jones was a Vice President at The First
Boston Corporation.
LAYLA KHASHOGGI has served as a Director of the Company since its
organization in 1992. Ms. Khashoggi currently serves as director and officer of
the Santa Barbara Zoo and the Laguna Blanca School. Ms. Khashoggi is Essam
Khashoggi's spouse.
WILLIAM MARQUARD has served as a Director of the Company since June 1994.
Mr. Marquard is a retired businessman. From 1952 through 1985, Mr. Marquard
served in various capacities for American Standard Corp. (and its predecessor,
Mosler, Inc.), including as President, Chief Executive Officer and Chairman. He
continued to serve as the Chairman of American Standard's Executive Committee
until 1988 and later served as its Chairman of the Board from 1989 until March
1992. Mr. Marquard serves as Chairman of the Board of Arkansas Best Corporation
and Mosler, Inc. He also serves as a Director of Americold Corporation, Earle M.
Jorgensen Co., Earle M. Jorgensen Holding Co., Kelso and Company, and Treadco,
Inc.
GRAHAM H. PHILLIPS has served as a Director of the Company since November
1997 and served as President of the Company from May 1996 to October 1997. Mr.
Phillips was Senior Vice President-- Marketing of the Company from January 1993
to May 1996. Mr. Phillips has been Chairman of the Board of Burson Marsteller
Worldwide, a major international public relations company, since October 1997.
Mr. Phillips was Chairman and Chief Executive Officer, from December 1989 to
June 1992, of Ogilvy & Mather Worldwide, one of the largest advertising groups
in the world. Mr. Phillips spent 28 years with Ogilvy & Mather in various client
service and management functions, serving in Europe, Canada and the United
States. Mr. Phillips currently serves as a consultant to the Company.
JEROLD H. RUBINSTEIN has served as a Director of the Company since June
1994. Mr. Rubinstein has served as the Chairman and Chief Executive Officer of
DMX, Inc., a start-up music network using new
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technologies and new presentations of music listening, since 1986. From 1981 to
1987, Mr. Rubinstein was the General Partner at JRC Oil, a Northern Colorado
oil-drilling and exploration company, as well as the co-founder and Chairman of
Los Angeles-based Bel-Air Savings and Loan. From December 1978 until January
1980, he was the Chairman and Chief Executive Officer of United Artists Records,
which he had purchased with a partner. From January 1975 until March 1978, he
was the Chairman and Chief Executive Officer of the American Broadcasting
Company music division. Mr. Rubinstein was also a founder of, and from 1971 to
1975 was a partner in, Segel, Rubinstein & Goldman, a business management firm
that handled the financial affairs of a number of prominent members of the
entertainment industry. Mr. Rubinstein is a Director of United Service Advisors
Inc.
The Company expects to appoint two additional independent directors who will
have substantial business experience to the Board of Directors within 30 days
after the consummation of the Offering. The directors are elected at each annual
meeting of stockholders for a one-year term and until their successors have been
elected and qualified. The Board has adopted a policy, to take effect upon
consummation of the Offering, to hold at least six in person meetings per year.
The officers of the Company are elected annually and serve at the discretion of
the Board of Directors. The holders of the Company's outstanding Series A
Preferred Stock currently have the right to elect one director. Mr. Marquard was
elected by the Series A stockholders. This right will terminate upon the
conversion or redemption of the Series A Preferred Stock, which the Company
currently anticipates will happen approximately 60 days after the completion of
the Offering. See "Description of Capital Stock--Preferred Stock."
A majority of the members of the Board's Audit Committee and Compensation
Committee are current independent directors. Promptly after the Offering, the
Audit Committee will be reconstituted to include only independent directors and
will include the two new independent directors. All of the members of the
Board's Conflicts Committee are disinterested directors with respect to the
financial interests of EKI. All of the members of the Board's Stock Option
Committee are disinterested directors. The Compensation Committee establishes
salaries, incentives and other forms of compensation for Directors, officers and
other employees of the Company, and is charged with administering various
incentive compensation and benefit plans. The Audit Committee oversees actions
taken by the Company's independent auditors and reviews internal audit controls.
In addition, the Audit Committee receives a report of the operations of the
Company directly from the Chief Financial Officer and General Counsel on a
monthly basis and at each meeting. The Conflicts Committee administers on behalf
of the Company the License Agreement, the Technical Services Agreement and the
Patent Allocation Agreement. The Stock Option Committee oversees and administers
the Company's 1995 Stock Incentive Plan and 1994 Stock Option Plan.
In addition to the above-named Directors and executive officers, the
following employees of EKI have been instrumental in the development of the
Company's business:
DR. PER JUST ANDERSEN has served as the Vice President of Product
Engineering at EKI and has led EKI's technical development since he joined EKI
in 1992. Dr. Andersen's professional experience includes work as a Project
Manager and Industrial Researcher. Since 1983, he has worked with Royal
Copenhagen Porcelain, the Technological Institute of Denmark and was a worldwide
consultant in advanced concrete projects as a Senior Engineer at G.M. Idorn
Consult, Inc., where he held the position of Manager of Materials Optimization
and Instrumentation Development. In this capacity, Dr. Andersen led and
participated in major concrete consulting projects around the world, including
consulting with Spie-Battinole on the design of the concrete on the French side
of the French-English tunnel, with the U.S. Strategic Highway Research Program
in conjunction with Pennsylvania State University on concrete microstructure as
well as with major U.S. corporations and universities including Ameron,
Gifford-Hill American, Price Brothers, Purdue University, Northwestern
University, and University of Illinois at Champaign-Urbana. Dr. Andersen is the
co-inventor of 50 U.S. patents and 26 foreign patents, as of February 17, 1998,
all relating to the EARTHSHELL technology. Dr. Andersen received a M.Sc. in
Chemical Engineering from the Engineering Academy of Denmark, a M.Sc. in
Materials Science from Pennsylvania State University, and a
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<PAGE>
Ph.D. in Materials Science from the Technical University in Denmark. Dr.
Andersen has over 25 publications in international scientific journals, has
co-authored several book chapters and has frequently presented papers at
professional meetings around the world.
DR. BRUCE CHRISTENSEN has served as a Research Scientist of EKI since May
1994. From June 1993 until April 1994, Dr. Christensen was a Post-Doctoral
Fellow in the Materials Science and Engineering Department of Northwestern
University in the area of cement-based materials. During this period, Dr.
Christensen also served as a materials consultant to EKI. Dr. Christensen has
over 20 publications in international scientific journals, has co-authored two
book chapters and has presented approximately 15 papers at various professional
meetings on the subjects of cement chemistry and impedance spectroscopy. Dr.
Christensen earned a B.Sc. in Chemical Engineering and a B.Sc. in Materials
Science and Engineering from the University of Minnesota in June 1989, and a
Ph.D. in Materials Science and Engineering from Northwestern University in June
1993.
DR. DAVID DELLINGER has served as a Research Scientist of EKI since April
1992. From 1977 through 1982, Dr. Dellinger did field and laboratory geological
work for the U.S. Geological Survey. From 1982 until April 1992, he was enrolled
in the Ph.D. program in Geological Sciences at the University of California,
Santa Barbara, where he researched igneous petrology and geochemistry and taught
optical petrographic microscopy. From 1982 through 1996, Dr. Dellinger continued
to work concurrently as a geologist at the U.S. Geological Survey, and from 1990
through 1992 he worked as a geological consultant. Dr. Dellinger received a
B.Sc. in Geology at Stanford University in 1977 and a Ph.D. from the University
of California, Santa Barbara in March 1996.
DR. AMITABHA KUMAR has served as a Research Scientist of EKI since June
1994. From May 1988 through May 1994, Dr. Kumar worked as a Senior Research
Scientist at the Central Glass and Ceramic Research Institute in Calcutta,
India. Dr. Kumar currently also serves as associate editor for The Indian
Ceramic Society and has over 35 publications in international scientific
journals and has presented approximately 20 papers at seminars and symposiums.
Dr. Kumar is the co-inventor of two pending patents regarding the EARTHSHELL
technology; in addition, he has three patents from previous assignments in
India. Dr. Kumar earned a B.Sc. in Ceramics from Banaras Hindu University in
June 1978, and a M.Sc. and a Ph.D. in Solid State Science from Pennsylvania
State University in August 1985.
DR. JAN PER AXEL LOFVANDER has served as a Research Scientist of EKI since
December 1993. From August 1989 until November 1993, Dr. Lofvander was a
research engineer studying microstructural characterization in the Materials
Department at the University of California, Santa Barbara. Dr. Lofvander's
professional experience includes managing projects at the High Performance
Composites Center at University of California, Santa Barbara. Dr. Lofvander has
36 publications in international scientific journals and six industrial reports
relating to materials applications. Dr. Lofvander was co-founder of a consulting
company specializing in the manufacture and analysis of advanced materials. Dr.
Lofvander received his M.Sc. in Metallurgy and Materials Science from the Royal
Institute of Technology in Stockholm, Sweden in December 1984, and a Ph.D. in
Materials Science and Engineering from University of Illinois, Urbana-Champaign,
Illinois in June 1989.
DR. SHAODE ONG has served as a Research Scientist of EKI since June 1994.
Prior to joining EKI, Dr. Ong worked as a Research Associate in the Materials
Group in the School of Civil Engineering at Purdue University from January 1988
until May 1993. Dr. Ong is co-inventor for three pending patents regarding the
EARTHSHELL technology. He has 12 publications in international scientific
journals, and he has presented 10 papers at seminars and symposiums. Dr. Ong
received his B.Sc. in Building Materials Science from Tongji University,
Shanghai, China in July 1986, and a M.Sc. E. and a Ph.D. in Civil Engineering
Materials from Purdue University, West Lafayette, Indiana in May 1993.
SANDEEP KUMAR has served as a Research Scientist of EKI since August 1992.
Mr. Kumar received a B.Sc. in Ceramic Engineering from the Institute of
Technology in India in June 1988, and a M.Sc. in
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Material Engineering from the University of California, Santa Barbara in
December 1995. From September 1988 to June 1992, Mr. Kumar served as a
research/engineering assistant for the Engineering Materials Department at the
University of California, Santa Barbara.
DENISE MILLER has served as a Research Scientist of EKI since August 1992.
From March 1989 until June 1992, Ms. Miller was a Graduate Research Assistant in
the Engineering Materials Department of the University of California, Santa
Barbara. Ms. Miller has several professional publications as well as prior work
experience as an engineering consultant to Chevron. Ms. Miller received a B.Sc.
in Chemical Engineering from the University of California, Santa Barbara in
1986. In 1992, she obtained a M.Sc. in Mechanical Engineering with an emphasis
in Materials Processing at the University of California, Santa Barbara.
VERA JACQUELINE RUBLEE has served as a Research Scientist of EKI since
August 1993. From 1981 to 1992, Ms. Rublee pursued geological field research
with the British Columbia Geological Survey, as well as private exploration for
various companies and research at several academic institutions. Ms. Rublee
received a B.Sc. in Geology from the University of British Columbia in May 1985,
and a M.Sc. in Geology from the University of Ottawa in March 1994.
KRISTOPHER TURNER has served as a Research Scientist of the Company since
November 1993. From September 1990 until October 1993, Mr. Turner was a Graduate
Student Researcher at the University of California, Santa Barbara. Mr. Turner
received a B.Sc. in Metallurgical Engineering from the University of Texas, El
Paso in December 1989, and a M.Sc. in Materials from the University of
California, Santa Barbara in July 1993.
COMPENSATION OF DIRECTORS
Directors are eligible to receive automatic option grants to purchase 5,240
shares on an annual basis pursuant to the Company's 1995 Stock Incentive Plan.
The exercise price of the options is fixed at the fair market value of the
underlying shares on the date of grant. Prior to the November 3, 1997 amendment
to the 1995 Stock Incentive Plan, the Director options were issued to each
Director at the end of each one-year term. Options granted to Directors in
January 1997 for the 1996 fiscal year are exercisable at 80% of the price per
share at which the Company's Common Stock is first sold to the public. These
options vested immediately and expire no later than January 2002. On November 3,
1997, the 1995 Stock Incentive Plan was amended to authorize the grant of the
options to each Director at each annual meeting at which they are elected to
office, commencing with the 1997 fiscal year. Under the amendment, the Director
options vest and become exercisable on the day prior to the next annual meeting
of stockholders, if the director is then in office. As a result of the
amendment, each individual who served as a director of the Company for each of
the 1997 and 1998 fiscal years received an option to purchase 5,240 shares of
the Company's Common Stock at an exercise price of $15.20 per share for each
year. See "--Stock Option Plans." The Directors have never received any cash
compensation for their service as directors other than reimbursement for
out-of-pocket expenses incurred in connection with attendance at such meetings
and the Company has no current intention of paying cash compensation to the
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All decisions relating to executive compensation during 1997 were made by
the Company's Board of Directors. Mr. Hodson, Chief Executive Officer and
President of the Company, participated in deliberations of the Board of
Directors concerning 1997 executive officer compensation. Mr. Hodson did not
receive any cash compensation from the Company during the first nine months of
1997. Mr. Hulme, Executive Vice President of the Company since September 1996,
did not participate in deliberations of the Board of Directors concerning 1997
executive officer compensation.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1997, the
cash compensation of the Chief Executive Officer and the other executive
officers of the Company who received compensation in excess of $100,000 in such
year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY* BONUS (NUMBER OF OPTIONS) COMPENSATION
- ------------------------------------------------ --------- ---------- ----------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Simon K. Hodson(1).............................. 1997 $ 125,000 -- 15,720 $ 28,745(2)
Chief Executive Officer
Graham H. Phillips(3)........................... 1997 191,667 -- 267,240 --
President
Richard K. Hulme................................ 1997 220,000 -- 5,240 --
Executive Vice President and Chief Operating
Officer
D. Scott Houston................................ 1997 180,000 -- -- --
Chief Financial Officer
</TABLE>
- ------------------------------
* The Company provides various perquisites to its executives which are not
disclosed in accordance with SEC regulations because the value of such
perquisites is less than 10% of the executive's salary.
(1) Mr. Hodson was an employee of and was paid a salary by EKI until October 1,
1997 when Mr. Hodson entered into an employment agreement with the Company.
Mr. Hodson did not receive any compensation directly from the Company for
the first 9 months of 1997 and this amount is the actual amount the Company
paid Mr. Hodson in 1997. See "--Employment Agreements." In addition to
serving as Chief Executive Officer of the Company since its inception, Mr.
Hodson has served as President of the Company from October 15, 1997 to
present. See note 3.
(2) Reflects the Company's assumption of the remaining principal balance for an
automobile loan on Mr. Hodson's behalf.
(3) Mr. Phillips tendered his resignation as President of the Company effective
October 15, 1997 to become Chairman of Burson Marsteller Worldwide, a major
international public relations company. He continues as a consultant to the
Company and is paid a nominal retainer.
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in 1997 to the Chief
Executive Officer and the other Named Executive Officers.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED RATES
SHARES OPTIONS OF STOCK APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED IN 1997 (PER SHARE) DATE 5% 10%
- ---------------------------------- ----------- ----------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Simon K. Hodson................... 15,720 5 $ 15.20 1/8/02 $ 247,574 $ 535,755
Graham H. Phillips................ 262,000 83 $ 3.82 12/31/03 $ 7,108,637 $ 11,911,650
5,240 2 $ 15.20 11/4/02 $ 82,525 $ 178,585
Richard K. Hulme.................. 5,240 2 $ 15.20 1/8/02 $ 82,525 $ 178,585
D. Scott Houston.................. -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. The Company used
the midpoint of the range of the initial public offering of $19.00 as the
fair market value of the shares of Common Stock to compute these Potential
Realizable Values.
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<PAGE>
The following table sets forth, for the Chief Executive Officer and the
Named Executive Officers, information with respect to options exercised,
unexercised options and year-end option values, in each case with respect to
options to purchase shares of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1997 AT DECEMBER 31, 1997 (1)
ACQUIRED ON VALUE -------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- --------------- ----------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Simon K. Hodson.............. -- -- 15,720 5,240 $ 99,384 $ 19,912
Graham H. Phillips........... -- -- 235,800 31,440 $ 3,580,200 $ 417,712
Richard K. Hulme............. -- -- 246,280 26,200 $ 3,659,672 $ 397,800
D. Scott Houston............. -- -- 142,528 119,472 $ 2,045,032 $ 1,457,968
</TABLE>
- ------------------------------
(1) The Company used the midpoint of the range of the initial public offering
($19.00) as the fair market value of the shares of Common Stock to compute
these values.
EMPLOYMENT AGREEMENTS
Simon K. Hodson entered into a two-year employment agreement with the
Company that expires on September 30, 1999, subject to the Company's option to
extend the agreement for an additional one-year term. Under the terms of the
employment agreement, Mr. Hodson may be terminated at any time with or without
cause upon written notice. The agreement provides for an annual salary of
$500,000, subject to annual review and increase at the discretion of the Board
of Directors.
D. Scott Houston entered into an employment agreement with the Company
effective October 15, 1993. Mr. Houston's employment agreement provides that his
employment is "at will" at the discretion of the Company, and that he may be
terminated at any time for cause, and at any time with or without cause subject
to 30 days written notice. Mr. Houston's employment agreement provides for an
annual salary of $180,000, subject to annual review and increase at the
discretion of the Board of Directors.
David H. Kennedy entered into an employment agreement with the Company,
which will be effective upon the consummation of the Offering. Mr. Kennedy's
employment agreement provides that his employment may be terminated at any time
and for any reason, upon 30 days written notice. Mr. Kennedy's employment
agreement provides for an annual salary of $360,000, a signing bonus of $15,000
and a grant of options to purchase 50,000 shares of Common Stock.
STOCK OPTION PLANS
1995 STOCK INCENTIVE PLAN
The Board of Directors of the Company has adopted the 1995 Stock Incentive
Plan (the "1995 Plan"), pursuant to which employees, directors and consultants
of the Company will be eligible to receive options to purchase Common Stock. The
following is a description of the material features of the 1995 Plan. The
following description does not purport to be complete and is qualified in its
entirety by reference to the full text of the 1995 Plan, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The purpose of the 1995 Plan is to enable the Company to attract, retain and
motivate employees, directors and consultants by providing for or increasing
their proprietary interests in the Company. Every employee and consultant of the
Company or any of its subsidiaries and any director of the Company is eligible
to be considered for the grant of awards under the 1995 Plan. Directors may be
eligible to receive
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<PAGE>
annual automatic grants pursuant to the 1995 Plan. The term "employees" in the
following discussion is used to refer to employees (including employee
directors) and consultants.
The 1995 Plan authorizes the Stock Option Committee (the "Committee") to
enter into any type of arrangement with an eligible employee that, by its terms,
involves or might involve the issuance of (i) Common Stock or (ii) a derivative
security with an exercise or conversion privilege at a price related to the
Common Stock with a value derived from the value of the Common Stock. Awards
under the 1995 Plan are not restricted to any specified form or structure and
may include arrangements such as sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, phantom stock, dividend equivalents, performance units or
performance shares. An award may consist of one such arrangement or two or more
such arrangements in tandem or in the alternative. Any stock option granted to
an employee may be an Incentive Stock Option ("ISO") or a non-qualified stock
option.
The 1995 Plan generally provides that no one employee may be granted options
or other awards with respect to more than 393,000 shares of Common Stock in any
one calendar year, subject to certain anti-dilution adjustments. The
anti-dilution provisions of the 1995 Plan generally provide that no adjustment
shall be made under those provisions to the extent such adjustment would cause
ISOs issued or issuable under the 1995 Plan to be treated as other than ISOs, or
to the extent the Committee determines that such adjustment would result in the
disallowance of a federal income tax deduction for compensation attributable to
awards by causing such compensation to be treated as other than
"performance-based compensation," as defined under Section 162 of the Code.
Awards may not be granted under the 1995 Plan on or after the tenth anniversary
of its adoption.
1994 STOCK OPTION PLAN
The Board of Directors of the Company adopted the 1994 Stock Option Plan
(the "1994 Plan"), pursuant to which employees and consultants of the Company
were eligible to receive options to purchase Common Stock granted prior to the
adoption of the 1995 Plan. The following is a description of the material
features of the 1994 Plan. The following description does not purport to be
complete and is qualified in its entirety by reference to the full text of the
1994 Plan, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The purpose of the 1994 Plan is to provide incentives to key employees and
consultants to pursue actions that will create stockholder value and promote the
overall success of the Company and to attract and retain key talent for
positions of substantial responsibility. Every employee and consultant of the
Company or any of its subsidiaries is eligible to be considered for the grant of
awards under the 1994 Plan. The term "employees" in the following discussion is
used to refer to employees (including employee directors) and consultants. The
1994 Plan authorizes the Committee to award ISOs and non-statutory stock options
to employees. Awards may not be granted under the 1994 Plan on or after the
tenth anniversary of its adoption. The 1995 Plan effectively supersedes the 1994
Plan for options issued on or after the date of adoption of the 1995 Plan.
CERTAIN PROVISIONS APPLICABLE TO THE 1995 PLAN AND THE 1994 PLAN
Awards may be issued under the 1995 Plan and the 1994 Plan (collectively,
the "Plans") for any lawful consideration including services rendered by the
employee. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the Plans is 4,585,000 (subject to adjustment
to prevent dilution).
Except for provisions in the Plans setting minimum exercise prices for ISOs,
the Plans do not specify a minimum amount that employees are required to pay to
acquire the benefits in connection with an award. Any such amount will be
established by the Committee and set forth in the agreement evidencing the
award. For federal income tax purposes, the maximum compensation payable to
employees pursuant to the
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<PAGE>
Plans, during the term of the Plans and awards granted thereunder, is equal to
the number of shares of Common Stock with respect to which awards may be issued
thereunder, multiplied by the value of such shares on the date such compensation
is measured (which, in the case of non-statutory options, will generally be the
date of exercise of the options).
An award under the Plans may permit the recipient to pay all or part of the
purchase price of the shares or other property issuable pursuant thereto by,
among other things (i) delivering previously owned shares of capital stock of
the Company or (ii) delivering a promissory note, the terms and conditions of
which will be determined by the Committee. Previously owned shares of stock of
the Company acquired upon exercise of an option, however, may be used to pay the
purchase price for shares pursuant to an option only if such previously owned
shares have been owned by the grantee for more than six months.
The Plans are designed to comply with Rule 16b-3. The Company intends to
file a registration statement under the Securities Act to register shares to be
issued pursuant to the Plans. See "Shares Eligible for Future Sale."
The Plans are administered by the Committee. The Committee has full and
final authority to select the employees to receive awards pursuant to the Plans
and to grant such awards. Subject to the provisions of each of the Plans, the
Committee has a wide degree of flexibility in determining the terms and
conditions of any award and the number of shares to be issued pursuant such
award. The expenses of administering the Plans will be borne by the Company.
49
<PAGE>
CERTAIN TRANSACTIONS
LICENSE AGREEMENT AND PATENT ALLOCATION AGREEMENT
Pursuant to the License Agreement, the Company has been granted a
world-wide, exclusive, royalty-free license to utilize and sublicense others to
utilize EKI's proprietary technology in manufacturing, selling, and otherwise
commercially developing EARTHSHELL "Food Service Disposables". See
"Business--Relationship with EKI." The License grants the Company exclusive
rights to issued patents, pending patents and trade secrets to the extent that
they relate to food-service disposables produced from inorganic-based materials.
The Company also has certain business, reporting, indemnification and
confidentiality obligations under the License Agreement.
The Company and EKI entered into the Patent Allocation Agreement effective
October 1, 1997, which supersedes the Prior Patent Agreement and certain
provisions of the License Agreement. Until September 30, 1999, the Company will
pay all costs associated with prosecuting, filing, maintaining or acquiring
patents and patent applications in connection with technology that is directly
related to the food service disposable containers which are licensed to the
Company under the License Agreement ("Food Service Disposables"). After
September 30, 1999, the Company will pay all costs associated with prosecuting,
filing, maintaining or acquiring patents and patent applications in connection
with technology that primarily benefits the Food Service Disposables licensed to
the Company (as compared with the other technology owned by EKI). EKI will pay
for all other patent related costs. EKI and the Company will review, on a
biennial basis, the comparative benefits of each existing patent and patent
application to determine whether Food Service Disposables licensed to the
Company derive the principal benefits from the patent or patent application in
question and will allocate the associated patent costs for the ensuing two-year
period accordingly. No party will have the right to be reimbursed for any costs
following notification in writing by the other party that it does not desire to
incur such costs.
On February 16, 1998, EKI entered into a patent purchase agreement with a
third party for the purchase of certain technology that may be applicable to
starch-based disposable packaging. Pursuant to the terms of the Patent
Allocation Agreement, EKI will license such technology to the Company. In
connection with this purchase, the Company entered an agreement to pay to EKI
$3.5 million on or about December 31, 2003. The Company's obligation will be
reduced by 5% of the purchase price of any equipment purchased by EKI, the
Company or its licensees or joint ventures from the company which previously
owned the technology. In addition, the Company is required to pay $3 million
over the five year period commencing January 1, 2004 if EKI, the Company or the
Company's licensees or joint ventures have not purchased, by December 31, 2003,
at least $35 million of equipment from the company which previously owned the
technology and EKI, the Company or the Company's licensees or joint ventures use
the purchased technology.
Any costs incurred by EKI or the Company in connection with filing,
prosecuting, and maintaining patents or patent applications prior to December
31, 1997 were allocated in accordance with the terms and provisions of the Prior
Patent Agreement. Under the Prior Patent Agreement, the Company reimbursed EKI
for all costs associated with prosecuting, filing and maintaining patents and
patent applications in connection with technology that was directly related to
food and beverage containers within, or which had significant teachings with
respect to, the field of use licensed to the Company. EKI paid for all other
patent related costs. Under the Prior Patent Allocation Agreement, the Company
incurred, or reimbursed EKI for, total costs of $1.9 million, $1.4 million and
$653,000 in connection with the applications during 1995, 1996, and 1997
respectively. The patents and patent applications are the property of EKI, and
EKI may obtain a benefit therefrom other than under the License, including the
utilization and/or licensing of the patents and related technology in a manner
or for uses unrelated to the License.
TECHNICAL SERVICES AGREEMENT
In addition to the License Agreement and the Patent Allocation Agreement,
effective October 1, 1997 the Company and EKI entered into the Technical
Services Agreement which superseded the Prior
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<PAGE>
Technical Services Agreement. Pursuant to the Technical Services Agreement which
expires on December 31, 2002, the Company has a first priority right to the
services of certain EKI technical personnel. The Company pays EKI for technical
services specifically requested by the Company based on established hourly
billing rates and reimburses EKI for out-of-pocket expenses related to specific
research projects. In addition, the Technical Services Agreement extends the
sublease of the Company's headquarters, comprising approximately 1,600 square
feet, through March 31, 2001, subject to the right of the Company to terminate
the sublease on 30 days' written notice. The Company paid $67,000 to EKI each
year for the sublease of this space during 1995, 1996 and 1997.
The Technical Services Agreement superseded the Prior Technical Services
Agreement that was entered into between the Company and EKI on July 1, 1994 and
which terminated on September 30, 1997. Like the Technical Services Agreement,
the Prior Technical Services Agreement required EKI to render technical services
to the Company on a priority basis based on established hourly billing rates and
to reimburse EKI for its direct, out of pocket expenses incurred in connection
with the Company's specific research projects. The Company paid an aggregate of
$8.4 million, $9.1 million and $7.5 million to EKI for these services under the
Prior Technical Services Agreement during 1995, 1996, and 1997 respectively.
REGISTRATION RIGHTS
As additional consideration for EKI's services under the Prior Technical
Services Agreement, the Company entered into a Registration Rights Agreement
with EKI (the "Registration Rights Agreement"). The Registration Rights
Agreement provides certain registration rights for the 82,530,000 shares of
Common Stock originally issued to EKI (whether held by EKI or subsequent
transferees). The Company is also obligated, following the date one year after
the consummation of the Offering, to prepare and keep in place (at the Company's
expense) a Registration Statement on Form S-3 covering certain shares of Common
Stock currently held by EKI which will be issued upon the exercise of options to
be granted by EKI to its employees and consultants.
The Registration Rights Agreement grants two "piggyback" registration rights
for offerings of Common Stock by the Company (subject to cutback provisions for
the registration rights of other holders of Common Stock and the holders of the
Company's Series A Preferred Stock) and the right to participate in one demand
registration upon a request by the holders of 20,632,500 shares of Common Stock
originally issued to EKI, some of which shares have been transferred to other
holders. The holders of such shares will be responsible, on a pro-rata basis,
for most of the expenses relating to the exercise of the demand registration
right and a portion of the expenses relating to the exercise of their piggyback
registration rights. See "Shares Eligible for Future Sale."
INDEBTEDNESS OWED TO EKI
Subsequent to December 31, 1994, the Company's operations have been funded
with loans from, and accounts payables owed to, EKI. As of December 31, 1997,
the indebtedness owed to EKI totaled $33.3 million, including a note payable in
the amount of $32.1 million, $636,000 in accrued interest and $622,000 in
accrued payables under the Prior Patent Allocation Agreement and Prior Technical
Services Agreement. The promissory note is payable on demand and provides for
interest at an initial annual rate of 8.50% compounded quarterly. The interest
rate on the note payable to EKI is adjusted quarterly to equal the current prime
rate as published in THE WALL STREET JOURNAL. Although the indebtedness owed to
EKI was incurred by the Company to fund its ongoing operations, EKI is under no
obligation to make additional loans or capital contributions to the Company. The
Company intends to use a portion of the proceeds of the Offering to repay all of
the indebtedness owed to EKI. See "Use of Proceeds" and note 3 to the Financial
Statements of the Company included elsewhere herein.
GUARANTEES OF CREDIT AGREEMENT
EKI, Mr. Essam Khashoggi, the Chairman of the Board and an indirect
controlling stockholder of the Company, and a trust controlled by Mr. Khashoggi
guaranteed the borrowings under the $14.0 million line of credit provided by
Imperial Bank to the Company. The Imperial Bank credit facility will be paid in
full upon consummation of the Offering and the guaranty will be released.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of each class of the Company's voting securities as of
March 20, 1998, and as adjusted to reflect the sale of 10,526,316 shares of
Common Stock by the Company and the sale of 2,673,684 shares of Common Stock by
the Selling Stockholders, by (i) each person known by the Company to own
beneficially more than 5% of any class of voting securities of the Company, (ii)
each Director of the Company, (iii) each Named Executive Officer of the Company,
(iv) all Directors and executive officers as a group and (v) certain of the
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
-------------------------------------------------------
COMMON PREFERRED, SERIES
---------------------------------- A
PERCENT ------------------ NUMBER OF SHARES
OF CLASS PERCENT OF OF COMMON STOCK
NAME AND ADDRESS(3) NUMBER (1)(2) NUMBER CLASS BEING OFFERED
- ------------------------- ---------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Essam Khashoggi(4)(5).... 73,398,252 84.5% -- -- --
Simon K. Hodson(5)(6).... 15,720 * -- -- --
Richard K. Hulme(7)(9)... 267,240 * -- -- --
D. Scott Houston(7)...... 199,906 * -- -- --
James P.
Argyropolous(8)........ 1,053,240 1.2% -- -- --
John Daoud(5)............ 68,120 * -- -- --
Ellis Jones(9)........... 23,580 * -- -- --
Layla Khashoggi(5)(10)... 15,720 * -- -- --
William Marquard(5)...... 15,720 * -- -- --
Graham H.
Phillips(7)(8)......... 267,240 * -- -- --
Jerold H.
Rubinstein(5).......... 15,720 * -- -- --
All Directors and
Executive Officers as a
Group (11
Persons)(4)(5)(7)(8)(9)... 75,340,458 86.7% -- -- --
E. Khashoggi Industries
LLC(4)................. 63,771,848 73.4% -- -- --
E. Khashoggi Industries
Inc.(4)................ 7,478,790 8.6% -- -- --
Anaconda Opportunity
Fund, L.P.............. -- -- 1,805 6.8% 244,183
Carillon Bond Fund....... -- -- 500 1.9% 67,640
Financial Management
Advisors High Income,
L.P.................... -- -- 640 2.4% 86,580
Financial Management
Advisors High Yield
Capital Appreciation,
L.P.................... -- -- 811 3.0% 109,713
FMA High Yield Income LP,
Liquidating Trust...... -- -- 555 2.1% 75,081
David A. Gardner......... -- -- 500 1.9% 9,470
Hare & Co................ -- -- 2,000 7.5% 270,561
Mousseteek Free.......... -- -- 310 1.2% 41,937
G. Lynn Shostack......... -- -- 500 1.9% 28,409
Springtime Limited....... 3,056,754 3.5% 1,000 3.7% 311,146
W.S. Investments L.P..... -- -- 312 1.2% 42,208
Whittier Ventures, LLC... -- -- 500 1.9% 13,528
Williams, Jones &
Associates, Inc........ -- -- 4,875 18.3% 230,789
Remaining Selling
Stockholders, as a
group, each of whom
owns less than 1% of
the outstanding Common
Stock or Series A
Preferred Stock (59
persons)............... 2,554,500 2.9% 1,934 7.3% 1,144,439
<CAPTION>
COMMON SHARES BENEFICIALLY OWNED
AFTER OFFERING (1)
------------------------------------
PERCENT OF
NAME AND ADDRESS(3) NUMBER CLASS
- ------------------------- ---------- ----------
<S> <C> <C>
Essam Khashoggi(4)(5).... 73,398,252 73.4%
Simon K. Hodson(5)(6).... 15,720 *
Richard K. Hulme(7)(9)... 267,240 *
D. Scott Houston(7)...... 199,906 *
James P.
Argyropolous(8)........ 1,053,240 1.1%
John Daoud(5)............ 68,120 *
Ellis Jones(9)........... 23,580 *
Layla Khashoggi(5)(10)... 15,720 *
William Marquard(5)...... 15,720 *
Graham H.
Phillips(7)(8)......... 267,240 *
Jerold H.
Rubinstein(5).......... 15,720 *
All Directors and
Executive Officers as a
Group (11
Persons)(4)(5)(7)(8)(9) 75,340,458 75.3%
E. Khashoggi Industries
LLC(4)................. 63,771,848 63.7%
E. Khashoggi Industries
Inc.(4)................ 7,478,790 7.5%
Anaconda Opportunity
Fund, L.P.............. 228,727 *
Carillon Bond Fund....... 63,360 *
Financial Management
Advisors High Income,
L.P.................... 81,100 *
Financial Management
Advisors High Yield
Capital Appreciation,
L.P.................... 102,769 *
FMA High Yield Income LP,
Liquidating Trust...... 70,329 *
David A. Gardner......... 121,530 *
Hare & Co................ 253,439 *
Mousseteek Free.......... 39,283 *
G. Lynn Shostack......... 102,591 *
Springtime Limited....... 3,007,608 3.0%
W.S. Investments L.P..... 39,536 *
Whittier Ventures, LLC... 117,472 *
Williams, Jones &
Associates, Inc........ 1,046,461 1.0%
Remaining Selling
Stockholders, as a
group, each of whom
owns less than 1% of
the outstanding Common
Stock or Series A
Preferred Stock (59
persons)............... 1,916,769 1.9%
</TABLE>
- ------------------------------
* Indicates ownership of less than one percent.
(1) Assumes that all 26,675 shares of Series A Preferred Stock currently
outstanding are converted into shares of Common Stock. See "Description of
Capital Stock."
(2) Computed by treating the 6,988,850 shares of Common Stock into which the
shares of Series A Preferred Stock are convertible as issued and
outstanding.
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<PAGE>
(3) The address of each of the directors and executive officers is c/o
EarthShell Corporation, 800 Miramonte Drive, Santa Barbara, California
93109.
(4) Includes 63,771,848 shares held by EKI of which Mr. Khashoggi indirectly
owns a 90% beneficial interest, 7,478,790 shares held by E. Khashoggi
Industries Inc. of which Mr. Khashoggi indirectly owns a 100% beneficial
interest and 2,131,894 shares held by Mr. Khashoggi's other affiliated
entities. Mr. Khashoggi has sole voting and dispositive power with respect
to all such 73,382,532 shares.
(5) Includes options to purchase 15,720 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which are exercisable in
60 days of February 24, 1998.
(6) Does not include any of the shares held by EKI in which Mr. Hodson holds an
indirect 10% interest or any of the 810,366 shares held by CTC in which Mr.
Hodson holds an indirect 10% interest.
(7) Represents options to purchase shares of Common Stock that are fully vested
and exercisable.
(8) Includes options to purchase 5,240 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which are exercisable in
60 days of February 24, 1998.
(9) Includes options to purchase 10,480 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which are exercisable in
60 days of February 24, 1998.
(10) Ms. Khashoggi is Mr. Essam Khashoggi's spouse.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share. The following statements are summaries of
certain provisions applicable to the Company's capital stock.
COMMON STOCK
As of December 31, 1997, there were 82,530,000 shares of Common Stock
outstanding, held of record by 89 stockholders. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
stockholders. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, holders of Common Stock would be entitled to share ratably in the
Company's assets remaining after payment of liabilities, and after provision is
made for each class of stock, if any, having preference over the Common Stock
(including as of the date of this Prospectus the Series A Preferred Stock
described below). Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All of the outstanding shares of Common Stock
are, and the Common Stock offered by the Company hereby, when issued for the
consideration set forth in this Prospectus, will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, rights, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. The Board of Directors, without stockholder approval, can
issue Preferred Stock with voting, conversion, and other rights which could
adversely affect the voting power and other rights of the holders of Common
Stock. The issuance of Preferred Stock in certain circumstances may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock,
and may adversely affect the market price of the Common Stock. At present, the
Company has no plans to issue any additional shares of Preferred Stock.
As of December 31, 1997, there were 26,675 shares of Series A Preferred
Stock outstanding (convertible into 6,988,850 shares of Common Stock), held of
record by 56 stockholders. Shortly following the consummation of the Offering,
the Company intends, subject to the Board of Directors' approval, to deliver to
the holders of the Series A Preferred Stock notice of the Company's election to
redeem all outstanding shares of the Series A Preferred Stock approximately 60
days after the date of such notice. The holders of the Series A Preferred Stock
have the right pursuant to the terms thereof to convert their Series A Preferred
Stock into Common Stock, with each share of Series A Preferred Stock being
convertible into 262 shares of Common Stock (assuming completion of the
262-for-one stock split of the Common Stock). The Company expects that all of
the holders of Series A Preferred Stock will convert such stock into Common
Stock prior to redemption. Any shares of Series A Preferred Stock not converted
will be redeemed by the Company at a price of $1,015 per share plus accrued
dividends, the equivalent of approximately $3.87 per common share plus accrued
dividends on an as converted basis.
The Series A Preferred Stock ranks senior to the Common Stock with respect
to the right to receive dividends and distributions upon liquidation,
dissolution or winding up of the Company. Dividends on the Series A Preferred
Stock are cumulative from the date of original issue and are payable quarterly
in arrears on the fifteenth day of each January, April, July, and October, in
each year, commencing on January 15, 1994. Dividends on the Series A Preferred
Stock accrue at the rate of 8% per annum of the liquidation preference of $1,000
per share. Upon liquidation, dissolution or winding up of the affairs of the
Company,
54
<PAGE>
the holders of shares of Series A Preferred Stock are entitled to be paid out of
the assets of the Company, a liquidation payment equal to $1,000 per share, plus
an amount equal to any accrued and unpaid dividends to the date of distribution,
but without interest, before any payment shall be made or any assets distributed
to holders of Common Stock.
Pursuant to the Certificate of Designation, so long as any shares of the
Series A Preferred Stock are outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series A Preferred Stock: (i) amend, alter or repeal the provisions of
Series A Preferred Stock so as to affect adversely any right, preference,
privilege or voting power of the Series A Preferred Stock; (ii) amend the
Certificate of Incorporation of the Company; (iii) reclassify the Company's
outstanding securities; or (iv) enter into any transaction with any affiliate
(other than a wholly owned subsidiary), subject to certain exceptions. Pursuant
to the Certificate of Designation, so long as any shares of the Shares A
Preferred Stock are outstanding, the Company shall not, without the affirmative
vote or consent of the holders of at least 70% of the shares of the Series A
Preferred Stock outstanding at the time: (i) authorize, create or issue or
increase the authorized or issued amount of, any class or series of stock
ranking senior or on a parity with the Series A Preferred Stock with respect to
the payment of dividends or the distribution of assets on liquidation; or (ii)
amend, alter or repeal any of the provisions affecting adjustments in the number
of shares of Common Stock issuable upon the conversion of shares of Series A
Preferred Stock. Pursuant to the Certificate of Designation, so long as any
shares of the Series A Stock remain outstanding, the holders of a majority of
the Series A Preferred Stock then outstanding shall be entitled, voting as a
class, to elect one member of the Company's Board of Directors. The holders of
the Series A Preferred Stock, for so long as such shares are outstanding, also
have certain rights to receive information and priority subscription rights to
maintain their percentage equity interest in the Company.
ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which restricts certain transactions and business
combinations between a corporation and an "Interested Stockholder" owning 15% or
more of the corporation's outstanding voting stock, for a period of three years
from the date the stockholder becomes an Interested Stockholder. Subject to
certain exceptions, unless the transaction is approved by the board of directors
and the holders of at least 66 2/3% of the outstanding voting stock of the
corporation (excluding shares held by the Interested Stockholder), Section 203
prohibits significant business transactions such as a merger with, disposition
of assets to, or receipt of disproportionate financial benefits by the
Interested Stockholder, or any other transaction that would increase the
Interested Stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an Interested Stockholder, the
Interested Stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans).
The Company's Certificate of Incorporation and Bylaws include a number of
provisions which may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. These provisions include limitations on
stockholder action initiated by Interested Stockholders, a prohibition on the
call of special meetings of stockholders by persons other than the Board of
Directors, and a requirement of advance notice for the submission of stockholder
proposals or director nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or
55
<PAGE>
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers,
directors, employees and other agents to the maximum extent permitted by
Delaware law. The Company's Bylaws also permit it to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the Bylaws would
permit indemnification.
The Company believes that the provisions in its Certificate of Incorporation
and its Bylaws are necessary to attract and retain qualified persons as officers
and directors.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the rights of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California, however, if (i) the corporation transacts business in
California and the average of its California property, payroll and sales factors
(as defined in the California Revenue and Taxation Code) with respect to it is
more than 50% during its latest fiscal year, (ii) more than one-half of its
outstanding voting securities are held of record by persons having addresses in
California and (iii) the corporation is not otherwise exempt. An exemption is
provided if the corporation has outstanding securities qualified for trading as
a national market security on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") if such corporation has at least 800
record and nominee holders of its equity securities as of the record date of its
most recent annual meeting of stockholders.
The Company's Common Stock has been approved for quotation on The Nasdaq
National Market. At present, most of the Company's activities occur in
California and approximately 73.4% of the Common Stock will be owned upon
completion of the Offering by EKI and its affiliates. EKI's principal office is
located in California, so that certain provisions of California corporate law
may apply to the Company, as described below, unless as a result of the Offering
there are more than 800 holders of its equity securities as of the applicable
date.
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt
include, without limitation, those provisions relating to the stockholders'
right to cumulate votes in elections of directors (cumulative voting is
mandatory under California law), the stockholders' right to remove directors
without cause (which under California law is subject to the stockholders' right
to cumulate votes), the right of stockholders to call a special meeting (such
right is mandatory under California law if the requesting stockholder owns at
least 10% of the voting stock) and the Company's ability to indemnify its
officers, directors and employees (which is more limited in California than in
Delaware). Notwithstanding the foregoing, a corporation may provide for a
classified board of directors, or eliminate cumulative voting, or both if it is
a "listed corporation." A "listed corporation" means a corporation with
outstanding shares listed on the New York Stock Exchange or the American Stock
Exchange, or a corporation with outstanding securities qualified for trading as
a national market security on Nasdaq if such corporation has at least 800
holders of its equity securities as of the record date of its most recent annual
meeting of stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and assuming the conversion of the
outstanding shares of Series A Preferred Stock into Common Stock, the Company
will have 100,045,166 shares of Common Stock outstanding. The shares sold in the
Offering (13,200,000 shares assuming no exercise of the Underwriters'
over-allotment option) will be freely tradable without restriction under the
Securities Act, except for any such shares held at any time by an "affiliate" of
the Company, as such term is defined under Rule 144 promulgated under the
Securities Act.
The remaining 86,845,166 shares were issued and sold by the Company in
private transactions and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned shares for at least one year,
including an "affiliate," as that term is defined in Rule 144, is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of one percent (1%) of the then outstanding shares of
Common Stock (1,000,452 shares immediately after the Offering) or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above. Of the 86,845,166 remaining shares outstanding, affiliates hold
74,463,282 shares, and have owned such shares for Rule 144 purposes since the
incorporation of the Company. Of the shares owned by non-affiliates, 9,981,938
shares have been held by such non-affiliates in excess of two years. See "Risk
Factors-- Effect on Share Price of Shares Eligible for Future Sale."
Any employee, officer, director, advisor or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the Company becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934.
The Company has entered into a Registration Rights Agreement with EKI (the
"EKI Registration Rights Agreement"). The EKI Registration Rights Agreement
provides certain registration rights for the 82,530,000 shares of Common Stock
originally issued to EKI (whether held by EKI or subsequent transferees). The
Company is also obligated, following the date one year after the consummation of
the Offering, to prepare and keep in place (at the Company's expense) a
Registration Statement on Form S-3 covering certain shares of Common Stock
currently held by EKI which may be transferred upon the exercise of options to
be granted by EKI to its employees and consultants. The EKI Registration Rights
Agreement grants two "piggyback" registration rights for offerings of Common
Stock by the Company (subject to cutback provisions for the registration rights
of other holders of Common Stock and the holders of the Company's Series A
Preferred Stock) and the right to participate in one demand registration upon a
request by the holders of 20,632,500 of the 82,530,000 shares of Common Stock
originally issued to EKI, some of which shares have been transferred to other
holders. The holders of such shares will be responsible, on a pro-rata basis,
for most of the expenses relating to the exercise of the demand registration
right and a portion of the expenses relating to the exercise of their piggyback
registration rights. See "Certain Transactions."
The holders of an additional 1,746,754 shares of Common Stock, and the
holders of 26,675 shares of Series A Preferred Stock convertible into 6,988,850
shares of Common Stock, have been granted demand and piggyback registration
rights with respect to such shares of Common Stock under various registration
rights agreements. Under their demand registration rights, subject to certain
conditions, the holders of at
57
<PAGE>
least 25% of such registrable securities may require the Company to use
commercially reasonable efforts to register such shares under the Securities
Act. The Company is obligated to complete no more than two demand registrations,
and in no event is the Company required to complete a demand registration within
six months after the effective date of its most recent registration statement.
Under their piggyback registration rights, these persons may elect to
participate and sell their registrable securities in up to a maximum of two
(assuming all securities requested to be registered are so registered)
subsequent public offerings in which the Company issues additional securities
for its own behalf, subject to reduction (with all shares of the Company first
being registered) in the event that the managing underwriter in such offering
advises the Company that the number of securities sought to be registered
exceeds the number of shares of Common Stock which could be sold without having
an adverse effect on the offering.
Holders of an additional 1,048,000 shares of Common Stock have been granted
piggyback registration rights entitling them to sell their registrable
securities in subsequent public offerings in which the Company issues additional
securities for its own behalf.
Except as noted above, the cost of all registrations pursuant to the
foregoing registration rights will be borne by the Company, except for
underwriters' commissions and discounts which will be borne by the sellers of
the registrable securities.
As of December 31, 1997, there were outstanding stock options to purchase an
aggregate of 1,158,040 shares of Common Stock. All outstanding stock options are
held by Directors and officers of the Company and are subject to the lock-up
arrangements described below. Following the Offering, the Company intends to
file a Registration Statement on Form S-8 covering an aggregate of 4,585,000
shares of Common Stock that have been reserved for issuance under the Company's
1995 Stock Incentive Plan and 1994 Stock Option Plan, thus permitting the resale
of such shares in the public market without restriction under the Securities Act
upon the expiration of the lock-up period described below and the exercise of
such options. See "Management--Stock Option Plan."
The Company and all stockholders who are not Selling Stockholders (other
than one stockholder who owns 262 shares of Common Stock), including all
officers, Directors or affiliates have agreed with the Underwriters, subject to
certain exceptions, not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days from the date of this Prospectus without the
prior written consent of Salomon Brothers Inc. All Selling Stockholders of the
Company have agreed, subject to certain exceptions, not to sell or otherwise
dispose of any shares of Common Stock for a period of 270 days from the date of
this Prospectus without the prior written consent of Salomon Brothers Inc.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of certain of the United States federal tax
considerations that may be relevant to the purchase, ownership and disposition
of the Common Stock by investors who hold the Common Stock as a capital asset
and does not purport to be a complete analysis of all the potential tax
consequences thereof. The discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes could be retroactively applied in a manner that adversely affects
holders of such Common Stock. Potential investors should be aware that the
discussion does not address (i) foreign, state and local tax considerations or
(ii) all of the federal tax considerations that may be relevant to particular
investors in light of their individual circumstances or to holders subject to
special treatment under United States federal tax laws, such as dealers in
securities, insurance companies, tax-exempt organizations and financial
institutions.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
UNITED STATES FEDERAL TAX CONSEQUENCES, AS WELL AS ALL APPLICABLE STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
COMMON STOCK.
PERSONAL HOLDING COMPANY TAX
As a corporation, the Company will be subject to federal, state, local and
foreign income taxes on its taxable income. In addition, because more than 50%
of the value of the Company's outstanding stock will be owned directly or
indirectly by five or fewer individuals, and a substantial portion of the
Company's income is expected to be derived from royalties and equipment leasing,
there is a significant risk that the Company will be classified as a "personal
holding company." As a personal holding company, the Company will be subject to
an additional federal tax equal to 39.6% of, in general, its undistributed after
tax earnings for any year in which, generally, the Company's royalty and other
passive type income constitutes 60% or more of its "adjusted ordinary gross
income" (I.E., ordinary gross income, as distinguished from capital gains
income, adjusted to reflect certain statutory exclusions and deductions) for the
year. In the event that the Company is subject to the personal holding company
tax in a taxable year, the Company will only be able to use its net operating
loss, if any, for the immediately preceding year to offset its income subject to
the personal holding company tax for such year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Net Operating Loss
Tax Carryforwards."
The Company intends to minimize its liability for the personal holding
company tax either by deriving more than 40% of its adjusted ordinary gross
income for each year from non-passive sources (such as through joint venture
arrangements with manufacturing or other operating companies), or by
distributing all or part of its personal holding company income for any taxable
year in which that threshold cannot be satisfied. The amount of any such
distribution generally will be treated as a dividend taxable as ordinary income.
There can be no assurance, however, that the Company will be able to eliminate
its liability for the personal holding company tax.
TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of shares of
Common Stock who (for United States Federal income tax purposes): (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate, the income of which is
subject to United States Federal income taxation regardless of its source or
(iv) is a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
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DIVIDENDS
A cash distribution made with respect to the Common Stock will be treated as
a dividend, taxable as ordinary income to the extent of the Company's current or
accumulated earnings and profits for tax purposes. Cash distributions in excess
of the current or accumulated earnings and profits of the Company will be
treated for federal income tax purposes first as a return of the holder's
adjusted tax basis in its shares and then as a gain from the sale or exchange of
such shares. In general, certain distributions of Common Stock and Preferred
Stock and distributions of promissory notes or other property will be taxed as
if they were cash distributions in an amount equal to the fair market value of
such property even though no cash is received.
A distribution treated as a dividend should qualify for the 70%
intercorporate dividends-received deduction subject to the minimum holding
period (generally at least 46 days within a 90 day period beginning 45 days
before the relevant ex-dividend date) and other applicable requirements. Under
certain circumstances, a corporate holder may be subject to the alternative
minimum tax with respect to the amount of its dividends-received deduction.
GAIN OR LOSS ON DISPOSITION OF COMMON STOCK
Upon any sale or other taxable disposition of Common Stock, a United States
Holder will recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received on such sale or other taxable disposition and (ii) the
holder's adjusted tax basis in such shares of Common Stock. Such gain or loss
will be capital gain or loss if the shares have been held by the United States
Holder as a capital asset and, with respect to a non-corporate (I.E., an
individual, trust or estate) United States Holder, will be mid-term or long-term
gain or loss if such shares have been held for more than one year or more than
eighteen months, respectively.
BACKUP WITHHOLDING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on dividends and redemption proceeds received with respect to the Common
Stock. Generally, backup withholding applies only when the taxpayer fails to
furnish or certify a proper Taxpayer Identification Number or when the taxpayer
is notified by the IRS that the taxpayer has failed to report payments of
interest and dividends properly. The Company may require holders of the Common
Stock to establish an exemption from backup withholding or to make arrangements
satisfactory to the Company with respect to the payment of backup withholding. A
Holder who does not provide the Company with a current Taxpayer Identification
Number may be subject to penalties imposed by the IRS. Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining any applicable exemption.
TAXATION OF NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder of Common Stock that, for United States federal tax purposes,
is a Non-United States Holder. For purposes of this discussion, a "Non-United
States Holder" generally is any person who is, for United States federal income
tax purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership or a foreign estate or trust, and for United States federal estate
tax purposes, a non-resident who is not a citizen of the United States (as
specifically defined for United States federal estate tax purposes). This
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-United States Holder and applies only to Non-United States
Holders that hold Common Stock as a capital asset. Prospective investors are
urged to consult their tax advisors regarding the United States federal income
and estate tax consequences of acquiring, holding and disposing of Common Stock
(including such investor's status as a United States
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Holder or Non-United States Holder), as well as any tax consequences that may
arise under the laws of any state, local, foreign or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-United States Holder generally will be subject to
withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at the rate of 30%, unless the withholding rate
is reduced under an applicable income tax treaty between the United States and
the country of tax residence of the Non-United States Holder. A Non-United
States Holder may be required to satisfy certain certification requirements in
order to claim treaty benefits or to otherwise claim a reduction of or exemption
from withholding. Assuming the necessary certification and disclosure
requirements are met, the 30% withholding tax will not apply if the dividend is
effectively connected with a trade or business conducted within the United
States by the Non-United States Holder (or, alternatively, where an income tax
treaty applies, if the dividend is attributable to a permanent establishment
maintained within the United States by the Non-United States Holder). In such
event, the dividend, less any deductions available to the holder in respect of
such dividend, will be subject to the United States federal income tax at a
maximum marginal rate of 39.6% for individuals and 35% for corporations (or at
then applicable graduated individual or corporate rates). Corporate holders may
also be subject to the branch profits tax imposed under Section 884 of the Code.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder who is not subject to tax pursuant to Code
provisions applicable to certain expatriates generally will not be subject to
United States federal income tax on gain recognized on a sale or other
disposition of Common Stock unless the gain is effectively connected with a
trade or business conducted within the United States by the Non-United States
Holder (or, alternatively, where an income tax treaty applies, unless the gain
is attributable to a permanent establishment maintained within the United States
by the Non-United States Holder). Any such effectively connected gain would be
subject to the United States federal income tax on net income that applies to
United States persons (and, with respect to corporate holders, also may be
subject to the branch profits tax). In addition, a Non-United States Holder who
is an individual and holds the Common Stock as a capital asset will be subject
to federal income tax at a 30% rate on any gain recognized on the disposition of
Common Stock (which gain may be offset by certain United States source capital
losses) if such individual is present in the United States for 183 days or more
in the taxable year of disposition and either (i) has a "tax home" in the United
States (as specifically defined for purposes of the United States federal income
tax), or (ii) maintains an office or other fixed place of business in the United
States and the gain from the sale of the stock is attributable to such office or
other fixed place of business.
If the Company is or becomes a "United States real property holding
corporation" ("USRPHC"), Non-United States Holders may be subject to federal
income tax on any gain recognized upon the disposition of the Common Stock. As a
very general rule, the Company will be considered a USRPHC if 50% or more of the
value of its assets consist of United States real property interests. The
Company believes that it has not been, is not currently, and is not likely to
become, a USRPHC.
Legislation was proposed as recently as 1995 that, if enacted, would have
resulted under certain circumstances in the imposition of United States federal
income tax on gain realized from the disposition of Common Stock by certain
Non-United States Holders who own or owned, directly or by attribution, 10% or
more of the Common Stock. It is impossible to predict whether or in what form
any such legislation or other legislation might be enacted and what the scope or
effective date of any such legislation might be.
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UNITED STATES FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by a Non-United States Holder at his
or her date of death, or Common Stock which was the subject of certain lifetime
transfers made by such an individual, will be included in his or her gross
estate for federal estate tax purposes and will therefore be subject to United
States federal estate tax unless an applicable treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid to, and the tax withheld with respect to,
such holder, regardless of whether any tax was actually withheld. That
information may also be made available to the tax authorities of the country in
which a Non-United States Holder resides.
United States federal backup withholding tax (which generally is imposed at
the rate of 31% on certain payments to persons not otherwise exempt who fail to
furnish information required under United States information reporting
requirements) generally will not apply to dividends paid to a Non-United States
Holder before January 1, 1999 either at an address outside the United States
(provided that the payor does not have actual knowledge that the payee is a
United States person), or if the dividends are subject to withholding at the 30%
rate (or lower treaty rate), as discussed above. However, under newly issued
Treasury Regulations (the "Final Withholding Regulations"), dividend payments
made after December 31, 1998 generally will be subject to information reporting
and backup withholding unless applicable certification and procedural
requirements are satisfied.
As a general matter, payment by a United States office of a broker of the
proceeds of a sale of Common Stock is subject to both backup withholding and
information reporting unless the holder certifies as to its Status as a
Non-United States Holder under penalties of perjury or otherwise establishes an
exemption. Information reporting and backup withholding will generally not apply
to a payment of the proceeds of a sale of Common Stock effected at a foreign
office of a broker. Until January 1, 1999, however, information reporting
requirements (but not backup withholding) will apply to a payment of the
proceeds of a sale of Common Stock by a foreign office of a broker that is a
United States person, or by a foreign office of a foreign broker that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, or that is a "controlled foreign corporation,"
as to the United States, unless the broker has documentary evidence in its
records that the holder is a Non-United States Holder and certain conditions are
met, or the holder otherwise establishes an exemption. Furthermore, under the
Final Withholding Regulations, payment of the proceeds of a sale of Common Stock
to or through a United States office of a broker after December 31, 1998, will
be subject to both backup withholding and information reporting unless the
beneficial owner certifies under penalty of perjury that it is a Non-United
States Holder or otherwise establishes an exemption from backup withholding and
information reporting. Payment outside the United States of the gross proceeds
from the sale or redemption of Common Stock effected through a foreign office of
a broker having certain connections with the United States may be subject to
backup withholding and information reporting unless certain certification and
procedural requirements are satisfied. Prospective investors should consult with
their own tax advisors regarding the possible application to them of the
information reporting and backup withholding rules of the Final Withholding
Regulations.
The backup withholding tax is not an additional tax and may be credited
against the Non-United States Holder's United States federal income tax
liability or refunded to the extent excess amounts are withheld, provided that
the required information is supplied to the IRS.
LEGISLATIVE PROPOSALS/REFORMS
A wide variety of legislation has been proposed, some of which, if enacted,
would substantially modify and replace the current federal income tax system. It
is impossible to predict whether or in what form any such legislation or other
legislation might be enacted and what the scope or effective date of any such
legislation might be.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"),
the Company has agreed to sell to each of the U.S. Underwriters named below (the
"U.S. Underwriters"), and each of the U.S. Underwriters, for whom Smith Barney
Inc. and Credit Suisse First Boston Corporation are acting as the
representatives (the "U.S. Representatives"), has severally agreed to purchase
the number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITING
U.S. UNDERWRITER COMMITMENT
- ---------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc..................................................................
Credit Suisse First Boston Corporation............................................
------------
Total........................................................................... 10,560,000
------------
------------
</TABLE>
The Company has been advised by the U.S. Representatives that the several
U.S. Underwriters initially propose to offer such Shares to the public at the
Price to Public set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per Share. The U.S.
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per Share to other dealers. After the Offering, the Price to Public
and such concessions may be changed.
The Selling Stockholders have granted to the U.S. Underwriters and the
international underwriters (the "International Underwriters" and, collectively
with the U.S. Underwriters, the "Underwriters") options, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 1,980,000
additional shares of Common Stock from the Selling Stockholders at the Price to
Public less the Underwriting Discount, solely to cover over-allotments. The
Company has granted to the Underwriters options, on the same terms as those
issued by the Selling Stockholders, to purchase up to 1,980,000 shares of Common
Stock from the Company, which shall be exercisable if any of the Selling
Stockholders fail to deliver shares issuable upon exercise of the option granted
by them. To the extent that the U.S. Underwriters and the International
Underwriters exercise such options, each of the U.S. Underwriters and the
International Underwriters, as the case may be, will be committed, subject to
certain conditions, to purchase a number of option shares proportionate to such
U.S. Underwriter's or International Underwriter's initial commitment. The U.S.
Underwriting Agreement provides that, in the event of a default by a U.S.
Underwriter, in certain circumstances the purchase commitments of non-defaulting
U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be
terminated.
Subject to the terms and conditions set forth in an International
Underwriting Agreement among the Company and the International Underwriters, the
Company has agreed to sell to each of the International Underwriters, and each
of the International Underwriters, for whom Smith Barney Inc. and Credit Suisse
First Boston (Europe) Limited are acting as the representatives (the
"International Representatives" and, together with the U.S. Representatives, the
"Representatives"), has severally agreed to purchase the number of Shares set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITING
INTERNATIONAL UNDERWRITER COMMITMENT
- ---------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc..................................................................
Credit Suisse First Boston (Europe) Limited.......................................
------------
Total............................................................................. 2,640,000
------------
------------
</TABLE>
Both the U.S. Underwriting Agreement and the International Underwriting
Agreement provide that the obligations of the U.S. Underwriters and the
International Underwriters are such that if any of the Shares are purchased by
the U.S. Underwriters pursuant to the U.S. Underwriting Agreement, or by the
International Underwriters pursuant to the International Underwriting Agreement,
all the Shares agreed to be purchased by either the U.S. Underwriters or the
International Underwriters, as the case may be, pursuant to their respective
agreements must be so purchased. The Price to Public and Underwriting Discount
per Share for the U.S. Offering and the International Offering will be
identical. The closing of the International Offering is a condition to the
closing of the U.S. Offering and the closing of the U.S. Offering is a condition
to the closing of the International Offering.
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Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 10,560,000 Shares offered by the U.S. Underwriters, (i) it is not
purchasing any Shares for the account of anyone other than a United States or
Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute this Prospectus to any person
outside of the United States or Canada, or to anyone other than a United States
or Canadian Person and (iii) any dealer to whom it may sell any Shares will
represent that it is not purchasing for the account of anyone other than a
United States or Canadian Person and agree that it will not offer or resell,
directly or indirectly, any Shares outside of the United States or Canada, or to
anyone other than a United States or Canadian Person or to any other dealer who
does not so represent and agree. Each International Underwriter has severally
agreed that, as part of the distribution of the 2,640,000 Shares offered by the
International Underwriters, (i) it is not purchasing any Shares for the account
of any United States or Canadian Person, (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any Shares or distribute any
Prospectus relating to the International Offering to any person in the United
States or Canada, or to any United States or Canadian Person and (iii) any
dealer to whom it may sell any Shares will represent that it is not purchasing
for the account of any United States or Canadian Person and agree that it will
not offer or resell, directly or indirectly, any Shares in the United States or
Canada, or to any United States or Canadian Person or to any other dealer who
does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of its source (other than any non-United
States or non-Canadian branch of any United States or Canadian Person), and
includes any United States or Canadian branch of a person other than a United
States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of Shares as may be mutually agreed.
The price of any Shares so sold shall be the Price to Public, less an amount not
greater than the concession to securities dealers. To the extent that there are
sales between the U.S. Underwriters and the International Underwriters pursuant
to the Agreement Between U.S. Underwriters and International Underwriters, the
number of Shares initially available for sale by the U.S. Underwriters or by the
International Underwriters may be more or less than the amount specified on the
cover page of this Prospectus. Neither the U.S. Underwriters nor the
International Underwriters are obligated to purchase from the other any unsold
shares of Common Stock.
Any offer of the Shares in Canada will be made only pursuant to an exemption
from the prospectus filing requirement and an exemption from the dealer
registration requirement (where such an exemption is not available, offers shall
be made only by a registered dealer) in the relevant Canadian jurisdiction where
such offer is made. Purchasers of the Shares offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
The U.S. Underwriting Agreement provides that the Company and EKI will
jointly and severally indemnify the U.S. Underwriters against certain
liabilities and expenses, including liabilities under the Securities Act, or
contribute to payments the U.S. Underwriters may be required to make in respect
thereof.
The Company and all of the stockholders who are not Selling Stockholders
(other than one stockholder who owns 262 Shares of Common Stock), including EKI
and the Directors and officers of the Company, have agreed, subject to certain
exceptions, not to offer, sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, directly or indirectly, or announce the offering of any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, for 180 days from the
date of this Prospectus, without the prior written consent of Salomon Brothers
Inc. All Selling Stockholders of the Company have agreed, subject to certain
exceptions, to the foregoing restrictions for a period 270 days from the date of
this Prospectus.
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At the Company's request, the U.S. Underwriters have reserved up to
1,100,000 shares of Common Stock (the "Directed Shares") for sale at the Price
to Public to certain manufacturers, licensees and equipment and new material
suppliers and to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase such Shares. The number of Shares of
Common Stock available for sale to the general public will be reduced to the
extent of sales of Directed Shares to any of the persons for whom they have been
reserved. Any Shares not so purchased will be offered by the U.S. Underwriters
on the same basis as all other Shares offered hereby. The Underwriters and
Representatives have informed the Company that they do not expect discretionary
sales by the Underwriters to exceed 8% of the Shares being offered hereby.
During and after the Offerings, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offerings. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offerings
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company
and the Representatives. Among the factors considered in determining the Price
to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general,
certain other financial and operating information of the Company in recent
periods, and other factors deemed relevant. There can be no assurance that the
prices at which the Shares will sell in the public market after the Offerings
will not be lower than the Price to Public.
The Company's Common Stock has been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol "ERTH".
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Latham & Watkins,
Costa Mesa, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, and for
the period from November 1, 1992 (inception) through December 31, 1997 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report contains an emphasis paragraph
relating to the Company's ability to continue as a going concern), and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
The portions of this Prospectus entitled "Risk Factors--Protection of
Proprietary Technology" and "Business--Patents, Proprietary Rights and
Trademarks" have been reviewed and approved by Workman, Nydegger & Seeley, Salt
Lake City, Utah, as experts in patent law.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits and schedules thereto on file
with the Commission pursuant to the Securities Act and the rules and regulations
of the Commission thereunder. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies
may be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. The Commission maintains
a web site that contains reports, proxy and information statements and other
information filed electronically with the Commission at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EARTHSHELL CONTAINER CORPORATION
Independent Auditors' Report.............................................................. F-2
Balance Sheets as of December 31, 1996 and
1997 and (unaudited) pro forma December 31, 1997........................................ F-3
Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the
period from November 1, 1992 (inception)
through December 31, 1997............................................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and
(unaudited) pro forma December 31, 1997................................................. F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the
period from November 1, 1992 (inception)
through December 31, 1997............................................................... F-6
Notes to Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EarthShell Container Corporation:
We have audited the accompanying balance sheets of EarthShell Container
Corporation (a development stage enterprise -- the "Company") as of December 31,
1996 and 1997, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997 and for the period from November 1, 1992 (inception) through
December 31, 1997. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 and for the period from inception
through December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company is
a development stage enterprise that has incurred losses in its operations since
inception, currently has a stockholders' deficit and negative working capital,
and continues to rely on its stockholders and borrowings from a financial
institution to provide cash flow to sustain its operations. Although the
Company's operations subsequent to December 31, 1997 have been funded in part by
loans from its majority stockholder, the stockholder is under no obligation to
continue to fund the Company, and without additional funding from its
stockholders or other sources, there is substantial doubt about the Company's
ability to continue as a going concern. Management's plans to procure additional
long-term funding are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Los Angeles, California
February 20, 1998
(except for Note 10 as to which the
date is March 23, 1998)
F-2
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------------- 1997
1996 1997 (NOTE 1)
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 21,179 $ 8,437 $ 8,437
Prepaid insurance.......................... 12,443 9,248 9,248
Other assets............................... 26,877 19,288 19,288
------------ ------------ ---------------
Total current assets....................... 60,499 36,973 36,973
PROPERTY AND EQUIPMENT, NET.................. 2,756,935 3,741,129 3,741,129
------------ ------------ ---------------
TOTAL........................................ $ 2,817,434 $ 3,778,102 $ 3,778,102
------------ ------------ ---------------
------------ ------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Note payable and accrued interest to
majority stockholder..................... $ 22,215,793 $ 32,696,955 $ 32,696,955
Notes payable to banks..................... 6,904,775 11,843,855 11,843,855
Dividends payable.......................... 9,149,890
Payable to majority stockholder............ 752,192 622,090 622,090
Accounts payable and accrued expenses...... 1,676,642 3,182,534 3,182,534
------------ ------------ ---------------
Total current liabilities................ 31,549,402 48,345,434 57,495,324
------------ ------------ ---------------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000
shares authorized; 9,170,000 Series A
shares designated; 6,988,850 Series A
shares issued and outstanding as of
December 31, 1996 and 1997 (Pro forma, no
shares outstanding)...................... 267 267
Additional paid-in preferred capital....... 24,472,734 24,472,734
Common stock, $.01 par value, 200,000,000
shares authorized; 82,530,000 issued and
outstanding as of December 31, 1996 and
1997 and (Pro forma 89,518,850 shares
outstanding)............................. 3,150 3,150 895,189
Additional paid-in common capital.......... 2,020,843 5,177,502 28,758,464
Deficit accumulated during the development
stage.................................... (55,228,962) (74,220,985) (83,370,875)
------------ ------------ ---------------
Total stockholders' deficit.............. (28,731,968) (44,567,332) (53,717,222)
------------ ------------ ---------------
TOTAL........................................ $ 2,817,434 $ 3,778,102 $ 3,778,102
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
EXPENSES:
Related party research and
development................. $ 8,427,239 $ 9,060,523 $ 7,454,899 $ 37,724,112
Other research and
development................. 672,992 1,098,787 1,446,141 4,675,996
Related party general and
administrative expenses..... 67,200 67,200 67,200 1,801,600
Other general and
administrative expenses..... 2,294,301 3,338,263 5,618,055 15,577,593
Depreciation and
amortization................ 44,047 310,776 506,546 2,259,377
Related party patent
expenses.................... 1,929,266 1,382,185 652,867 7,200,607
----------- ----------- ----------- -------------
Total expenses.............. 13,435,045 15,257,734 15,745,708 69,239,285
Related party interest
expense....................... 509,926 1,453,966 2,185,177 4,149,069
Other interest (income) expense,
net........................... (31,577) 237,637 1,060,338 828,631
----------- ----------- ----------- -------------
LOSS BEFORE INCOME TAXES........ 13,913,394 16,949,337 18,991,223 74,216,985
INCOME TAXES.................... 800 800 800 4,000
----------- ----------- ----------- -------------
NET LOSS........................ 13,914,194 16,950,137 18,992,023 74,220,985
ASSUMED PREFERRED DIVIDENDS..... 2,134,000 2,134,000 2,134,000 9,149,890
----------- ----------- ----------- -------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS.................. $16,048,194 $19,084,137 $21,126,023 $ 83,370,875
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
BASIC AND DILUTED LOSS PER
COMMON SHARE (NOTE 1)......... $(.19) $(.23) $(.26) $(1.01)
PRO FORMA NET LOSS PER COMMON
SHARE (NOTE 1)................ $(.17)
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING PRO
FORMA NET LOSS PER COMMON
SHARE (NOTE 1)................ 92,379,252
</TABLE>
See notes to financial statements.
F-4
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE DEFICIT
PREFERRED STOCK ADDITIONAL ADDITIONAL ACCUMULATED
SERIES A PAID-IN COMMON STOCK PAID-IN DURING
--------------- PREFERRED ---------------------- COMMON DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
------- ------ ------------ --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995...... 6,988,850 $ 267 $ 24,472,734 82,530,000 $ 3,150 $ 6,850 $ (24,364,631)
Contribution to equity........ 1,117,723
Net loss...................... (13,914,194)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1995.... 6,988,850 267 24,472,734 82,530,000 3,150 1,124,573 (38,278,825)
Contribution to equity........ 650,000
Issuance of stock warrants.... 246,270
Net loss...................... (16,950,137)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1996.... 6,988,850 267 24,472,734 82,530,000 3,150 2,020,843 (55,228,962)
Compensation related to stock
options and warrants........ 3,156,659
Net loss...................... (18,992,023)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1997.... 6,988,850 267 24,472,734 82,530,000 3,150 5,177,502 (74,220,985)
Conversion (on a pro forma
basis) of preferred stock to
common stock (unaudited).... (6,988,850) (267) (24,472,734) 6,988,850 267 24,472,734
Accrual of preferred stock
dividends (unaudited)....... (9,149,890)
------- ------ ------------ --------- ---------- ----------- --------------
PRO FORMA BALANCE, DECEMBER
31, 1997
(unaudited) (Note 1)........ -- $ -- $ -- 89,518,850 $ 895,189 $28,758,464 $ (83,370,875)
------- ------ ------------ --------- ---------- ----------- --------------
------- ------ ------------ --------- ---------- ----------- --------------
<CAPTION>
TOTAL
--------------
<S> <C>
BALANCE, JANUARY 1, 1995...... $ 118,370
Contribution to equity........ 1,117,723
Net loss...................... (13,914,194)
--------------
BALANCE, DECEMBER 31, 1995.... (12,678,101)
Contribution to equity........ 650,000
Issuance of stock warrants.... 246,270
Net loss...................... (16,950,137)
--------------
BALANCE, DECEMBER 31, 1996.... (28,731,968)
Compensation related to stock
options and warrants........ 3,156,659
Net loss...................... (18,992,023)
--------------
BALANCE, DECEMBER 31, 1997.... (44,567,332)
Conversion (on a pro forma
basis) of preferred stock to
common stock (unaudited)....
Accrual of preferred stock
dividends (unaudited)....... (9,149,890)
--------------
PRO FORMA BALANCE, DECEMBER
31, 1997
(unaudited) (Note 1)........ $ (53,717,222)
--------------
--------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31
1995 1996 1997 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................... $(13,914,194) $(16,950,137) $ (18,992,023) $(74,220,985)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 44,047 310,776 506,546 2,259,377
Issuance of stock options to
director and consultant........ 3,096,761 3,096,761
Issuance of stock options to
officer........................ 650,000 -- 650,000
Amortization of debt issue
costs.......................... 41,045 230,232 271,277
Loss on sale or disposal of
property and equipment......... -- 65,639
Net loss on sale of
investments.................... -- 32,496
Accretion of discounts on
investments.................... (410,084)
Changes in operating assets and
liabilities:
Prepaid expenses and other
assets......................... 52,533 31,183 10,784 (28,536)
Accounts payable and accrued
expenses....................... 580,914 330,463 1,505,891 3,182,533
Payable to majority
stockholder.................... 7,866,439 7,346,761 8,996,134 25,476,182
Accrued interest on notes payable
to majority stockholder........ 234,510 196,631 204,927 636,068
------------ ------------ ------------- -------------
Net cash used in operating
activities................. (5,135,751) (8,043,278) (4,440,748) (38,989,272)
------------ ------------ ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments--U.S.
government securities............ -- (36,918,254)
Proceeds from sales and redemptions
of investments................... 2,704,011 -- 37,295,842
Proceeds from sale of property and
equipment........................ 225,000 -- 297,670
Purchase of property and
equipment........................ (1,918,152) (1,176,589) (1,461,994) (7,235,550)
------------ ------------ ------------- -------------
Net cash provided by (used
in) investing activities... 1,010,859 (1,176,589) (1,461,994) (6,560,292)
------------ ------------ ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of notes
payable to stockholders.......... 6,210,000 2,335,000 2,275,000 12,820,000
Proceeds from drawings on line of
credit with bank................. 7,110,000 4,740,000 11,850,000
Proceeds from issuance of common
stock............................ 10,000
Proceeds from issuance of preferred
stock............................ 25,675,000
Preferred stock issuance costs..... (1,201,999)
Repayment of note payable.......... (2,000,000) (470,000) (1,125,000) (3,595,000)
------------ ------------ ------------- -------------
Net cash provided by
financing activities....... 4,210,000 8,975,000 5,890,000 45,558,001
------------ ------------ ------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. 85,108 (244,867) (12,742) $ 8,437
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.............. 180,938 266,046 21,179
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 266,046 $ 21,179 $ 8,437 $ 8,437
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for:
Income taxes..................... $ 800 $ 800 $ 800 $ 4,000
Interest......................... $ 275,415 $ 199,494 $ 829,943 $ 1,305,689
Warrants issued with debt........ $ 246,270 $ 59,898 $ 306,168
Transfer of property from EKI.... $ 28,745 $ 28,745
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash compensation of $650,000 and $3,096,761, was recorded in 1996 and
1997, respectively, representing the difference between fair market value
and exercise price of options on the date of grant.
In consideration of the $9,000,000 line of credit established in 1996, the
Company issued stock warrants to Imperial Bank which entitle the lender to
purchase a total of $750,000 of common stock issuable upon the completion of
the initial public offering, $300,000 at a per share price equal to the
initial public offering price of the Company's common stock and $450,000 at
a price per share equal to 110% of the initial public offering price. These
warrants were valued and recorded at $246,270 based upon the Company's
option pricing model. (See Note 7).
In consideration of the $14,000,000 line of credit established in 1997, the
Company issued stock warrants to Imperial Bank which entitle the lender to
purchase a total of $300,000 of common stock issuable upon the completion of
the initial public offering at a price per share equal to 110% of the
initial public offering price. These warrants were valued and recorded at
$59,898 based upon the Company's option pricing model. (See Note 7).
See notes to financial statements.
F-6
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
EarthShell Container Corporation (the "Company") was incorporated in
Delaware on November 1, 1992 and is a subsidiary of E. Khashoggi Industries, LLC
(together with its predecessor entity, "EKI"). Both the Company and EKI are
development stage enterprises. In connection with the formation of the Company,
the Company entered into a license agreement (see Note 3) for certain technology
developed by EKI, exclusively for use in connection with the manufacture and
sale of selected disposable food and beverage containers for use in the
food-service industry. The accompanying financial statements reflect only the
costs and expenses related to this application of the technology under
development since the Company's formation on November 1, 1992. Expenses incurred
prior to November 1, 1992 by EKI and its predecessor entities have been
excluded, as they related to broader applications of the technology not included
in the license agreement. The accompanying financial statements have been
presented as if the Company commenced operations on January 1, 1993. Expenses
for the two-month period from November 1, 1992 (date of inception) to December
31, 1992 totaled $2,749 and are included in the 1993 financial statements.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, from the date of inception to December 31, 1997, the Company
incurred accumulated losses of $74,220,985, and as of December 31, 1997, the
Company's current liabilities exceeded its current assets by $48,308,461. As a
development stage enterprise, the Company has primarily relied on funding from
its stockholders to sustain its operations. In September 1993, the Company
completed a private placement offering of preferred stock, raising $24,473,001
in net proceeds (see Note 6). During the remainder of 1993 and 1994, the Company
applied substantially all of these proceeds to the furtherance of its research
and development activities and the repayment of stockholder advances. During and
subsequent to December 31, 1995, the Company's operations have been
substantially funded with loans from its majority stockholder and borrowings
from a bank. However, the majority stockholder is under no obligation to loan or
make additional capital contributions to the Company.
Management is currently preparing for a public offering of the Company's
common stock to obtain additional funds so that the Company can meet its
obligations, sustain its development activities, achieve positive cash flow from
operations and repay the stockholder loans and other debt. Management
anticipates that the offering will be initiated upon the completion of certain
product commercialization activities currently in process.
If the Company is unable to successfully complete an offering or obtain
funding from other sources, the Company may not be able to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded on the straight-line
basis over the estimated useful lives of the assets of three years.
F-7
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 and are classified as available for sale.
STATEMENT OF CASH FLOWS
For presentation purposes, cash and cash equivalents include cash and funds
invested in short-term money market accounts with original maturities of three
months or less (see disclosure of noncash activities in Note 3).
UNAUDITED PRO FORMA INFORMATION
As of December 31, 1997, the unaudited pro forma balance sheet and statement
of stockholders' equity (deficit) have been presented assuming the conversion of
the Company's Series A cumulative senior convertible preferred stock. It is
contemplated that all of the outstanding shares of the Company's Series A
cumulative senior convertible preferred stock will be converted to an aggregate
of 6,988,850 shares of the Company's common stock. In addition, upon conversion
at December 31, 1997, the Company would have been required to declare dividends
of $9,149,890 in accordance with the terms of the Series A cumulative senior
convertible preferred stock.
Pro forma loss per common share for the year ended December 31, 1997 is
determined by dividing net loss less interest expense and loan fee amortization
by the weighted average common shares outstanding during the period (82,530,000
shares), the assumed conversion of Series A preferred stock into Common Stock
(6,988,850 shares), plus the assumed sale of shares at $19.00 per share to fund
dividends payable (481,573 shares) and to repay the $33,319,045 in indebtedness
owed to the majority stockholder and the $11,878,745 notes payable to banks
(2,378,829 shares).
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amounts expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred income tax assets and liabilities.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted loss per common share is calculated based on weighted
average shares outstanding of 82,530,000 for 1995, 1996 and 1997, respectively.
Basic and diluted are the same because common stock equivalents are considered
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of the Company's financial instruments approximate their
fair values. The Company's financial instruments are primarily composed of
investments in U.S. government securities and
F-8
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
notes payable. The investments are short term in nature and carry current market
rates. Notes payable initially bear interest at the prime rate in effect at the
date of issuance, which is adjusted to the prime rate in effect on the first day
of each calendar quarter.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company does not expect the impact of SFAS No. 131 to be material in
relation to its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years financial statements
to conform to 1996 and 1997 classifications.
F-9
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
----------- ---------
Furniture and equipment.............................. $1,327,273 $2,349,408
<S> <C> <C>
Deposits on equipment................................ 1,788,592 2,257,197
----------- ---------
3,115,865 4,606,605
Accumulated depreciation and amortization............ (358,930) (865,476)
----------- ---------
Property and equipment, net.......................... $2,756,935 $3,741,129
----------- ---------
----------- ---------
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company's administrative and research offices are located in shared
facilities with EKI. In addition, the conduct of the Company's current
operations requires sharing of technical support and management personnel of
EKI, primarily to assist in furthering the Company's development of the licensed
technology and product applications. To confirm these arrangements, the Company
and EKI entered into certain intercompany agreements. From September 1, 1993
through June 30, 1994, the Company operated under a management, administrative
services and professional services agreement (the "Management Services
Agreement"). Under the terms of the Management Services Agreement, the Company
reimbursed EKI for all direct payroll costs and related expenses incurred on
approved projects, plus an allocation of EKI's overhead and general and
administrative costs. Overhead and general and administrative costs were
allocated to the Company based on payroll costs charged to Company-specific
projects compared to EKI's total payroll cost. The Management Services Agreement
also provided for the payment of monthly administrative fees from September 1,
1993 through the first two quarters of 1994. Administrative fees totaled
$400,000 and $1,200,000 in 1993 and 1994, respectively. Effective July 1, 1994
the Company and EKI entered into a Technical Services and Sublease Agreement
(the "Prior Technical Services Agreement"), which superseded the Management
Services Agreement. Under the terms of the Prior Technical Services Agreement,
the Company paid EKI for all direct project labor hours incurred at specified
hourly billing rates and direct expenses incurred on approved projects. The
specified hourly billing rates, which are subject to revision semiannually, are
fully burdened to include all EKI facility, equipment and overhead costs and
vary according to job classification. The intercompany rates have been compared
to a market rate study prepared by an independent third party provider of
similar services and are within the range of average market rates for each job
classification. The Company also subleased office space from EKI for $5,600 per
month under this agreement. The Prior Technical Services Agreement terminated on
September 30, 1997. The Company entered into an Amended and Restated Technical
Services and Sublease Agreement effective October 1, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company paid or accrued $7,454,899,
$9,060,523, and $8,427,239, respectively, for services performed under the Prior
Technical Services Agreement and $67,200 in sublease payments for each of the
respective periods.
On December 31, 1994, the Company sold substantially all of its equipment
and leasehold improvements to EKI. EKI issued a note to the Company totaling
$2,018,204, representing the Company's original cost of the assets. The
transaction resulted in a gain of $1,117,723, which was offset against the note
receivable from EKI. The net note receivable balance of $900,481 was netted
against the payable to
F-10
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
EKI in the accompanying 1994 financial statements. During 1995, the note
receivable was offset by notes payable that were issued to EKI. As a result, the
note receivable was eliminated, and the gain was recorded as a contribution to
additional paid-in common capital.
In connection with the formation of the Company, the Company entered into a
license agreement with EKI to manufacture, use, sell and sublicense certain
technology rights and to use certain trademarks owned by EKI in connection with
the products covered under the License Agreement. The license covers the period
of the patents covering the technologies. Under an Agreement for Allocation of
Patent Costs (the "Prior Patent Allocation Agreement"), the Company was required
to reimburse EKI for all costs and expenses associated with filing, prosecuting
and maintaining patents or patent applications or technology which were directly
related to food and beverage containers within the field of use licensed to the
Company under the License Agreement, or which were outside the field of use
under the License Agreement, but which had significant teachings, claims or
applications for such uses. The Company entered into an Amended and Restated
Agreement for Allocation of Patent Costs effective October 1, 1997. Under the
Prior Patent Allocation Agreement, legal fees of $1,929,266, $1,382,185 and
$652,867, were paid to or on behalf of EKI during 1995, 1996 and 1997,
respectively.
At December 31, 1996, the notes payable to the majority stockholder of
$21,784,652 include amounts due to EKI under the Prior Technical Services
Agreement and the Prior Patent Allocation Agreement. During 1996, $13,709,652 of
the payables to EKI were converted to notes payable and several other notes
payable were issued to EKI for cash loans totaling $8,075,000. The notes
initially bear interest at the prime rate in effect at the date of issuance. The
interest rates are adjusted to the prime rate in effect on the first day of each
calendar quarter. At December 31, 1996 and December 31, 1997, all of the notes
accrued interest at 8.25% and 8.50%, respectively, and were payable on demand.
During 1997, $7,145,986 of billings due under the Prior Technical Services
Agreement and Prior Patent Allocation Agreement and $1,980,249 of interest due
to EKI were converted to notes payable. In addition, several other notes were
issued to EKI for cash loans totaling $1,150,000. As a result, total notes
payable to EKI increased from $21,784,652 as of December 31, 1996 to $32,060,887
as of December 31, 1997. These notes payable were combined into one note payable
dated December 31, 1997.
The amount payable to the majority stockholder of $752,192 and $622,090 as
of December 31, 1996 and 1997, respectively, includes amounts due to EKI under
the Prior Technical Services Agreement and the Prior Patent Allocation
Agreement.
The Company borrowed $2,000,000 from a preferred stockholder on December 21,
1994 and executed a demand note payable that accrued interest at the rate of 8%
per annum. The note was fully repaid in February 1995.
4. NOTES PAYABLE
As of December 31, 1997, notes payable include a $32,060,887 note payable
due to EKI, the majority stockholder, as described in Note 3, and $11,850,000
outstanding on a line of credit less an unamortized original issue discount of
$34,890 related to the stock warrants described in Note 8. In addition, the
Company is obligated to another bank for a property loan of $28,745.
In 1996, the Company established a $9,000,000 line of credit with a bank
which originally expired on May 30, 1997 and was extended to April 15, 1998 and
increased to $14,000,000. The extension of credit has
F-11
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
been guaranteed by EKI, Mr. Essam Khashoggi, the Chairman of the Board and
indirect controlling stockholder of the Company, and a trust controlled by Mr.
Khashoggi. In addition, the Company executed a general security agreement that
grants the bank a security interest in the license agreement entered into by the
Company with EKI. Interest is payable monthly at an annual rate of 1% in excess
of the bank's announced prime lending rate. At December 31, 1996 the bank's
prime lending rate was 8.25% and the outstanding principal was $7,110,000 and is
shown net of the $205,225 unamortized portion of an original issue discount
related to the stock warrants described in Note 8. The discount is amortized on
a straight-line basis over the term of the line of credit. At December 31, 1997
the bank's prime lending rate was 8.50% and the outstanding principal was
$11,850,000.
The weighted average interest rate on the notes payable agreements for the
years ended December 31, 1996 and 1997 was 8.94% and 8.76%, respectively.
5. COMMITMENTS
At December 31, 1996 and 1997, the unpaid balances due to vendors for
equipment purchases totaled $186,798 and $2,493,043, respectively.
On February 16, 1998, EKI entered into a patent purchase agreement with a
third party for the purchase of certain technology that may be applicable to
starch-based disposable packaging. Pursuant to the terms of the Patent
Allocation Agreement, EKI will license such technology to the Company. In
connection with this purchase, the Company entered an agreement to pay to EKI
$3.5 million on or about December 31, 2003. The Company's obligation will be
reduced by 5% of the purchase price of any equipment purchased by EKI, the
Company or its licensees or joint ventures from the company which previously
owned the technology. In addition, the Company is required to pay $3 million
over the five year period commencing January 1, 2004 if EKI, the Company or the
Company's licensees or joint ventures have not purchased, by December 31, 2003,
at least $35 million of equipment from the company which previously owned the
technology and EKI, the Company or the Company's licensees or joint ventures use
the purchased technology.
6. CUMULATIVE CONVERTIBLE PREFERRED STOCK
On September 17, 1993, the Company completed a private placement of
preferred stock totaling $26,675,000, with net proceeds to the Company totaling
$24,473,001. Under the Series A Cumulative Senior Convertible Preferred Stock
Purchase Agreement, the Company issued 6,988,850 shares of Series A cumulative
senior convertible preferred stock at $3.82 per share. Dividends, when declared,
are payable on a quarterly basis at 8% per annum. At December 31, 1996, and
December 31, 1997 cumulative undeclared dividends totaled $7,016,000 and
$9,149,890, respectively. Each share of preferred stock is convertible into one
share of common stock. Subject to the right of the holders of the preferred
stock to convert their shares into common stock, the Company has the right to
redeem the preferred stock at a price of $3.87 per share between September 30,
1997 and September 30, 1998 and at a price of $3.82 per share after September
30, 1998. After three years from the issuance, registration rights enable the
preferred stockholders to cause the Company to effect two registration
statements for the common stock into which their shares of preferred stock are
convertible. Preferred stockholders have the right to vote with the common stock
as if the preferred stock had converted to common stock of the Company.
Preferred stockholders have the right to elect one member to the Board of
Directors.
F-12
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS
The Company adopted the EarthShell Container Corporation 1994 Stock Option
Plan on June 22, 1994 (the "1994 Plan"). The Company subsequently adopted the
EarthShell Container Corporation 1995 Stock Incentive Plan effective as of
November 27, 1995 (the "1995 Plan") which effectively supersedes the 1994 Plan
for options issued on or after the date of the 1995 Plan's adoption. The 1994
and 1995 Plans provide that the Company may grant an aggregate number of options
for up to 4,585,000 shares of common stock to employees or other eligible
persons as defined by the Plans. Options issued to date under the 1994 Plan and
the 1995 Plan generally vest at varying rates from 0 to 5 years and generally
expire 10 years from the date of grant. During 1994, options for 771,590 shares
were granted. Options for 41,920 fully vested shares were granted to directors
in 1995 under the 1995 Plan at an exercise price of $7.63 per share. In
determining that the exercise price of the options was equivalent to the fair
market value of the underlying shares of Common Stock, the directors considered
various objective criteria, including the price obtained for the Company's
shares in several isolated third party sales of the Common Stock under arm's
length terms. Options for 104,800 shares were canceled during 1995. In January
1996, options for 412,650 shares were granted under the 1995 Plan at an exercise
price of $7.63 per share vesting over two years. Of these options, 262,000
shares were granted whereby the individual will be reimbursed $4.96 per share by
EKI upon exercise. Accordingly, compensation expense of $650,000 representing
the portion of the exercise price to be reimbursed by EKI for options that were
considered to be vested in 1996, was recognized during the year ended December
31, 1996, as a contribution to capital. Options for 131,000 shares were canceled
during 1996. At December 31, 1996, options exercisable into 990,360 shares of
Common Stock were outstanding at a per share exercise price of $3.82 for options
issued under the 1994 Plan and $7.63 for options issued under the 1995 Plan.
During 1997, options for 141,480 shares were granted to directors under the 1995
Plan of which 47,160 shares were granted at an exercise price equal to 80% of
the initial public offering price and vested immediately. The modest discount
from the initial offering price was determined to represent the fair market
value of the underlying shares at the time of option grant based on such
objective criteria as the restricted nature of the securities, the absence of a
public trading market, and the anticipated length of time to consummate the
initial public offering. The remaining options for 94,320 shares were granted at
an exercise price of $15.20 per share vesting on the day immediately prior to
the next stockholders' meeting held subsequent to the date of grant.
In October 1997, options to purchase 262,000 shares of common stock were
regranted as a result of an extension of the terms of the option agreement to a
director with an exercise price of $3.82 per share. The fair value of the common
stock at the date of grant was $15.20 per share. Compensation expense was
recorded during 1997 in the amount of $2,982,000 related to the regrant of these
options.
In October 1997, options to purchase 26,200 shares of common stock were
regranted as a result of an extension of the terms of the option agreement to a
consultant with an exercise price of $7.63 per share. The fair value of the
common stock at the date of grant was $15.20 per share. Compensation expense was
recorded during 1997 in the amount of $114,761 related to the regrant of these
options.
In November 1997, options to purchase 26,200 shares of common stock were
granted to a director at an exercise price of $15.20 per share vesting
immediately.
At December 31, 1997, options for 1,158,040 shares were outstanding, of
which 925,908 were exercisable.
F-13
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
---------- -------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1995.................................. 771,590 $3.82 $ 3.82
Options granted................................................. 41,920 $7.63 $ 7.63
Options canceled................................................ (104,800) $3.82 $ 3.82
----------
Outstanding at December 31, 1995................................ 708,710 $ 4.04
Options granted................................................. 412,650 $7.63 $ 7.63
Options canceled................................................ (131,000) $7.63 $ 7.63
----------
Outstanding at December 31, 1996................................ 990,360 $ 5.06
Options granted................................................. 455,880 $3.82-$15.20 $ 8.22
Options canceled................................................ (288,200) $3.82-$7.63 $ 4.16
----------
Outstanding at December 31, 1997................................ 1,158,040 $ 6.53
----------
----------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------- ----------- --------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 3.82 666,790 6 $ 3.82 588,190 $ 3.82
$ 7.63 323,570 7.4 $ 7.63 217,198 $ 7.63
$15.20 167,680 5.2 $ 15.20 120,520 $ 15.20
</TABLE>
Had compensation cost of the Company's stock option plan been determined
based on the fair value at the grant dates of awards under the plans (without
giving effect to the pro forma adjustments as described in Note 1), the
Company's net loss available to common stockholders for the years ended December
31, 1996 and 1997 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED, YEAR ENDED,
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Net loss available to common stockholders:
As reported.................................................. $ 19,084,137 $ 21,126,023
Pro forma.................................................... $ 19,411,664 $ 22,676,181
Net loss per common share:
As reported.................................................. $ .23 $ .26
Pro forma.................................................... $ .24 $ .27
</TABLE>
The Company accounts for its plans in accordance with Accounting Principles
Board Opinion No. 25. Had compensation costs for the plans been determined
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," pro forma net loss for 1996 would have been
$19,411,664. The pro forma net loss for 1997 would have been $22,676,181.
The fair value of stock options granted during 1996 was $1,552,361. The fair
value of stock options was estimated on the grant date using the Black Scholes
option pricing model with the following weighted
F-14
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
average assumptions: risk-free interest rate of 6.8%; expected life of 6.4
years; and expected volatility of 20.0%.
The fair value of stock options granted during 1997 was $3,868,135 of which
$3,096,761 was recorded as compensation expense as of December 31, 1997. The
fair value of stock options was estimated on the grant date using the Black
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 6.0%; expected life of 3.4 years; and expected
volatility of 20.0%.
The fair value of stock options granted during 1995 was not material.
8. STOCK WARRANTS
On June 7, 1996, in consideration of a $3,000,000 line of credit financing
arrangement, the Company issued a warrant which entitles the lender to purchase
common stock shares equal to $150,000 divided by the price per share of the
Company's common stock in the initial public offering. The warrant exercise
price is equal to the initial public offering price and can be exercised at any
time following six months after the initial public offering by the Company and
prior to its expiration date of June 7, 2001.
On July 2, 1996, the line of credit was increased to $4,500,000 and an
additional warrant was issued which entitles the lender to purchase another
$150,000 in common stock on terms similar to those in the previously issued
warrant of June 7, 1996.
On November 15, 1996, the line of credit was increased to $9,000,000 and an
additional warrant was issued which entitles the lender to purchase $450,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on November 15, 2003.
The foregoing warrants were valued and recorded at $246,270 based upon the
Company's option pricing model (see Note 7).
On October 6, 1997, the line of credit was increased to $13,000,000 and an
additional warrant was issued which entitles the lender to purchase $250,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on October 6, 2004.
On December 31, 1997, the line of credit was increased to $14,000,000 and an
additional warrant was issued which entitles the lender to purchase $50,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on December 31, 2004.
The warrants issued in 1997 were valued at $59,898 based upon the Company's
option pricing model (see Note 7).
F-15
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial and tax reporting purposes. At December
31, deferred tax assets were composed primarily of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Federal:
Depreciation.................................................... $ 88,176 $ 107,742
Capitalized operating expenses.................................. 3,952,663 5,921,976
Capitalized research and development............................ 2,744,130 2,966,105
Accrued interest to related party............................... 146,588 --
Deferred contributions.......................................... 359,721 359,721
Net operating loss carryforward................................. 11,671,200 16,060,992
------------- -------------
18,962,478 25,416,536
------------- -------------
State:
Depreciation.................................................... 3,747 30,557
Capitalized operating expenses.................................. 1,081,170 1,619,834
Capitalized research and development............................ 3,617,279 4,278,956
Accrued interest to related party............................... 40,096 --
Deferred contributions.......................................... 93,981 93,981
Net operating loss carryforward................................. 105,953 395,112
------------- -------------
4,942,226 6,418,440
------------- -------------
Deferred tax asset................................................ 23,904,704 31,834,976
Valuation allowance............................................... (23,904,704) (31,834,976)
------------- -------------
Net deferred tax asset.......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The increase in the valuation allowance of $7,930,272 at December 31, 1997
as compared to December 31, 1996 and $7,557,914 at December 31, 1996 as compared
to December 31, 1995 was the result of changes in the components of the deferred
tax items.
For federal income tax purposes, the Company has net operating loss
carryforwards of $47,239,000 as of December 31, 1997 that expire through 2012.
For state income tax purposes, the Company has net operating loss carryforwards
of $4,249,000 as of December 31, 1997 that expire through 2012.
Income tax expense for 1997, 1996 and 1995 consists of the minimum state
franchise tax expense.
10. SUBSEQUENT EVENT
On March 23, 1998, the Company declared a 262-for-one stock split of its
Common Stock. All share and per share amounts included in the accompanying
financial statements have been retroactively adjusted to reflect the stock
split.
F-16
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 25
Management................................................................ 41
Certain Transactions...................................................... 50
Principal and Selling Stockholders........................................ 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Certain United States Federal Income Tax Considerations................... 59
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
13,200,000 Shares
[LOGO]
Common Stock
------
PROSPECTUS
, 1998
---------
Salomon Smith Barney
Credit Suisse First Boston
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[ALTERNATE COVER PAGE OF INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED MARCH 23, 1998
PROSPECTUS
13,200,000 Shares
[LOGO]
Common Stock
---------------
Of the 13,200,000 Shares offered hereby, 10,526,316 Shares are being sold by
the Company and 2,673,684 Shares are being sold by certain stockholders. None of
the officers or directors of the Company is selling any Shares of Common Stock
in the offering. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Shares of Common Stock by the
Selling Stockholders.
Of the Shares being offered, 10,560,000 Shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,640,000 Shares are being
offered in a concurrent International Offering outside the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offering"), subject to transfers between the U.S. Underwriters and the
International Managers. The Price to Public and Underwriting Discount per Share
will be identical for the U.S. Offering and the International Offering. See
"Subscription and Sale." The closing of the U.S. Offering and International
Offering are conditioned upon each other.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $17.00 and $21.00 per share. See "Subscription and Sale"
for information relating to the factors considered in determining the initial
public offering price. The Company's Common Stock has been approved for
quotation on The Nasdaq Stock Market's National Market under the symbol "ERTH."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Subscription and Sale."
(2) Before deducting expenses payable by the Company, estimated at $1,620,000.
(3) The Company and certain of the Selling Stockholders have granted to the
U.S. Underwriters and the International Managers 30-day options to purchase
up to an aggregate of 1,980,000 additional Shares of Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. See "Subscription and Sale." If such options are
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively, and total Proceeds to Selling Stockholders will be $ .
--------------------------------
The Shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the Shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
-------------------------
JOINT BOOK-RUNNING MANAGERS
Salomon Smith Barney International Credit Suisse First Boston
, 1998.
<PAGE>
[EarthShell packaging logo and picture of
EARTHSHELL cups, bowls, hinged-lid container,
tray, breakfast platter and plate with quotes as
follows, "'Finally, fast food packaging that
Mother Earth can love!' Essam Khashoggi,
Chairman of the Board and "From the earth, back to the earth . . ."]
------------------------
In this Prospectus, references to "dollars" and "$" are to United States
dollars.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "SUBSCRIPTION AND SALE."
EARTHSHELL-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY.
ALI-ITE-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF E. KHASHOGGI
INDUSTRIES, LLC. BIG MAC-REGISTERED TRADEMARK- AND QUARTER POUNDER-REGISTERED
TRADEMARK- ARE REGISTERED TRADEMARKS OF MCDONALD'S CORPORATION.
<PAGE>
[Alternate Underwriting Section of International Prospectus]
SUBSCRIPTION AND SALE
The institutions named below (the "Managers") have, subject to the terms and
conditions set forth in a Subscription Agreement dated , 1998 (the
"Subscription Agreement"), severally and not jointly, agreed with the Company
and the Selling Stockholders to subscribe and pay for the following respective
numbers of International Shares as set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
MANAGER SHARES
- --------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc. ...............................................................
Credit Suisse First Boston (Europe) Limited......................................
------------
Total........................................................................ 2,640,000
------------
------------
</TABLE>
The Subscription Agreement provides that the obligations of the Managers are
such that, subject to certain conditions precedent, the Managers will be
obligated to purchase all the International Shares of the Common Stock offered
hereby (other than those shares covered by the over-allotment option discussed
below) if any are purchased. The Subscription Agreement provides that, in the
event of a default by a Manager, in certain circumstances the purchase
commitments of the non-defaulting managers may be increased or the Subscription
Agreement may be terminated.
The Company and the Selling Stockholders have entered into an Underwriting
Agreement with the U.S. Underwriters of the U.S. Offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of the U.S. Shares in
the United States and Canada. The closing of the U.S. Offering is a condition to
the closing of the International Offering and vice versa. Subject to the terms
and conditions set forth in the Underwriting Agreement, the Company has agreed
to sell to each of the U.S. Underwriters named below and each of the U.S.
Underwriters, for whom Smith Barney Inc. and Credit Suisse First Boston
Corporation are acting as the representatives, has severally agreed to purchase
the number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITING
U.S. UNDERWRITER COMMITMENT
- ---------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc..................................................................
Credit Suisse First Boston Corporation............................................
------------
Total........................................................................... 10,560,000
------------
------------
</TABLE>
The Selling Stockholders have granted to the Managers and the U.S.
Underwriters an option, exercisable by Smith Barney Inc., expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up to
1,980,000 additional shares at the initial public offering price, less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock offered hereby. The Company has granted
to the Underwriters options, on the same terms as those issued by the Selling
Stockholders, to purchase up to 1,980,000 shares of Common Stock from the
Company, which shall be exercisable if any of the Selling Stockholders fail to
deliver shares issuable upon exercise of the option granted by them. To the
extent that this option to purchase is exercised, each Manager and each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares being sold to the
Managers and the U.S. Underwriters as the number of International Shares set
forth next to such Manager's name in the preceding table and as the number set
forth next to such U.S. Underwriter's name in the corresponding table in the
Prospectus relating to the U.S. Offering bears to the sum of the total number of
shares of Common Stock in such tables.
The Company and the Selling Stockholders have been advised by Smith Barney
Inc., on behalf of the Managers, that the Managers propose to offer the
International Shares outside the United States and Canada initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Managers, to certain dealers at such price less a commission of
$ per share and that the Managers and such dealers may reallow a commission
of $ per share on sales to certain other dealers. After the initial public
offering, the public offering price and commission and reallowance may be
changed by the Managers.
63
<PAGE>
[ALTERNATE UNDERWRITING SECTION OF INTERNATIONAL PROSPECTUS]
The offering price and the aggregate underwriting discounts and commissions
per share and per share commission and re-allowance to dealers for the
International Offering and the concurrent U.S. Offering will be identical.
Pursuant to an Agreement between the U.S. Underwriters and Managers (the
"Intersyndicate Agreement") relating to the Common Stock Offering, changes in
the offering price, the aggregate underwriting discounts and commissions per
share and per share commission and reallowance to dealers will be made only by
Smith Barney Inc., on behalf of the Managers and as representative of the U.S.
Underwriters.
Pursuant to the Intersyndicate Agreement, each of the Managers has agreed
that, as part of the distribution of International Shares and subject to certain
exceptions, it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares of Common Stock or distribute any prospectus relating to
the Common Stock in the United States or Canada or to any other dealer who does
not so agree. Each of the U.S. Underwriters has agreed that, as part of the
distribution of the U.S. Shares and subject to certain exceptions, it has not
offered or sold and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute any prospectus relating to the Common Stock to any
person outside the United States and Canada or to any other dealer who does not
so agree. The foregoing limitations do not apply to stabilization transactions
or to transactions between the Managers and the U.S. Underwriters pursuant to
the Intersyndicate Agreement. As used herein, "United States" means the United
States of America (including the States and the District of Columbia), its
territories, possessions and other areas subject to its jurisdiction, "Canada"
means Canada, its provinces, territories, possessions and other areas subject to
its jurisdiction, and an offer or sale shall be in the United States or Canada
if it is made to (i) any individual resident in the United States or Canada or
(ii) any corporation, partnership, pension, profit-sharing or other trust or
other entity (including any such entity acting as an investment adviser with
discretionary authority) whose office most directly involved with the purchase
is located in the United States or Canada.
Pursuant to the Intersyndicate Agreement, sales may be made between the
Managers and the U.S. Underwriters of such number of shares of Common Stock as
may be mutually agreed upon. The price of any shares so sold will be the public
offering price less such amount agreed upon by Smith Barney Inc., on behalf of
the Managers and as representative of the U.S. Underwriters, but not exceeding
the selling concession applicable to such shares. To the extent there are sales
between the Managers and the U.S. Underwriters pursuant to the Intersyndicate
Agreement, the number of shares of Common Stock initially available for sale by
the Managers or by the U.S. Underwriters may be more or less than the amount
appearing on the cover page of this Prospectus. Neither the Managers nor the
U.S. Underwriters are obligated to purchase from the other any unsold shares of
Common Stock.
Each of the Managers and the U.S. Underwriters severally represents and
agrees that: (i) it has not offered or sold and prior to the date six months
after the date of issue of the Common Stock will not offer or sell any Common
Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of the Class A Common Stock to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
The Company and all of the stockholders who are not Selling Stockholders
(other than one stockholder who owns 262 shares of Common Stock), including EKI
and directors and officers of the Company, have agreed, subject to certain
exceptions, not to offer, sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, directly or indirectly, or
64
<PAGE>
[ALTERNATE UNDERWRITING SECTION OF INTERNATIONAL PROSPECTUS]
announce the offering of any shares of Common Stock, including any such shares
beneficially owned or controlled by the Company, or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for 180 days
from the date of this Prospectus without the prior written consent of Salomon
Brothers Inc. All Selling Stockholders of the Company have agreed to the
foregoing restrictions, subject to certain exceptions, for a period of 270 days
from the date of this Prospectus.
The Company and EKI, jointly and severally, have agreed to indemnify the
Managers and the U.S. Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to payments that the
Managers and the U.S. Underwriters may be required to make in respect thereof.
During and after the Offerings, the U.S. Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
overallotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. The U.S. Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members of other broker-dealers in respect of the shares of Common Stock sold in
the Offerings for their account may be reclaimed by the syndicate if such shares
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company,
the U.S. Underwriters and the Managers. Among the factors considered in
determining the Price to Public were prevailing market conditions, the market
values of publicly traded companies that the U.S. Underwriters believed to be
somewhat comparable to the Company, the demand for the shares and for similar
securities of publicly traded companies that the U.S. Underwriters believed to
be somewhat comparable to the Company, the future prospects of the Company and
its industry in general, certain other financial and operating information of
the Company in recent periods, and other factors deemed relevant. There can be
no assurance that the prices at which the shares will sell in the public market
after the Offerings will not be lower than the Price to Public.
The U.S. Underwriters and Managers have informed the Company that they do
not expect discretionary sales by the Underwriters to exceed 8% of the Shares
being offered hereby.
The Company's Common Stock has been approved for quotation on the Nasdaq
Stock Market's National market under the symbol "ERTH."
All references to "Underwriting" in this Prospectus shall be deemed to be
references to this section-- "Subscription and Sale."
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Latham & Watkins,
Costa Mesa, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, and for
the period from November 1, 1992 (inception) through December 31, 1997 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report contains an emphasis paragraph
relating to the Company's ability to continue as a going concern), and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
The portions of this Prospectus entitled "Risk Factors--Protection of
Proprietary Technology" and "Business--Patents, Proprietary Rights and
Trademarks" have been reviewed and approved by Workman, Nydegger & Seeley, Salt
Lake City, Utah, as experts in patent law.
65
<PAGE>
[ALTERNATE BACK COVER OF INTERNATIONAL PROSPECTUS]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 25
Management................................................................ 41
Certain Transactions...................................................... 50
Principal and Selling Stockholders........................................ 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Certain United States Federal Income Tax Considerations................... 59
Subscription and Sale..................................................... 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
13,200,000 Shares
[LOGO]
Common Stock
------
PROSPECTUS
, 1998
---------
Salomon Smith Barney
International
Credit Suisse First Boston
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Registration Fee................................................................ $ 96,600
NASD Fees....................................................................... 25,500
Nasdaq National Market Fees..................................................... 50,000
Printing Expenses............................................................... 425,000
Legal Fees and Expenses......................................................... 800,000
Transfer Agent and Registrar Fees............................................... 3,300
Accounting Fees and Expenses.................................................... 200,000
Blue Sky Fees and Expenses...................................................... 12,000
Miscellaneous Expenses.......................................................... 7,600
------------
TOTAL......................................................................... $ 1,620,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law (the "DGCL") makes
provision for the indemnification of officers and directors in terms
sufficiently broad to indemnify officers and directors of the Company under
certain circumstances from liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. The Company's Charter and
Bylaws provide, in effect, that, to the fullest extent and under the
circumstances permitted by Section 145 of the DGCL, the Company will indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is a
director or officer of the Company or is or was serving at the request of the
Company as a director or officer of another corporation or enterprise. The
Company may, in its discretion, similarly indemnify its employees and agents.
The Charter relieves its directors from monetary damages to the Company or its
stockholders for breach of such director's fiduciary duty as directors to the
fullest extent permitted by the DGCL. Under Section 102(b)(7) of the DGCL, a
corporation may relieve its directors from personal liability to such
corporation or its stockholders for monetary damages for any breach of their
fiduciary duty as directors except (i) for a breach of the duty of loyalty, (ii)
for failure to act in good faith, (iii) for intentional misconduct or knowing
violation of law, (iv) for willful or negligent violation of certain provisions
in the DGCL imposing certain requirements with respect to stock repurchases,
redemption and dividends, or (v) for any transactions from which the director
derived an improper personal benefit. Depending upon the character of the
proceeding, under Delaware law, the Company may indemnify against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding if the person indemnified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interest of the
Company, and, with respect to any criminal action or proceeding, had no cause to
believe his or her conduct was unlawful. To the extent that a director or
officer of the Company has been successful in the defense of any action, suit or
proceeding referred to above, the Company will be obligated to indemnify him or
her against expenses (including attorneys' fees) actually and reasonably
incurred in connection therewith.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 2, 1992 the Company authorized the issuance of 315,000 shares of
Common Stock for $10,000 cash to E. Khashoggi Industries, a California
partnership in which Essam Khashoggi, a director of the Company, owns a 90%
beneficial interest. The sale of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act.
In September 1993, the Company sold an aggregate of 26,675 shares of its
Series A Preferred Stock at $1,000 per share for an aggregate of $26,675,000 in
private transactions with 24 individual and institutional investors, each of
which the Company believes to be an "accredited investor" within the meaning of
Rule 501 of the Securities Act. Salomon Brothers Inc served as placement agent
and earned a placement agent fee of $1,000,000 and 1,000 shares of Series A
Preferred Stock. The sales of shares in the offering were exempt from
registration pursuant to Section 4(2) of the Securities Act.
In November 1996, in consideration of the extension of a line of credit
financing arrangement that ultimately allowed for a borrowing capacity of
$9,000,000, the Company issued warrants to Imperial Bank which entitle the
lender to purchase shares of common stock equal to $300,000, divided by the
price per share of the Company's Common Stock in an initial public offering and
$450,000 divided by 110% of the price per share in the initial public offering.
The issuance of these warrants were exempt from registration pursuant to Section
4(2) of the Securities Act.
In October 1997, in consideration of an increase of a line of credit from
$9,000,000 to $13,000,000, the Company issued a warrant to Imperial Bank which
entitles the lender to purchase common stock shares equal to $250,000 divided by
110% of the price per share in the initial public offering. The issuance of this
warrant was exempt from registration pursuant to Section 4(2) of the Securities
Act.
In December 1997, in consideration of an increase in a line of credit from
$13,000,000 to $14,000,000, the Company issued a warrant to Imperial Bank which
entitles the lender to purchase common stock shares equal to $50,000 divided by
110% of the price per share in the initial public offering. The issuance of this
warrant was exempt from registration pursuant to Section 4(2) of the Securities
Act.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.+
3.2 Bylaws of EarthShell Container Corporation.+
3.3 Certificate of Designation, Preferences Relative, Participating, Optional and Other
Special Rights of the Company's Series A Cumulative Senior Convertible Preferred
Stock.+
3.4 Amended and Restated Certificate of Incorporation of the Company.+
3.5 Amended and Restated Bylaws of the Company.+
4.1 Specimen certificate of Common Stock.+
5.1 Opinion and consent of Gibson, Dunn & Crutcher LLP.
10.1 Amended and Restated License Agreement dated February 28, 1995 by and between the
Company and E. Khashoggi Industries ("EKI").+
10.2 Registration Rights Agreement dated as of February 28, 1995 by and between the Company
and EKI, as amended.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.3 Employment Agreement dated October 19, 1993 by and between the Company and Scott
Houston, as amended.+
10.4 Stock Purchase Agreement dated as of September 16, 1993 by and between the Company and
the persons named therein.+
10.5 Registration Rights Agreement dated as of September 16, 1993 by and between the Company
and the persons named therein, as amended.+
10.6 Sublicense Agreement dated June 19, 1995 by and between the Company and Dopaco, Inc, as
amended.+
10.7 Sublicense Agreement dated November 9, 1994 by and between the Company and Genpak
Corporation, as amended.+
10.8 Sublicense Agreement dated October 7, 1994 by and between the Company and Sweetheart Cup
Company Inc.+
10.9 Sublicense Agreement dated October 21, 1993 by and between the Company and International
Paper.+
10.10 Sublicense Agreement dated October 4, 1993 by and between the Company and Mobil Chemical
Company.+
10.11 EarthShell Container Corporation 1994 Stock Option Plan.+
10.12 EarthShell Container Corporation 1995 Stock Incentive Plan.+
10.13 Form of Stock Option Agreement under the EarthShell Container Corporation 1994 Stock
Option Plan.+
10.14 Form of Stock Option Agreement under the EarthShell Container Corporation 1995 Stock
Incentive Plan.+
10.15 Letter from Imperial Bank to the Company dated March 18, 1998.
10.16 Warrant to Purchase Stock issued July 2, 1996 by the Company to Imperial Bank.+
10.17 Credit Agreement dated June 7, 1996 by and between the Company and Imperial Bank.+
10.18 Warrant to Purchase Stock issued June 7, 1996 by the Company to Imperial Bank.+
10.19 Employment Agreement dated October 1, 1997 by and between the Company and Simon K.
Hodson.+
10.20 Amended and Restated Technical Services and Sublease Agreement dated October 1, 1997 by
and between the Company and EKI.+
10.21 Amended and Restated Agreement for Allocation of Patent Costs dated October 1, 1997 by
and between the Company and EKI.+
10.22 Promissory Note dated December 31, 1997 in the principal amount of $14,000,000 made by
the Company in favor of Imperial Bank.+
10.23 Credit Agreement dated November 15, 1996 by and between the Company and Imperial Bank.+
10.24 Letter of Intent dated July 23, 1997 by and between Sweetheart Cup Company Inc. and the
Company.+
10.25 Letter of Intent dated November 13, 1996 by and between Prairie Packaging Inc. and the
Company.+
10.26 Warrant to Purchase Stock issued November 15, 1996 by the Company to Imperial Bank.+
10.27 Promissory Note dated December 31, 1997 in the principal amount of $32,060,887 made by
the Company in favor of EKI.+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.28 Letters dated August 22, 1997 from Shelby Yastrow to Simon K. Hodson and Simon K. Hodson
to Shelby Yastrow.+
10.29 First Amendment to Credit Agreement dated October 6, 1997 by and between the Company and
Imperial Bank.+
10.30 Warrant to Purchase Stock issued October 6, 1997 by the Company to Imperial Bank.+
10.31 Sublicense Agreement dated October 16, 1997 by and between the Company and Sweetheart
Cup Company Inc.+
10.32 Operating Agreement for the Production of Hinged Sandwich Containers for McDonald's
Corporation between Sweetheart Cup Company Inc. and the Company dated as of October
16, 1997.+
10.33 Lease Agreement--Commercial Building dated February 1, 1997 between the Company and PDG,
Ltd.+
10.34 Second Amendment to Credit Agreement dated December 31, 1997 by and between the Company
and Imperial Bank.+
10.35 Warrant to Purchase Stock dated December 31, 1997 by the Company to Imperial Bank.+
10.36 Letter Agreement dated January 14, 1998 by and between the Company and Prairie
Packaging, Inc.+
10.37 Letter Agreement re Haas/BIOPAC Technology dated February 17, 1998 by and between the
Company and EKI.+
10.38 Second Amendment to 1995 Stock Incentive Plan of the Company.+
10.39 Amendment No. 2 to Registration Rights Agreement dated as of September 16, 1993.+
10.40 Amendment No. 2 to Registration Rights Agreement dated February 28, 1995.+
10.41 Promissory Note dated October 31, 1997 in the principal amount of $29,832.61 made by the
Company in favor of Montecito Bank & Trust.+
10.42 Employment Agreement dated February 16, 1998 between the Company and David H. Kennedy.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Workman, Nydegger & Seeley.
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).
23.4 Consent of Cal Recovery, Inc.
23.5 Consent of The Research Foundation of the State University of New York.
24.1 Power of Attorney.+
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out of the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable, in the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense in any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Barbara, State of
California, on March 23, 1998.
EARTHSHELL CONTAINER CORPORATION
By: /s/ SIMON K. HODSON
-----------------------------------------
Simon K. Hodson
VICE CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Chairman of the Board March 23, 1998
Essam Khashoggi
Vice Chairman of the
/s/ SIMON K. HODSON Board, Chief Executive
- ------------------------------ Officer and President March 23, 1998
Simon K. Hodson (Principal Executive
Officer)
* Chief Financial Officer
- ------------------------------ (Principal Financial and March 23, 1998
D. Scott Houston Accounting Officer)
*
- ------------------------------ Secretary and Director March 23, 1998
John Daoud
- ------------------------------ Director
James P. Argyropoulos
*
- ------------------------------ Director March 23, 1998
Ellis Jones
*
- ------------------------------ Director March 23, 1998
Layla Khashoggi
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director
Graham H. Phillips
*
- ------------------------------ Director March 23, 1998
William A. Marquard
*
- ------------------------------ Director March 23, 1998
Jerold H. Rubinstein
</TABLE>
*By: /s/ SIMON K. HODSON
-------------------------
Simon K. Hodson March 23, 1998
ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.+
3.2 Bylaws of EarthShell Container Corporation.+
3.3 Certificate of Designation, Preferences Relative, Participating, Optional and Other
Special Rights of the Company's Series A Cumulative Senior Convertible Preferred
Stock.+
3.4 Amended and Restated Certificate of Incorporation of the Company.+
3.5 Amended and Restated Bylaws of the Company.+
4.1 Specimen certificate of Common Stock.+
5.1 Opinion and consent of Gibson, Dunn & Crutcher LLP.
10.1 Amended and Restated License Agreement dated February 28, 1995 by and between the
Company and E. Khashoggi Industries ("EKI").+
10.2 Registration Rights Agreement dated as of February 28, 1995 by and between the Company
and EKI, as amended.+
10.3 Employment Agreement dated October 19, 1993 by and between the Company and Scott
Houston, as amended.+
10.4 Stock Purchase Agreement dated as of September 16, 1993 by and between the Company and
the persons named therein.+
10.5 Registration Rights Agreement dated as of September 16, 1993 by and between the Company
and the persons named therein, as amended.+
10.6 Sublicense Agreement dated June 19, 1995 by and between the Company and Dopaco, Inc, as
amended.+
10.7 Sublicense Agreement dated November 9, 1994 by and between the Company and Genpak
Corporation, as amended.+
10.8 Sublicense Agreement dated October 7, 1994 by and between the Company and Sweetheart Cup
Company Inc.+
10.9 Sublicense Agreement dated October 21, 1993 by and between the Company and International
Paper.+
10.10 Sublicense Agreement dated October 4, 1993 by and between the Company and Mobil Chemical
Company.+
10.11 EarthShell Container Corporation 1994 Stock Option Plan.+
10.12 EarthShell Container Corporation 1995 Stock Incentive Plan.+
10.13 Form of Stock Option Agreement under the EarthShell Container Corporation 1994 Stock
Option Plan.+
10.14 Form of Stock Option Agreement under the EarthShell Container Corporation 1995 Stock
Incentive Plan.+
10.15 Letter from Imperial Bank to the Company dated February 5, 1998.
10.16 Warrant to Purchase Stock issued July 2, 1996 by the Company to Imperial Bank.+
10.17 Credit Agreement dated June 7, 1996 by and between the Company and Imperial Bank.+
10.18 Warrant to Purchase Stock issued June 7, 1996 by the Company to Imperial Bank.+
10.19 Employment Agreement dated October 1, 1997 by and between the Company and Simon K.
Hodson.+
10.20 Amended and Restated Technical Services and Sublease Agreement dated October 1, 1997 by
and between the Company and EKI.+
10.21 Amended and Restated Agreement for Allocation of Patent Costs dated October 1, 1997 by
and between the Company and EKI.+
10.22 Promissory Note dated December 31, 1997 in the principal amount of $14,000,000 made by
the Company in favor of Imperial Bank.+
10.23 Credit Agreement dated November 15, 1996 by and between the Company and Imperial Bank.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.24 Letter of Intent dated July 23, 1997 by and between Sweetheart Cup Company Inc. and the
Company.+
10.25 Letter of Intent dated November 13, 1996 by and between Prairie Packaging Inc. and the
Company.+
10.26 Warrant to Purchase Stock issued November 15, 1996 by the Company to Imperial Bank.+
10.27 Promissory Note dated December 31, 1997 in the principal amount of $32,060,887 made by
the Company in favor of EKI.+
10.28 Letters dated August 22, 1997 from Shelby Yastrow to Simon K. Hodson and Simon K. Hodson
to Shelby Yastrow.+
10.29 First Amendment to Credit Agreement dated October 6, 1997 by and between the Company and
Imperial Bank.+
10.30 Warrant to Purchase Stock issued October 6, 1997 by the Company to Imperial Bank.+
10.31 Sublicense Agreement dated October 16, 1997 by and between the Company and Sweetheart
Cup Company Inc.+
10.32 Operating Agreement for the Production of Hinged Sandwich Containers for McDonald's
Corporation between Sweetheart Cup Company Inc. and the Company dated as of October
16, 1997.+
10.33 Lease Agreement--Commercial Building dated February 1, 1997 between the Company and PDG,
Ltd.+
10.34 Second Amendment to Credit Agreement dated December 31, 1997 by and between the Company
and Imperial Bank.+
10.35 Warrant to Purchase Stock dated December 31, 1997 by the Company to Imperial Bank.+
10.36 Letter Agreement dated January 14, 1998 by and between the Company and Prairie
Packaging, Inc.+
10.37 Letter Agreement re Haas/BIOPAC Technology dated February 17, 1998 by and between the
Company and EKI.+
10.38 Second Amendment to 1995 Stock Incentive Plan of the Company.+
10.39 Amendment No. 2 to Registration Rights Agreement dated as of September 16, 1993.+
10.40 Amendment No. 2 to Registration Rights Agreement dated February 28, 1995.+
10.41 Promissory Note dated October 31, 1997 in the principal amount of $29,832.61 made by the
Company in favor of Montecito Bank & Trust.+
10.42 Employment Agreement dated February 16, 1998 between the Company and David H. Kennedy.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Workman, Nydegger & Seeley.
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).
23.4 Consent of Cal Recovery, Inc.
23.5 Consent of The Research Foundation of the State University of New York.
24.1 Power of Attorney.+
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 1.1
EarthShell Corporation
10,560,000 Shares (1)
Common Stock
($.01 par value)
U.S. Underwriting Agreement
New York, New York
March , 1998
Smith Barney Inc.
Credit Suisse First Boston Corporation
As U.S. Representatives of the several
U.S. Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
EarthShell Corporation, a Delaware corporation (the "Company"), and
the persons named in Schedule II hereto (the "Selling Stockholders"), propose
to sell to the underwriters named in Schedule I hereto (the "U.S.
Underwriters"), for whom you (the "U.S. Representatives," together with the
International Representatives, as defined in the International Underwriting
Agreement, being hereinafter called the "Representatives") are acting as
representatives, 10,560,000 shares of Common Stock, par value $.01 ("Common
Stock"), of the Company (said shares to be issued and sold by the Company and
shares to be sold by the Selling Stockholders collectively being hereinafter
called the "U.S. Underwritten Securities"). The Company and certain of the
Selling Stockholders (the "Contributing Stockholders") also propose to grant
to the U.S. Underwriters an option to purchase up to 1,584,000 additional
shares of Common Stock (the "U.S. Option Securities"; the U.S. Option
Securities, together with the U.S. Underwritten Securities, being hereinafter
called the "U.S. Securities"). It is understood that the Company and the
Selling Stockholders are concurrently entering into an International
Underwriting Agreement dated the date hereof (the "International Underwriting
Agreement") providing for the sale by the Company and the Selling
Stockholders of an aggregate of 2,640,000 shares of Common Stock (said shares
to be sold by the Company and the Selling Stockholders) pursuant to the
International Underwriting Agreement being hereinafter called the
"International Underwritten Securities", and providing for the grant to the
International Underwriters, as
- --------------------
(1) Plus an option to purchase from Earthshell Corporation and certain of
the Selling Stockholders up to 1,584,000 additional shares to cover
over-allotments.
<PAGE>
defined in the International Underwriting Agreement (the International
Underwriters, together with the U.S. Underwriters, being hereinafter called the
"Underwriters") of an option to purchase from the Company and the Contributing
Stockholders up to 396,000 additional shares of Common Stock (the "International
Option Securities"; the International Option Securities, together with the
International Underwritten Securities, being hereinafter called the
"International Securities" and the U.S. Securities, together with the
International Securities, being hereinafter called the "Securities"). It is
further understood and agreed that the International Underwriters and the U.S.
Underwriters have entered into an Agreement Between U.S. Underwriters and
International Underwriters dated the date hereof (the "Agreement Between U.S.
Underwriters and International Underwriters"), pursuant to which, among other
things, the International Underwriters may purchase from the U.S. Underwriters a
portion of the U.S. Securities to be sold pursuant to the U.S. Underwriting
Agreement and the U.S. Underwriters may purchase from the International
Underwriters a portion of the International Securities to be sold pursuant to
the International Underwriting Agreement. To the extent there are no additional
U.S. Underwriters listed on Schedule I other than you, the term U.S.
Representatives as used herein shall mean you, as U.S. Underwriters, and the
terms U.S. Representatives and U.S. Underwriters shall mean either the singular
or plural as the context requires.
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with,
each U.S. Underwriter as set forth below in this Section 1. Certain terms used
in this Section 1 are defined in Section 17 hereof.
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (file
number 333-13287) on Form S-1, including related preliminary prospectuses,
for the registration under the Act of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including the related preliminary prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either (A) prior to the Effective Date of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (B) after the Effective Date of such
registration statement, final prospectuses in accordance with Rules 430A
and 424(b)(1), (3) or (4). In the case of clause (B), the Company has
included in such registration statement, as amended at the Effective Date,
all information (other than, at the option of the Company, Rule 430A
Information) required by the Act and the rules thereunder to be included in
such registration statement and the Prospectuses. As filed, such amendment
and form of final prospectuses, or such final prospectuses (the
"Registration Statement"), shall contain all Rule 430A Information,
together with all other such required information, and, except to the
extent the U.S. Representatives shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior to
the Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information
2
<PAGE>
and other changes (beyond that contained in the latest U.S. Preliminary
Prospectus) as the Company has advised you, prior to the Execution Time,
will be included or made therein.
It is understood that two forms of prospectus are to be used
in connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and sold
to persons other than United States and Canadian Persons. The two forms of
prospectus are identical except for the outside front cover page, the
inside front cover page, the discussion under the headings "Underwriting"
and "Subscription and Sale" and the outside back cover page. Such form of
prospectus relating to the U.S. Securities as first filed pursuant to
Rule 424(b) after the Execution Time or, if no filing pursuant to
Rule 424(b) is made, such form of prospectus included in the Registration
Statement at the Effective Date, is hereinafter called the "U.S.
Prospectus"; such form of prospectus relating to the International
Securities as first filed pursuant to Rule 424(b) after the Execution Time
or, if no filing pursuant to Rule 424(b) is made, such form of prospectus
included in the Registration Statement at the Effective Date, is
hereinafter called the "International Prospectus"; and the U.S. Prospectus
and the International Prospectus are hereinafter collectively called the
"Prospectuses."
(ii) On the Effective Date, the Registration Statement
did or will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein) and
on any date on which shares sold in respect of the Underwriters'
over-allotment option are purchased, if such date is not the Closing Date
(a "settlement date"), each Prospectus (and any supplements thereto) will,
comply in all material respects with the applicable requirements of the Act
and the rules thereunder; on the Effective Date and at the Execution Time,
the Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date and any settlement date, each
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or the
Prospectuses (or any supplement thereto) in reliance upon and in conformity
with information furnished herein or in writing to the Company by or on
behalf of any Underwriter through the Representatives specifically for
inclusion in the Registration Statement or the Prospectuses (or any
supplement thereto).
(iii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized with full corporate
power and authority to own its properties and
3
<PAGE>
conduct its business as described in the Prospectuses, and is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such qualification.
(iv) The Company's authorized equity capitalization is
as set forth in the Prospectuses; the capital stock of the Company conforms
in all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters, will be fully paid and
nonassessable; the Securities have been duly authorized for listing,
subject to official notice of issuance and evidence of satisfactory
distribution on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market"); the certificates for the Securities are in valid and
sufficient form and, in all material respects, are duplicative of the
specimen certificate filed as an exhibit to the Registration Statement; the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities,
except which rights have been effectively satisfied or waived; and, except
as set forth in the Registration Statement, the Company has not issued or
granted any options, warrants or other rights to purchase, agreements or
other obligations to issue, or issued or granted any rights to convert any
obligations into or exchange any securities for, shares of capital stock of
or ownership interests in the Company, except for any of the foregoing
which have expired or terminated or which are otherwise no longer
outstanding.
(v) There is no franchise, contract or other document
of a character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not described
or filed as required; and the statements in the Prospectuses under the
headings "Certain United States Federal Income Tax Considerations" and
"Shares Eligible for Future Sale" fairly summarize the matters therein
described.
(vi) This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms.
(vii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended;
(viii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction inside or outside of the United States
4
<PAGE>
in connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectuses.
(ix) Neither the issue and sale of the Securities nor
the consummation of any other of the transactions contemplated herein nor
the fulfillment of the terms hereof will conflict with, result in a breach
or violation of or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter or by-laws
of the Company or (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company is a
party or bound or to which its property is subject, or (iii) any statute,
law, rule, regulation, judgment, order or decree applicable to the Company
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any
of its properties.
(x) No holders of securities of the Company have
pre-emptive rights or the right to the registration of such securities
under the Registration Statement, or if such rights exist, they have been
validly and legally satisfied or waived and will not be violated by the
transactions contemplated in this Agreement.
(xi) The consolidated financial statements and
schedules of the Company included in the Prospectuses and the Registration
Statement present fairly in all material respects the financial condition,
results of operations and cash flows of the Company as of the dates and for
the periods indicated, comply as to form with the applicable accounting
requirements of the Act and the rules and regulations thereunder and have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under the
caption "Selected Financial Data" in the Prospectuses and Registration
Statement fairly present, on the basis stated in the Prospectuses and the
Registration Statement, the information included therein.
(xii) No action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving
the Company or its property is pending or, to the best knowledge of the
Company, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to have a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto) (a "Material Adverse
Effect").
(xiii) The Company owns or leases all such properties as
are necessary to the conduct of its operations as presently conducted; the
Company is not in
5
<PAGE>
violation of any law, rule or regulation of any Federal, state or local
governmental or regulatory authority applicable to it or is not in
non-compliance with any term or condition of, or has failed to obtain and
maintain in effect, any license, certificate, permit or other governmental
authorization required for the ownership or lease of its property or the
conduct of its business, which violation, non-compliance or failure would
individually or in the aggregate have a Material Adverse Effect; and the
Company has not received notice of any proceedings relating to the
revocation or material modification of any such license, certificate,
permit or other authorization.
(xiv) The Company is not in violation or default of
(i) any provision of its charter or by-laws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which it is a party or bound or to which its property is subject, or
(iii) any statute, law, rule or regulation, or any judgment, order or
decree of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the Company or
any of its properties, as applicable.
(xv) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and delivered their report with respect
to the audited consolidated financial statements and schedules included in
the Prospectuses, are independent public accountants with respect to the
Company within the meaning of the Act and the applicable published rules
and regulations thereunder.
(xvi) There are no transfer taxes or other similar fees
or charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the execution
and delivery of this Agreement or the issuance by the Company or sale by
the Company of the Securities.
(xvii) The Company has filed all foreign, federal, state
and local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied against
it, to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested in
good faith or as would not have a Material Adverse Effect.
(xviii) No labor disturbance by or dispute with the
employees of the Company exists or is threatened or imminent that could
result in a Material Adverse Effect.
(xix) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are prudent and customary in the businesses in which they are engaged;
the Company has not been refused any insurance coverage sought or applied
for; and the Company has no reason to
6
<PAGE>
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost
that would not have a Material Adverse Effect.
(xx) The Company possesses all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its businesses, and the
Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xxi) The Company is not in violation of any federal or
state law or regulation relating to occupational safety and health or to
the storage, handling or transportation of hazardous or toxic materials and
the Company has received all permits, licenses or other approvals required
of it under applicable federal and state occupational safety and health and
environmental laws and regulations to conduct its business, and the Company
is in compliance with all terms and conditions of any such permit, license
or approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, result in a Material Adverse Effect.
(xxii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxiii) The Company owns or has obtained licenses for the
patents, patent applications, trade and service marks, trade secrets and
other intellectual properties referenced or described in the Prospectuses
as being owned by or licensed to it (collectively, the "Intellectual
Property"). Except as set forth in the Prospectuses under the caption
"Business--Patents, Proprietary Rights and Trademarks," (a) to the
Company's knowledge, there are no rights of third parties to any such
Intellectual Property; (b) to the Company's knowledge, there is no material
infringement by third parties of any such Intellectual Property; (c) there
is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others challenging the Company's rights in or to any
such Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim; (d) to the Company's
knowledge, there is no pending or threatened action, suit, proceeding or
claim by others
7
<PAGE>
challenging the validity or scope of any such Intellectual Property, and
the Company is unaware of any facts which would form a reasonable basis
for any such claim; (e) there is no pending or, to the Company's
knowledge, threatened action, suit, proceeding or claim by others that
the Company infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the
Company is unaware of any other fact which would form a reasonable basis
for any such claim; (f) to the Company's knowledge, there is no Patent
or published Patent application which contains claims that infringe any
Intellectual Property described in the Prospectuses as being owned by or
licensed to the Company or that interferes with the issued or pending
claims of any such Intellectual Property; and (g) to the Company's
knowledge, there is no prior art that may render any Patent licensed to
the Company invalid or any Patent application licensed to the Company
unpatentable which has not been disclosed to the Patent and Trademark
Office. The Company owns the Intellectual Property or has the rights to
the Intellectual Property that is necessary to conduct its business as
described in the Prospectuses.
(xxiv) Except as disclosed in the Registration Statement
and the Prospectuses, the Company (i) does not have any material lending or
other relationship with any bank or lending affiliate of Salomon Brothers
Inc, Smith Barney Inc. or Credit Suisse First Boston Corporation, and
(ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any affiliate of
Salomon Brothers Inc, Smith Barney Inc., Credit Suisse First Boston
Corporation or any other Underwriter, except for cumulative dividends and
accrued interest payable upon redemption of the Company's Series A
Cumulative Senior Convertible Preferred Stock.
(xxv) The Company does not own or control, either
directly or indirectly, any other corporation or the capital stock of any
other corporation.
(xxvi) Except as disclosed in the Prospectuses, there are
no contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like payment
in connection with the Offering.
(xxvii) Except as disclosed in the Prospectuses, the
Company has good and marketable title to all properties and assets owned by
it, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use
made or to be made thereof by it; and except as disclosed in the
Prospectuses, the Company holds any leased real or personal property under
valid and enforceable leases with no exceptions that would materially
interfere with the use or to be made thereof by them.
(xxviii) Since the date of the latest audited financial
statements included in the Prospectuses, there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the condition
8
<PAGE>
(financial or otherwise), business, prospects, properties or results of
operations of the Company, and, except as disclosed in or contemplated by
the Prospectuses, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(xxix) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business)
or guarantees of indebtedness by the Company or other agreements or
transactions with, to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of
them, except as disclosed in the Registration Statement and the
Prospectuses.
(xxx) The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliated located in Cuba.
(xxxi) Unless otherwise agreed to in writing by the
Representatives, the Company has furnished to the Representatives a letter
substantially in the form of Exhibit A hereto from each officer, director
and stockholder of the Company addressed to the Underwriters, in which each
such person has agreed that, until such date which is (a) 270 days after
the Closing Date if such person is a Selling Stockholder or (b) 180 days
after the Closing Date if such person is not a Selling Stockholder, without
the prior written consent of Salomon Brothers Inc, such person will not,
directly or indirectly, offer, sell, contract to sell, grant any option or
warrant for the sale of, register, loan, pledge, grant any rights with
respect to, or otherwise transfer or dispose of any shares of capital stock
of the Company or securities convertible into or exchangeable or
exercisable for, or any rights to purchase or acquire, such shares of
capital stock, including, without limitation, Common Stock which now or
hereafter may be deemed to be beneficially owned by such person, subject to
certain exceptions specified therein. It is understood that as joint
book-running managers Salomon Brothers Inc and Smith Barney Inc., on the
one hand, and Credit Suisse First Boston Corporation, on the other hand,
have agreed not to release the Company or any stockholders of the Company
from any restriction on transactions relating to the Company's securities
without the written consent of the other.
(xxxii) The Amended and Restated License Agreement between
the Company and E. Khashoggi Industries, LLC ("EKI") (the "Amended and
Restated License Agreement") has been duly authorized, executed and
delivered and is a legal, valid and binding agreement, enforceable against
EKI in accordance with its terms.
(xxxiii) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
U.S. Option Securities are to be purchased, as the case may be, and (ii)
completion of the distribution of the Securities, any offering material in
connection with the offering and sale of the Securities
9
<PAGE>
other than any Preliminary Prospectuses, the Prospectuses, the Registration
Statement and other materials, if any, permitted by the Act.
(xxxiv) The Company has not at any time during the last
five (5) years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer
or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(xxxv) The Company has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange
Act or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities
and has not effected any sales of shares of Common Stock which, if effected
by the issuer, would be required to be disclosed in response to Item 701 of
Regulation S-K, except as set forth in the Registration Statement.
Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each U.S. Underwriter.
(b) Each Selling Stockholder, severally and not jointly,
represents and warrants to, and agrees with, each U.S. Underwriter that:
(i) Such Selling Stockholder is the lawful owner of
the Securities to be sold by such Selling Stockholder hereunder and under
the International Underwriting Agreement and upon sale and delivery of, and
payment for, such Securities, as provided herein, such Selling Stockholder
will convey good and marketable title to such Securities, free and clear of
all liens, encumbrances, equities and claims whatsoever.
(ii) Such Selling Stockholder has no reason to believe
that the discussion contained under the caption "Principal and Selling
Stockholders" contained in the Registration Statement and Prospectuses is
not true and correct.
(iii) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities and has not effected any sales of shares of Common Stock
which, if effected by the issuer, would be required to be disclosed in
response to Item 701 of Regulation S-K.
10
<PAGE>
(iv) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery pursuant
to the terms of this Agreement, under a Custody Agreement and Power of
Attorney duly authorized, executed and delivered by such Selling
Stockholder, in the form heretofore furnished to you (the "Custody
Agreement and Power of Attorney") with U.S. Stock Transfer Corporation, as
Custodian (the "Custodian"); the Custody Agreement and Power of Attorney is
a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms; the Securities represented by the certificates
so held in custody for each Selling Stockholder are subject to the
interests hereunder of the Underwriters, the Company and the other Selling
Stockholders; the arrangements for custody and delivery of such
certificates, made by such Selling Stockholder hereunder and under the
Custody Agreement and Power of Attorney, are not subject to termination by
any acts of such Selling Stockholder, or by operation of law, whether by
the death or incapacity of such Selling Stockholder or the occurrence of
any other event; and if any such death, incapacity or any other such event
shall occur before the delivery of such Securities hereunder, certificates
for the Securities will be delivered by the Custodian in accordance with
the terms and conditions of this Agreement and the Custody Agreement and
Power of Attorney as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received
notice of such death, incapacity or other event.
(v) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction inside or outside of the United States in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectuses.
(vi) Except as disclosed in the Prospectuses, there are
no contracts, agreements or understandings between the Selling Stockholders
and any person, including the Company, that would give rise to a valid
claim against the Selling Stockholder, the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
the Offering.
(vii) Neither the sale of the Securities being sold by
such Selling Stockholder, nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder, or the
fulfillment of the terms hereof by such Selling Stockholder will conflict
with, result in a breach or violation of, or constitute a default under any
law or the charter or by-laws or trust documents of such Selling
Stockholder or the terms of any indenture or other agreement or instrument
to which such Selling Stockholder, or any of its subsidiaries is a party or
bound, or any judgment, order or decree applicable to such Selling
Stockholder, or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder, or any of its subsidiaries.
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(viii) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in connection
with the offering and sale of the Securities.
(ix) Such Selling Stockholder has reviewed the
"Principal and Selling Stockholders" section of the Prospectuses and will
comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the
Closing Date and will advise one of its Attorneys and Smith Barney Inc.,
prior to the Closing Date if any statement to be made on behalf of such
Selling Stockholder contemplated hereunder would be inaccurate if made as
of the Closing Date.
(x) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or
right of first refusal or other similar right to purchase any of the
Securities that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement; such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering
made by the Prospectuses, other than such rights of participation as have
been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms
of this Agreement; and such Selling Stockholder does not own any warrants,
options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectuses.
(xi) Such Selling Stockholder has executed and
furnished to the Company a letter substantially in the form of Exhibit A
hereto addressed to the U.S. Representatives, in which such Selling
Stockholder has agreed that, until such date which is 270 days after the
Closing Date, without the prior written consent of Salomon Brothers Inc,
such Selling Stockholder will not, directly or indirectly, offer, sell,
contract to sell, grant any option or warrant for the sale of, register,
loan, pledge, grant any rights with respect to, or otherwise transfer or
dispose of any shares of capital stock of the Company or securities
convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, such shares of capital stock, including, without
limitation, Common Stock which now or hereafter may be deemed to be
beneficially owned by such Selling Stockholder, subject to certain
exceptions provided therein It is understood that as joint book-running
managers Salomon Brothers Inc and Smith Barney Inc., on the one hand, and
Credit Suisse First Boston Corporation, on the other hand, have agreed not
to release the Company or any stockholders of the Company from any
restriction on transactions relating to the Company's securities without
the written consent of the other.
(xii) Such Selling Stockholder will cooperate to the
extent necessary to cause the Registration Statement or any post-effective
amendment thereto to become effective at the earliest possible time.
(xiii) Such Selling Stockholder has no reason to
believe that the Preliminary Prospectuses dated February 24, 1998
contained any untrue statements of fact that would be considered
material by an investor or failed to contain material facts necessary to
make the statements contained therein, in light of the circumstances
under which they were made, not misleading; it being understood that
such Selling Stockholder has neither verified, nor made any independent
investigation, search or inquiry of, any facts or statements made in the
Preliminary Prospectuses.
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(c) EKI represents and warrants to, and agrees with, each U.S.
Underwriter that:
(i) EKI has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized with full corporate
power and authority to own its properties and conduct its business, and is
duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification.
(ii) This Agreement has been duly authorized, executed
and delivered by EKI and constitutes a valid and binding obligation of EKI
enforceable in accordance with its terms.
(iii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction inside or outside of the United States in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectuses.
(iv) The Amended and Restated License Agreement has
been duly authorized, executed and delivered and is a legal, valid and
binding agreement, enforceable against EKI in accordance with its terms.
(v) No action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving
EKI or its property is pending or, to the best knowledge of EKI, threatened
that (i) could reasonably be expected to have a material adverse effect on
the performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
have a material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of EKI, taken as a whole,
whether or not arising from transactions in the ordinary course of
business.
(vi) EKI is not in violation or default of and the
consummation of the transactions herein contemplated will not give rise to
a claim of violation or default of (i) any provision of its charter or
by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed
of trust, note agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which it is a party or
bound or to which its property is subject, or (iii) any statute, law, rule
or regulation, or any judgment, order or decree of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over EKI or any of its properties, as
applicable.
(vii) On the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date, each Prospectus, if not
filed pursuant to Rule 424(b), will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
each Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that EKI makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or
the Prospectuses (or any supplement thereto) in reliance upon and in
conformity with information furnished herein or in writing to EKI by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectuses (or any
supplement thereto).
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2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company and each Selling
Stockholder agrees, severally and not jointly, to sell to the U.S. Underwriters
the amount of U.S. Underwritten Securities set forth opposite such person's name
on Schedule II, and each U.S. Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders, at a purchase price of
$____ per share, the amount of the U.S. Underwritten Securities set forth
opposite such U.S. Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, each Contributing Stockholder
hereby grants an option to the several U.S. Underwriters to purchase, severally
and not jointly, the amount of the U.S. Option Securities set forth opposite
their name on Schedule III at the same purchase price per share as the U.S.
Underwriters shall pay for the U.S. Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the U.S. Underwritten
Securities by the U.S. Underwriters. Said option may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day after the
date of the U.S. Prospectus upon written or telegraphic notice by the U.S.
Representatives to the Company and the Contributing Stockholders setting forth
the number of shares of the U.S. Option Securities as to which the several U.S.
Underwriters are exercising the option and the settlement date. Delivery of
certificates for the shares of U.S. Option Securities by the Company and the
Contributing Stockholders, and payment therefor to the Company and the
Contributing Stockholders, shall be made as provided in Section 3 hereof. The
maximum number of shares of the U.S. Option Securities to be sold by the Company
and the Contributing Stockholders is set forth in Schedule III hereof. If for
any reason any Contributing Stockholder fails or is unable to sell any portion
of the U.S. Option Securities set forth opposite their name in Schedule III
hereof, the Company agrees to issue and sell to the U.S. Underwriters such
additional number of securities at the same purchase price per share as the U.S.
Underwriters shall pay for the U.S. Underwritten Securities. In the event that
the U.S. Underwriters exercise less than their full over-allotment option, the
number of shares of the U.S. Option Securities to be sold by each party listed
on Schedule III shall be, as nearly as practicable, in the same proportion to
each other as are the number of shares of the U.S. Option Securities listed
opposite their respective names on said Schedule III. The number of shares of
the U.S. Option Securities to be purchased by each U.S. Underwriter shall be the
same percentage of the total number of shares of the U.S. Option Securities to
be purchased by the several U.S. Underwriters as such U.S. Underwriter is
purchasing of the U.S. Underwritten Securities, subject to such adjustments as
you in your absolute discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the U.S.
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City
time, on _______________, 1998, or at such time on such later date not more than
three Business Days after the foregoing date as the U.S. Representatives and
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the International Representatives shall designate, which date and time may be
postponed by agreement among the U.S. Representatives, the International
Representatives, the Company and the Selling Stockholders, or as provided in
Section 9 hereof (such date and time of delivery and payment for the U.S.
Securities being herein called the "Closing Date"). Delivery of the U.S.
Securities shall be made to the U.S. Representatives for the respective accounts
of the several U.S. Underwriters against payment by the several U.S.
Underwriters through the U.S. Representatives of the respective aggregate
purchase prices of the U.S. Securities being sold by the Company and each of the
Selling Stockholders to or upon the order of the Company and the Selling
Stockholders by wire transfer payable in same-day funds to two separate accounts
specified by the Company and one separate account specified by the Selling
Stockholders. Delivery of the U.S. Underwritten Securities and the U.S. Option
Securities shall be made through the facilities of The Depository Trust Company
unless the U.S. Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes,
if any, involved in the transfer to the several U.S. Underwriters of the U.S.
Securities to be purchased by them from such Selling Stockholder and the
respective U.S. Underwriters will pay any additional stock transfer taxes
involved in further transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third business day prior to the Closing Date, the Contributing Stockholders
and the Company, if applicable, will deliver the U.S. Option Securities (at the
expense of the Company) to the U.S. Representatives, at 388 Greenwich Street,
New York, New York, on the date specified by the U.S. Representatives (which
shall be within three Business Days after exercise of said option) and
certificates for the U.S. Option Securities in such names and denominations as
the U.S. Representatives shall have requested for the respective accounts of the
several U.S. Underwriters, against payment by the several U.S. Underwriters
through the U.S. Representatives of the purchase price thereof to or upon the
order of the Contributing Stockholders and the Company, if applicable, by wire
transfer payable in same-day funds to one account specified by the Contributing
Stockholders and one account specified by the Company, if applicable. If
settlement for the U.S. Option Securities occurs after the Closing Date, the
Company and the Contributing Stockholders will deliver to the U.S.
Representatives on the settlement date for the U.S. Option Securities, and the
obligation of the U.S. Underwriters to purchase the U.S. Option Securities shall
be conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
It is understood and agreed that the Closing Date shall occur
simultaneously with the "Closing Date" under the International Underwriting
Agreement, and that the settlement date, if any, shall occur simultaneously with
the "settlement date" under the International Underwriting Agreement.
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4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the U.S. Securities for sale to the public as set
forth in the U.S. Prospectus.
5. AGREEMENTS.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereto, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectuses or any Rule 462(b)
Registration Statement unless the Company has furnished you a copy for your
review prior to filing and will not file any such proposed amendment or
supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective
pursuant to Rule 430A, or filing of the Prospectuses is otherwise required
under Rule 424(b), the Company will cause the Prospectuses, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the U.S.
Representatives of such timely filing. The Company will promptly advise
the U.S. Representatives (A) when the Registration Statement, if not
effective at the Execution Time, shall have become effective, (B) when the
Prospectuses, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule
462(b) Registration Statement shall have been filed with the Commission,
(C) when, prior to termination of the offering of the Securities, any
amendment to the Registration Statement shall have been filed or become
effective, (D) of any request by the Commission or its staff for any
amendment of the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectuses or of any additional
information, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order or the suspension of any such qualification and, if
issued, to obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which either of the Prospectuses as then supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall be
necessary to amend the Registration Statement or supplement either of the
Prospectuses to comply with the Act or the rules thereunder, the Company
promptly will (i) prepare
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and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance and
(ii) supply any supplemented Prospectuses to you in such quantities as you
may reasonably request.
(iii) As soon as practicable, the Company will make
generally available to its security holders and to the U.S. Representatives
an earnings statement or statements of the Company which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
(iv) The Company will furnish to the U.S.
Representatives and counsel for the U.S. Underwriters, without charge,
signed copies of the Registration Statement (including exhibits thereto)
and to each other U.S. Underwriter and each Selling Stockholder a copy of
the Registration Statement (without exhibits thereto) and, so long as
delivery of a prospectus by an U.S. Underwriter or dealer may be required
by the Act or otherwise required, as many copies of each U.S. Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the U.S.
Representatives may reasonably request. The Company will pay the expenses
of printing or other production of all documents relating to the offering.
(v) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the U.S. Representatives may designate, will maintain such
qualifications in effect so long as required for the distribution of the
U.S. Securities and will pay any fee of the National Association of
Securities Dealers, Inc., in connection with its review of the offering.
(vi) The Company will not, for a period of 270 days
following the Execution Time, without the prior written consent of Salomon
Brothers Inc and the U.S. Representatives, offer, sell or contract to sell,
or otherwise dispose of (or enter into any transaction which is designed
to, or could be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other shares of Common Stock
or any securities convertible into, or exchangeable for, shares of Common
Stock; PROVIDED, HOWEVER, that the Company may issue and sell Common Stock
pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan of the Company in effect at the Execution Time
and the Company may issue Common Stock issuable upon the conversion of
securities or the exercise of warrants outstanding at the Execution Time.
(vii) For a period of 270 days following the Execution
Time, the Company will not, without the prior written consent of Smith
Barney Inc. and the U.S. Representatives, release or waive any of the
obligations of its stockholders pursuant to
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any agreements between the Company and its stockholders which restrict the
transfer, encumbrance, offer or disposal of the Company's securities.
(b) Each U.S. Underwriter agrees that (i) it is not purchasing
any of the U.S. Securities for the account of anyone other than a United States
or Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any of the U.S. Securities or distribute any U.S.
Prospectus to any person outside the United States or Canada, or to anyone other
than a United States or Canadian Person, and (iii) any dealer to whom it may
sell any of the U.S. Securities will represent that it is not purchasing for the
account of anyone other than a United States or Canadian Person and agree that
it will not offer or resell, directly or indirectly, any of the U.S. Securities
outside the United States or Canada, or to anyone other than a United States or
Canadian Person or to any other dealer who does not so represent and agree;
PROVIDED, HOWEVER, that the foregoing shall not restrict (A) purchases and sales
between the International Underwriters on the one hand and the U.S. Underwriters
on the other hand pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, (B) stabilization transactions contemplated under
the Agreement Between U.S. Underwriters and International Underwriters,
conducted through Smith Barney Inc. (or through the U.S. Representatives and
International Representatives) as part of the distribution of the Securities,
and (C) sales to or through (or distributions of U.S. Prospectuses or U.S.
Preliminary Prospectuses to) United States or Canadian Persons who are
investment advisors, or who otherwise exercise investment discretion, and who
are purchasing for the account of anyone other than a United States or Canadian
Person.
(c) The agreements of the U.S. Underwriters set forth in
paragraph (b) of this Section 5 shall terminate upon the earlier of the
following events:
(i) a mutual agreement of the U.S. Representatives and
the International Representatives to terminate the selling restrictions set
forth in paragraph (b) of this Section 5 and in Section 5(b) of the
International Underwriting Agreement; or
(ii) the expiration of a period of 30 days after the
Closing Date, unless (A) the Representatives shall have given notice to the
Company that the distribution of the International Securities by the
International Underwriters has not yet been completed, or (B) the
Representatives shall have given notice to the Company that the
distribution of the U.S. Securities by the U.S. Underwriters has not yet
been completed. If such notice by the Representatives or the International
Representatives is given, the agreements set forth in such paragraph
(b) shall survive until the earlier of (1) the event referred to in
clause (i) of this subsection (c) or (2) the expiration of an additional
period of 30 days from the date of any such notice.
(d) Unless otherwise agreed to by the Representatives, each
Selling Stockholder agrees that, until such date which is 270 days after the
Closing Date, without the prior written consent of Salomon Brothers Inc and the
U.S. Representatives, such Selling Stockholder will not, directly or indirectly,
offer, sell, contract to sell, grant any option or warrant
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for the sale of, register, loan, pledge, grant any rights with respect to, or
otherwise transfer or dispose of any shares of capital stock of the Company or
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, such shares of capital stock, including, without
limitation, Common Stock which now or hereafter may be deemed to be beneficially
owned by such Selling Stockholder, subject to certain exceptions provided
therein. It is understood that as joint book-running managers Salomon Brothers
Inc and Smith Barney Inc., on the one hand, and Credit Suisse First Boston
Corporation, on the other hand, have agreed not to release any Selling
Stockholder from any restriction on transactions relating to the Company's
securities without the written consent of the other. Each Selling Stockholder
also agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the securities held by such
Selling Stockholder except in compliance with this restriction.
6. CONDITIONS TO THE OBLIGATIONS OF THE U.S. UNDERWRITERS. The
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the
Company, EKI and Selling Stockholders contained herein as of the Execution Time,
the Closing Date and any settlement date pursuant to Section 3 hereof, to the
accuracy of the statements of the Company, EKI and the Selling Stockholders made
in any certificates pursuant to the provisions hereof, to the performance by the
Company, EKI and the Selling Stockholders of their respective obligations to be
performed at or before the Closing Date and to the following additional
conditions:
(a) If the Registration Statement has not become effective prior
to the Execution Time, unless the U.S. Representatives and the International
Representatives agree in writing to a later time, the Registration Statement
will become effective not later than (i) 6:00 PM New York City time on the date
of determination of the public offering price, if such determination occurred at
or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the
Business Day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City time on
such date; if filing of either of the Prospectuses, or any supplement thereto,
is required pursuant to Rule 424(b), the Prospectuses, and any such supplement,
will be filed in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have furnished to the U.S. Representatives
and the Selling Stockholders the opinion of Gibson, Dunn & Crutcher LLP, counsel
for the Company, dated the Closing Date, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
Delaware, with full corporate power and authority to own its properties and
conduct its business as described in the Prospectuses, is duly qualified to
do business as a foreign corporation and is in good standing under the laws
of each jurisdiction which requires such qualification, except in
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jurisdictions in which the failure to be so qualified would not have a
Material Adverse Effect, and to the knowledge of such counsel after due
inquiry, the Company has no subsidiaries;
(ii) The Company's authorized equity capitalization is
as set forth in the Prospectuses; the capital stock of the Company conforms
in all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock (including the
Securities being sold hereunder by the Selling Stockholders) have been duly
and validly authorized and issued and are fully paid and nonassessable; the
certificates for the Securities are in valid and sufficient form; and to
the knowledge of such counsel after due inquiry, the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the Securities, except which rights have been
validly and legally satisfied or waived; and, except as set forth in the
Prospectuses, to the knowledge of such counsel after due inquiry, no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into or exchange
any securities for, shares of capital stock of or ownership interests in
the Company are outstanding, except for any of the foregoing which have
expired or terminated or which are otherwise no longer outstanding or those
set forth in the Registration Statement;
(iii) Upon delivery of the shares of Common Stock of the
Company pursuant to this Agreement and payment therefor as contemplated
herein, the Underwriters will acquire good and marketable title to such
shares of Common Stock free and clear of any lien, claim, security
interest, or other encumbrance, restriction on transfer or other defect in
title;
(iv) To the knowledge of such counsel following due
inquiry but without search of court or agency records, there is no pending
or threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company of a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectuses, and there
is no franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectuses, or to be filed as
an exhibit thereto, which is not described or filed as required; the
descriptions contained in the Prospectuses under the heading "Certain
United States Federal Income Tax Considerations" constitute fair summaries
of those statutes and regulations discussed therein applicable to the
offering of the U.S. Securities; and the statements in the Prospectuses
under the heading "Shares Eligible for Future Sale" fairly summarize the
matters therein described;
(v) The Registration Statement has become effective
under the Act; any required filing of the Prospectuses, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that
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purpose have been instituted or threatened, and the Registration Statement
and each of the Prospectuses (other than the financial statements and other
financial information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules thereunder; and the
descriptions in the Registration Statement and the Prospectuses of
statutes, legal and governmental proceedings and contracts and other
documents are accurate and fairly present the information required to be
shown; provided however, that such counsel may exclude descriptions of
statutes and legal and governmental proceedings set forth in the
Intellectual Property Portion (as defined in Section 6(c)(iv) below) and
the Regulatory Portion (as defined in Section 6(d)(i) below) of the
Registration Statement and Prospectuses, and under the headings "Risk
Factors--Environmental Perception of EarthShell Products" and
"Business--The EarthShell Solution--Environmental Impact" of the
Registration Statement and Prospectuses);
(vi) This Agreement has been duly authorized, executed
and delivered by the Company;
(vii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended;
(viii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required on behalf
of the Company in connection with the sale of the U.S. Securities as
contemplated herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any jurisdiction and the
securities laws of any jurisdiction outside the United States in connection
with the purchase and distribution of the Securities by the U.S.
Underwriters in the manner contemplated in this Agreement and in the
Prospectuses;
(ix) Neither the issue and sale of the Securities, nor
the fulfillment of the terms hereof will conflict with, result in a breach
or violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter or by-laws
of the Company or (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company is a
party or bound or to which its property is subject which is listed as an
exhibit to the Registration Statement or described in the Prospectuses, or
(iii) any statute, law, rule or regulation, or any judgment, order or
decree applicable to the Company of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its properties, except for
any violation, breach or imposition which would not have a Material Adverse
Effect;
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(x) To the knowledge of such counsel after due
inquiry, no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement except for
such rights as are specified in (a) the Registration Rights Agreement dated
February 28, 1995, (b) the Registration Rights Agreement dated September
16, 1993, (c) the Agreement between EKI and Jimmy Argyropolous dated
October 13, 1992, and (d) the Registration Rights Agreements between the
Company, Eva Ein, Kenny Loggins and Barry DeVorzon dated April 23, 1993, in
each of cases (a) through (d), which rights have been legally and validly
satisfied or waived; and
(xi) To such counsel's knowledge after due inquiry,
there are no contracts or other documents of a character required to be
filed as an exhibit to the Registration Statement or required to be
described in the Registration Statement or Prospectuses that are not filed
or described as required.
In addition, such opinion shall state that such counsel has participated in the
preparation of the Registration Statement and Prospectuses as counsel to the
Company. Such participation included conferences with officers of the Company
and the Company's independent accountants, but did not include verification by
such counsel of the facts stated in the Registration Statement and the
Prospectuses and, therefore, would not necessarily reveal any material
misstatements of fact or omission to state a material fact. On the basis of
such participation, nothing has come to such counsel's attention which causes
such counsel to believe that either the Registration Statement or the
Prospectuses (except for the financial statements and other financial
information contained therein as to which such counsel expresses no opinion) as
of their respective dates and as of the Closing Date contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the States of Delaware
(limited to the Delaware General Corporation Law only), and California or the
Federal laws of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the U.S.
Underwriters and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Reference to the Prospectuses in this paragraph (b) include any supplements
thereto at the Closing Date.
(c) The Company shall have furnished to the U.S. Representatives
and the Selling Stockholders the opinion of Workman, Nydegger & Seeley, patent
counsel for the Company, dated the Closing Date, to the effect that:
(i) EKI is listed on the records of the United States
Patent and Trademark Office as the sole holder of record of each of the
patents listed under the heading "U.S. Patents Held by the Company" on
Schedule IV attached hereto (the "U.S.
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Patents") and each of the patent applications listed under the heading
"U.S. Patent Applications Submitted by the Company" on Schedule V attached
hereto (the "U.S. Applications"). Such counsel knows of no claims of third
parties to any ownership interest or lien with respect to any of the U.S.
Patents or U.S. Applications that would conflict with the Company's License
Rights under the Amended and Restated License Agreement.
(ii) EKI is listed in the records of the appropriate
foreign office as the sole holder of record of each of the foreign patents
listed under the heading "Non-U.S. Patents Held by the Company" on Schedule
VI hereof (the "Non-U.S. Patents") (collectively, the U.S. Patents and
Non-U.S. Patents are referred to herein as the "Patents") and each of the
foreign patent applications listed under the heading "Non-U.S. Patent
Applications Submitted by the Company" on Schedule VII attached hereto (the
"Non-U.S. Applications") (collectively, the U.S. Applications and the
Non-U.S. Applications are referred to herein as the "Applications"). Such
counsel knows of no claims of third parties to any of the Non-U.S. Patents
or Non-U.S. Applications that would conflict with the Company's License
Rights under the Amended and Restated License Agreement.
(iii) Pursuant to the Amended and Restated License
Agreement, ECC's License Rights apply with respect to all of the U.S.
Patents, Non-U.S. Patents, U.S. Applications and Non-U.S. Applications
listed in Schedules IV, V, VI and VII. To the best of such counsel's
knowledge, no other person or entity has obtained any rights from EKI that
would diminish the exclusive rights the Company obtained under the Amended
and Restated License Agreement.
(iv) Such counsel has reviewed the statements under the
Registration Statement/Prospectuses captions "Risk Factors--Protection of
Proprietary Technology," "Business--The Technology," and "Business--
Patents, Proprietary Rights and Trademarks" (collectively, the
"Intellectual Property Portion") of the Registration Statement and the
Prospectuses. Insofar as such statements constitute a summary of EKI's
Patents and Applications and the Company's License Rights, and matters
related thereto, such counsel believes them to fairly, accurately and
completely summarize the legal matters, documents and proceedings relating
to such Patents and Applications and license rights described therein.
Nothing has come to the attention of such counsel which causes it to
believe that the information in the Intellectual Property Portion contains
any untrue statement of a material fact or omits to state a material fact
which is required to be stated therein or necessary to make the statements
therein not misleading.
(v) Such counsel has no knowledge of any facts that
(i) would preclude the Company from having clear, exclusive rights to the
patents and Applications as granted by the Amended and Restated License
Agreement; (ii) would lead such counsel to conclude that any of the Patents
are invalid or unenforceable; or (iii) that any patent that may ultimately
issue from one or more of the Applications would be invalid or
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<PAGE>
unenforceable. Such counsel has no knowledge of any facts that cause it to
believe that the Company lacks any rights to use all intellectual property
necessary to conduct its business as now or proposed to be conducted or as
described in the Registration Statement or the Prospectuses. Such counsel
has knowledge of no facts that would preclude the Company from using the
Patents against third parties to prevent such third parties from engaging
in infringing conduct.
(vi) Such counsel has been advised by the Company of
certain specifications for compositions and processes for use in making
foamed starch based food containers and more specifically for a container
for the McDonald's Quarter Pounder with Cheese and a container for the
McDonald's Big Mac (such specifications are attached hereto as Schedule
VIII). Such counsel is not aware of any patent owned by a party other than
EKI that would be infringed by making food containers using the Schedule
VIII specifications. Such counsel has also been advised of pre-commercial
specifications for compositions and processes for use in making cellulose
ether based inorganically filled sheets which might be useable in making
food and drink containers. Such counsel is not aware of any patent owned
by a party other than EKI that would be infringed by making food containers
using specifications for compositions and processes for use in making
cellulose ether based inorganically filled sheets.
(vii) Such counsel is not aware of any material defect
of form in the preparation or filing of the Applications on behalf of EKI.
To such counsel's knowledge none of the Applications (excepting specific
claims therein) has been finally rejected by the examining agency.
(viii) To the best of such counsel's knowledge, the
Company has complied with the United States Patent and Trademark Office
duty of candor and disclosure during the prosecution leading to the
issuance of each of the U.S. Patents.
(ix) The Amended and Restated License Agreement has
been duly authorized, executed and delivered and is a legal, valid and
binding agreement, enforceable against EKI in accordance with its terms;
(x) Such counsel knows of no pending or threatened
action, suit, proceeding or claim by governmental authorities or others
that the Company is infringing or otherwise violating any patents or trade
secrets.
(xi) Such counsel is not aware of any pending or
threatened actions, suits, proceedings or claim by governmental authorities
or others challenging the validity or scope of the Patents.
(xii) Such counsel is not aware of any infringement on
the part of any third party of any patent or trade secret in violation of
rights held by the Company.
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(d) The Company shall have furnished to the U.S. Representatives
and the Selling Stockholders the opinion of Olsson, Frank & Weeda, P.C., special
regulatory counsel for the Company, dated the Closing Date, to the effect that:
(i) The statements under the captions "Risk
Factors--FDA Regulation," and "Business--Government Regulation"
(collectively, the "Regulatory Portion") in the Registration Statement and
the Prospectuses and any amendment or supplement thereto, to the extent
that they reflect matters of law, summaries of law or regulations, or
regulatory status of the Company, are correct and complete in all material
respects, subject to the qualifications set forth therein.
(ii) Each of the components of the Company's Big Mac
sandwich container ("Big Mac Container") is either approved by the Food and
Drug Administration (the "FDA") as an indirect food additive for its
intended use, is codified in the regulations of the FDA as "generally
recognized as safe" ("GRAS"), or is regarded by the Company and its
consultants (including such counsel) as GRAS for its intended use. Sale of
products manufactured using the formulation of Ali-ite used in
manufacturing the prototype Big Mac Container does not violate the laws and
regulations of the FDA.
(iii) Nothing has come to the attention of such counsel
which causes such counsel to believe that the information contained in (a)
the Registration Statement, or any amendments thereof contained or contains
an untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (b) the Prospectuses, or any
amendments thereof, contained or contains an untrue statement of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) The Company shall have furnished to the U.S.
Representatives and the Selling Stockholders the opinion of Paul, Hastings,
Janofsky & Walker LLP, environmental counsel for the Company, dated the
Closing Date, to the effect that: nothing has come to the attention of such
counsel which causes such counsel to believe that the information contained
in (a) the Registration Statement, or any amendments thereof contained or
contains an untrue statement of a material fact or omitted or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (b) the Prospectuses, or any amendments
thereof, contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(f) The Selling Stockholders shall have furnished to the U.S.
Representatives the opinion of Milbank, Tweed, Hadley & McCloy, counsel for the
Selling Stockholders, dated the Closing Date, to the effect that:
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(i) Each Selling Stockholder is the record owner of
the Securities to be sold by such Selling Stockholder pursuant to this
Agreement or the International Underwriting Agreement; and
(ii) Upon payment for and delivery of the Securities in
accordance with the terms of this Agreement and the International
Underwriting Agreement, and assuming the Underwriters are acquiring the
Securities purchased by them in good faith without notice of any adverse
claim (as defined in Section 8102(a)(1) of the California Uniform
Commercial Code), the Underwriters will be the owners of the Securities
purchased by them, free and clear of any adverse claim.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the States of Delaware, New
York or California or the Federal laws of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion of other counsel of
good standing whom they believe to be reliable and who are satisfactory to
counsel for the U.S. Underwriters, and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Selling
Stockholders and the Contributing Stockholders and public officials.
(g) The U.S. Representatives shall have received from Latham &
Watkins, counsel for the U.S. Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the U.S. Securities, the
Registration Statement, the Prospectuses (together with any supplement thereto)
and other related matters as the U.S. Representatives may reasonably require,
and the Company and each Selling Stockholder shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(h) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board, the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectuses, any supplements to the
Prospectuses and this Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material respects on and as
of the Closing Date with the same effect as if made on the Closing Date and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge, threatened; and
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(iii) since the date of the most recent financial
statements included in the Prospectuses (exclusive of any supplement
thereto), there has been no Material Adverse Effect.
(i) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by the Chairman of the Board, the
President and the principal financial or accounting officer of such Selling
Stockholder or by or on behalf of such Selling Stockholder, individually, dated
the Closing Date, to the effect that the representations and warranties of such
Selling Stockholder in this Agreement and in the Custody Agreement and Power of
Attorney are true and correct in all material respects on and as of the Closing
Date to the same effect as if made on the Closing Date.
(j) At the Execution Time and at the Closing Date, Deloitte &
Touche LLP shall have furnished to the U.S. Representatives and the Selling
Stockholders letters, dated respectively as of the Execution Time and as of
the Closing Date, in form and substance satisfactory to the U.S.
Representatives, confirming that they are independent accountants within the
meaning of the Act and the applicable published rules and regulations
thereunder and that they have performed a review of the financial information
of the Company contained in the Registration Statement and Prospectuses in
accordance with Statement on Accounting Standards No. 71 and stating in
effect that:
(i) in their opinion the audited financial statements
and financial statement schedules and pro forma financial statements
included in the Registration Statement and the Prospectuses and reported on
by them comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company; their limited review,
in accordance with standards established under Statement on Auditing
Standards No. 71 of the unaudited interim financial information, if any,
carrying out certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments set
forth in such letter; a reading of the minutes of the meetings of the
stockholders, directors and the Executive, Compensation, Audit, Conflicts
and Stock Option committees of the Company; and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to December 31, 1997, nothing came to their attention which caused them to
believe that:
(1) any unaudited financial statements, if any,
included in the Registration Statement and the Prospectuses do not
comply in form in all material respects with applicable accounting
requirements of the Act and with the published rules and regulations
of the Commission with respect to registration statements on Form S-1;
and said unaudited financial statements are not in
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conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements included in the Registration Statement and the
Prospectuses;
(2) with respect to the period subsequent to
December 31, 1997, there were any changes in the long-term debt of the
Company or capital stock of the Company or decreases in the
stockholders' equity of the Company as compared with the amounts shown
on December 31, 1997, consolidated balance sheet included in the
Registration Statement and the Prospectuses, or for the period
subsequent to December 31, 1997 there were any decreases, as compared
with the corresponding period in the preceding year in net revenues or
income before income taxes or in total or per share amounts of net
income of the Company, except in all instances for changes or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation by the Company as to the significance
thereof unless said explanation is not deemed necessary by the U.S.
Representatives; or
(3) the information included in the Registration
Statement and Prospectuses in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary Financial
Information), Item 402 (Executive Compensation) and Item 503(d) (Ratio
of Earnings to Fixed Charges) is not in conformity with the applicable
disclosure requirements of Regulation S-K.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain information of
an accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and its subsidiaries) set forth in the
Registration Statement and the Prospectuses, including the information set
forth under the captions "Selected Financial Data" and "Experts" in the
Prospectuses, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
(iv) on the basis of a reading of the unaudited pro
forma financial statements included in the Registration Statement and the
Prospectuses (the "pro forma financial statements"); carrying out certain
specified procedures; inquiries of certain officials of the Company who
have responsibility for financial and accounting matters; and proving the
arithmetic accuracy of the application of the pro forma adjustments to the
historical amounts in the pro forma financial statements, nothing came to
their attention which caused them to believe that the pro forma financial
statements do not comply in form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
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References to the Prospectuses in this paragraph (j) include any
supplement thereto at the date of the letter.
(k) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (j) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the Company, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectuses (exclusive
of any supplement thereto) the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the sole judgment of the U.S. Representatives,
so material and adverse as to make it impractical or inadvisable to proceed with
the offering or delivery of the U.S. Securities as contemplated by the
Registration Statement (exclusive of any amendment thereof) and the Prospectuses
(exclusive of any supplement thereto).
(l) On or prior to the Execution Time, the National Association
of Securities Dealers shall have approved the Underwriters' participation in the
distribution of the Securities to be sold by the Selling Stockholders.
(m) At the Execution Time, unless otherwise agreed to in writing
by the Representatives, the Company shall have furnished to the Representatives
a letter substantially in the form of Exhibit A hereto from each officer and
director of the Company and stockholders addressed to the Representatives, in
which each such person agreed that, until such date which is (a) 270 days after
the Closing Date if such person is a Selling Stockholder or (b) 180 days after
the Closing Date if such person is not a Selling Stockholder, without the prior
written consent of Salomon Brothers Inc, such person will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for the
sale of, register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of any shares of capital stock of the Company or securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, such shares of capital stock, including, without limitation, Common
Stock which now or hereafter may be deemed to be beneficially owned by such
person, subject to certain exceptions set forth therein. It is understood that
as joint book-running managers Salomon Brothers Inc and Smith Barney Inc., on
the one hand, and Credit Suisse First Boston Corporation, on the other hand,
have agreed not to release the Company or any stockholders of the Company from
any restriction on transactions relating to the Company's securities without the
written consent of the other.
(n) On or prior to the Execution Time, the Nasdaq National
Market shall have approved the quotation of the Securities on the Nasdaq
National Market.
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(o) Prior to the Closing Date, the Company shall have furnished
to the U.S. Representatives such further information, certificates and documents
as the U.S. Representatives may reasonably request.
(p) The closing of the purchase of the International
Underwritten Securities to be issued and sold by the Company pursuant to the
International Underwriting Agreement shall occur concurrently with the closing
described herein.
(q) The Company shall have caused the conversion for all Selling
Stockholders of the shares of Series A Cumulative Senior Convertible Preferred
Stock of the Company into shares of Common Stock.
(r) The Company shall have caused the recapitalization and stock
split to become effective in which each share of Common Stock will be converted
into 262 shares of Common Stock.
(s) The Company shall have caused the Company's Certificate of
Incorporation and by-laws to be amended to, among other things, change the
Company's name to EarthShell Corporation from EarthShell Container Corporation.
(t) The Company shall have arranged for proceeds from the sale
of Common Stock contemplated hereunder to be paid to Imperial Bank in
satisfaction of all amounts owing under the Company's Credit Facility and for
termination of such Credit Facility in connection therewith.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Latham & Watkins, counsel for the U.S. Underwriters,
at 650 Town Center Drive, 20th Floor, Costa Mesa, California 92626, on the
Closing Date.
7. REIMBURSEMENT OF U.S. UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the U.S. Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the U.S. Underwriters, the Company
will reimburse the U.S. Underwriters severally through Smith Barney Inc. on
demand for all out-
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of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the proposed purchase and
sale of the U.S. Securities. If the Company is required to make any payments to
the U.S. Underwriters under this Section 7 because of any Selling Stockholder's
refusal, inability or failure to satisfy any condition to the obligations of the
U.S. Underwriters set forth in Section 6, such Selling Stockholders shall,
together with any other Selling Stockholders so refusing, unable or failing to
satisfy such conditions, on a pro rata basis, reimburse the Company on demand
for all amounts so paid.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and EKI jointly and severally agree to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter within
the meaning of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the
Securities as originally filed or in any amendment thereof, or in any U.S. or
International Preliminary Prospectus or in either of the Prospectuses, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that the Company and EKI will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any U.S. Underwriter
through the U.S. Representatives specifically for inclusion therein. This
indemnity agreement will be in addition to any liability which the Company and
EKI may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls the Company or any
Underwriter within the meaning of either the Act or the Exchange Act, each other
Selling Stockholder to the same extent as the foregoing indemnity from the
Company and EKI to each Underwriter, but only with reference to written
information furnished to the Company by or on behalf of such Selling Stockholder
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Selling Stockholder may otherwise have. Notwithstanding anything to the
contrary in this Agreement, the aggregate liability any Selling Stockholder
shall have to all U.S. Underwriters and other persons and entities pursuant to
this Agreement (whether pursuant to Section 1(b), 8(b), 8(e) or otherwise),
shall not exceed an
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amount equal to the net proceeds (after deducting the Underwriters' discount)
received by such Selling Stockholder from the sale of the Securities pursuant to
this Agreement.
(c) Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each Selling Stockholder to
the same extent as the foregoing indemnity to each U.S. Underwriter, but only
with reference to written information relating to such U.S. Underwriter
furnished to the Company by or on behalf of such U.S. Underwriter through the
U.S. Representatives specifically for inclusion in the documents referred to in
the foregoing indemnity. This indemnity agreement will be in addition to any
liability which any U.S. Underwriter may otherwise have. The Company and each
Selling Stockholder acknowledge that the statements set forth in the last
paragraph of the cover page regarding delivery of the U.S. Securities, the
stabilization legend in block capital letters on page 2 and, under the heading
"Underwriting," (i) the sentences related to concessions and reallowances and
(ii) the paragraph related to stabilization in the Prospectuses constitute the
only information furnished in writing by or on behalf of the several U.S.
Underwriters for inclusion in the Prospectuses.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a), (b) or (c) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a), (b) or (c) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and expenses
of any separate counsel retained by the indemnified party or parties except as
set forth below); PROVIDED, HOWEVER, that such counsel shall be satisfactory to
the indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the indemnified
party shall have the right to employ separate counsel (including local counsel),
and the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An
32
<PAGE>
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company, the Selling Stockholders and
the U.S. Underwriters agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) (collectively "Losses") to
which the Company, one or more of the Selling Stockholders and one or more of
the U.S. Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company, by the Selling
Stockholders and by the U.S. Underwriters from the offering of the U.S.
Securities; PROVIDED, HOWEVER, that in no case shall any U.S. Underwriter
(except as may be provided in any agreement among underwriters relating to the
offering of the U.S. Securities) be responsible for any amount in excess of the
underwriting discount or commission applicable to the Securities purchased by
such U.S. Underwriter hereunder. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company, the Selling
Stockholders and the U.S. Underwriters shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company, of the Selling Stockholders and of the U.S. Underwriters
in connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company and by the Selling Stockholders shall be deemed to be equal to the total
net proceeds from the offering (before deducting expenses) received by each of
them, and benefits received by the U.S. Underwriters shall be deemed to be equal
to the total underwriting discounts and commissions, in each case as set forth
on the cover page of the U.S. Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company, the Selling
Stockholders or the U.S. Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, the Selling Stockholders and
the U.S. Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (e), no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each person
who controls an U.S. Underwriter within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of an U.S.
Underwriter shall have the same rights to contribution as such U.S. Underwriter,
and each person who controls the Company within the meaning of either the Act or
the Exchange Act, each
33
<PAGE>
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (e).
9. DEFAULT BY AN U.S. UNDERWRITER. If any one or more U.S.
Underwriters shall fail to purchase and pay for any of the U.S. Securities
agreed to be purchased by such U.S. Underwriter or U.S. Underwriters hereunder
and such failure to purchase shall constitute a default in the performance of
its or their obligations under this Agreement, the remaining U.S. Underwriters
shall be obligated severally to take up and pay for (in the respective
proportions which the amount of U.S. Securities set forth opposite their names
in Schedule I hereto bears to the aggregate amount of U.S. Securities set forth
opposite the names of all the remaining U.S. Underwriters) the U.S. Securities
which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of U.S.
Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of U.S. Securities
set forth in Schedule I hereto, the remaining U.S. Underwriters shall have the
right to purchase all, but shall not be under any obligation to purchase any, of
the U.S. Securities, and if such nondefaulting U.S. Underwriters do not purchase
all the U.S. Securities, this Agreement will terminate without liability to any
nondefaulting U.S. Underwriter, the Selling Stockholders or the Company. In the
event of a default by any U.S. Underwriter as set forth in this Section 9, the
Closing Date shall be postponed for such period, not exceeding five Business
Days, as the U.S. Representatives shall determine in order that the required
changes in the Registration Statement and the Prospectuses or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting U.S. Underwriter of its liability, if any, to the
Company, the Selling Stockholders and any nondefaulting U.S. Underwriter for
damages occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in
the absolute discretion of the U.S. Representatives, by written notice given to
the Company prior to delivery of and payment for the U.S. Securities, if at any
time prior to such time (i) a banking moratorium shall have been declared either
by Federal or New York State authorities, (ii) trading in securities on the New
York Stock Exchange or the Nasdaq National Market shall have been suspended or
limited or minimum prices shall have been established on such Exchange or
National Market, or (iii) there shall have occurred any outbreak or escalation
of hostilities, declaration by the United States of a national emergency or war
or other calamity or crisis the effect of which on financial markets is such as
to make it, in the sole judgment of the U.S. Representatives, impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the U.S. Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each of the Selling Stockholders and of the U.S.
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
U.S. Underwriter, any Selling Stockholder or the Company or any of the officers,
34
<PAGE>
directors or controlling persons referred to in Section 8 hereof, and will
survive delivery of and payment for the U.S. Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the U.S. Representatives, will be
mailed, delivered or telefaxed to the General Counsel, care of Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
Manager, Investment Banking, or, if sent to the Company, will be mailed,
delivered or telefaxed to (805) 899-3519 facsimile number and confirmed to it
at 800 Miramonte Drive, Santa Barbara, California 93109, Attention of the
Legal Department; or if sent to any Selling Stockholder, will be mailed,
delivered or telefaxed to (805) 899-3519 and confirmed to him at 800
Miramonte Drive, Santa Barbara, California, 93109, Attention: Simon K.
Hodson, D. Scott Houston, as attorneys in fact, c/o EarthShell Corporation,
with a copy to Milbank, Tweed, Hadley & McCloy, telefaxed to (213) 629-5063,
Attention: Kenneth J. Baronsky, and confirmed to him at 601 South Figueroa
Street, Los Angeles, California 90017.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
35
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"International Preliminary Prospectus" shall have the meaning set
forth under "U.S. Preliminary Prospectus."
"Preliminary Prospectus" shall have the meaning set forth under "U.S.
Preliminary Prospectus."
"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing
pursuant to Rule 424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration Statement at the
Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date (as hereinafter defined),
shall also mean such registration statement as so amended or such Rule 462(b)
Registration Statement, as the case may be. Such term shall include any
Rule 430A Information deemed to be included therein at the Effective Date as
provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the initial registration statement.
"U.S. Preliminary Prospectus" and the "International Preliminary
Prospectus", respectively, shall mean any preliminary prospectus with respect to
the offering of the U.S. Securities and the International Securities, as the
case may be, referred to in paragraph (i) above and any preliminary prospectus
with respect to the offering of the U.S. Securities and the International
Securities, as the case may be, included in the Registration Statement at the
Effective Date that omits Rule 430A Information; and the U.S. Preliminary
Prospectus and the International Preliminary Prospectus are hereinafter
collectively called the "Preliminary Prospectuses".
36
<PAGE>
"United States or Canadian Person" shall mean any person who is a
national or resident of the United States or Canada, any corporation,
partnership, or other entity created or organized in or under the laws of the
United States or Canada or of any political subdivision thereof, or any estate
or trust the income of which is subject to United States or Canadian Federal
income taxation, regardless of its source (other than any non-United States or
non-Canadian branch of any United States or Canadian Person), and shall include
any United States or Canadian branch of a person other than a United States or
Canadian Person. "U.S." or "United States" shall mean the United States of
America (including the states thereof and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction.
37
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several U.S. Underwriters.
Very truly yours,
EarthShell Corporation
By:
---------------------------------------
Chief Executive Officer and President
Selling Stockholders
By:
---------------------------------------
Attorney-in-Fact
E. Khashoggi Industries, LLC
By:
---------------------------------------
Chief Executive Officer and President
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Smith Barney Inc.
Credit Suisse First Boston Corporation
By: Smith Barney Inc.
By:
---------------------------------
Vice President
38
<PAGE>
For themselves and the other several U.S.
Underwriters named in Schedule I to the
foregoing Agreement.
Smith Barney Inc.
By:
---------------------------------
Vice President
39
<PAGE>
EXHIBIT A
LOCK-UP AGREEMENT
January __, 1998
Salomon Brothers Inc.
Credit Suisse First Boston
As Representatives of the Several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Reference is made to the proposed initial public offering (the
"Offering") of the Common Stock, $.01 par value per share (the "Common Stock"),
of EarthShell Corporation, a Delaware corporation (the "Company"), pursuant to
which Salomon Brothers Inc and Credit Suisse First Boston, together with certain
of their affiliated international entities, will serve as representatives (the
"Representatives") of the various underwriters (the "Underwriters").
The undersigned understands that the Underwriters propose to enter
into a U.S. Underwriting Agreement and an International Underwriting Agreement
(the "Underwriting Agreements") with the Company providing for the purchase by
the Underwriters of the Common Stock and that the Underwriters propose to
reoffer the Common Stock in a public offering.
In consideration of the execution of the Underwriting Agreements by
the Representatives, the undersigned agrees that, until such date which is (a)
270 days after the consummation (the "Closing Date") of the Offering if the
undersigned is selling Common Stock in the Offering (including shares, if any,
sold as part of the over-allotment option granted to the Underwriters) or (b)
180 days after the Closing Date of the Offering if the undersigned is not
selling Common Stock in the Offering (including shares, if any, sold as part of
the over-allotment option granted to the Underwriters) (such 270-day or 180-day
period is hereafter referred to as the "Lock-up Period"), without the prior
written consent of Salomon Brothers Inc, the undersigned will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for the
sale of, register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of (collectively, a "Disposition") any shares of capital
stock of the Company or securities convertible into or exchangeable or
exercisable for, or any rights to purchase or acquire, such shares of capital
stock, including, without limitation, Common Stock which now or hereafter may be
deemed to be beneficially owned by the undersigned (collectively, the
"Securities") (beneficial ownership to be determined in accordance with the
rules and regulations of the Securities and Exchange Commission); provided,
however, that the undersigned may transfer
A-1
<PAGE>
shares of (i) capital stock to one or more affiliates (including partners of any
partnership) or one or more members of the undersigned's immediate family, or a
trust, the sole beneficiaries of which are members of such individual's
immediate family, provided, that the transferee agrees in writing to be bound by
the terms of this letter agreement, (ii) Series A Cumulative Senior Convertible
Preferred Stock (the "Preferred Stock") to the Company pursuant to the
redemption provisions of the Certificate of Designation of the Preferred Stock
(the "Certificate of Designation"), (iii) Preferred Stock to the Company in
exchange for Common Stock pursuant to the conversion provisions of the
Certificate of Designation and (iv) Common Stock to the Underwriters in the
Offering, including pursuant to the over-allotment option granted to the
Underwriters.
The foregoing restriction is expressly agreed to preclude the
undersigned from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relate to or derives any significant part of its value from
Securities.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's capital stock against any
transfer of shares of capital stock of the Company in contravention of the
restrictions set forth above. The undersigned confirms that it understands that
the Underwriters and the Company will rely upon the representations set forth in
this letter in proceeding with the Offering.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this letter agreement, and that, upon
request, the undersigned will execute any additional documents necessary or
desirable in connection with the enforcement hereof.
All authority herein conferred or agreed to be conferred shall survive
the death of incapacity of the undersigned and any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
A-2
<PAGE>
If, for any reason, the Closing Date of the Offering does not occur
prior to May 31, 1998, or if the Underwriting Agreement shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreement), this
agreement shall be terminated.
-----------------------------------
Signature
-----------------------------------
Printed Name
Accepted as of the date hereof:
SALOMON BROTHERS INC
CREDIT SUISSE FIRST BOSTON
SALOMON BROTHERS
INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
As Representative of the Several Underwriters
By: SALOMON BROTHERS INC
By:
-----------------------
Name:
-----------------------
Title:
-----------------------
A-3
<PAGE>
EXHIBIT 1.2
EarthShell Corporation
2,640,000 Shares(1)
Common Stock
($0.01 par value)
International Underwriting Agreement
New York, New York
March , 1998
Smith Barney Inc.
Credit Suisse First Boston (Europe) Limited
As International Representatives of the several
International Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
EarthShell Corporation, a Delaware corporation (the
"Company") and the persons named in Schedule II hereto (the "Selling
Stockholders") propose to sell to the underwriters named in Schedule I hereto
(the "International Underwriters"), for whom you (the "International
Representatives," together with the U.S. Representatives, as defined in the U.S.
Underwriting Agreement, being hereinafter called the "Representatives") are
acting as representatives, 2,640,000 shares of Common Stock, par value $.01
("Common Stock"), of the Company (said shares to be issued and sold by the
Company and shares to be sold by the Selling Stockholders collectively being
hereinafter called the "International Underwritten Securities"). The Company
and certain of the Selling Stockholders (the "Contributing Stockholders") also
propose to grant to the International Underwriters an option to purchase up to
396,000 additional shares of Common Stock (the "International Option
Securities"; the International Option Securities, together with the
International Underwritten Securities, being hereinafter called the
"International Securities"). It is understood that the Company and the Selling
Stockholders are concurrently entering into a U.S. Underwriting Agreement dated
the date hereof (the "U.S. Underwriting Agreement") providing for the sale by
the Company and the Selling Stockholders of an aggregate of 10,560,000 shares of
Common Stock (said shares to be sold by the Company and the Selling Stockholders
pursuant to the U.S. Underwriting Agreement being hereinafter called the "U.S.
Underwritten Securities"), in the United States and Canada through arrangements
with certain underwriters in the United States and Canada (the "U.S.
Underwriters"), for whom Smith Barney Inc. and Credit Suisse First Boston
Corporation are
- -------------------------
(1) Plus an option to purchase from EarthShell Corporation and certain of the
selling Stockholders up to 396,000 additional shares to cover
over-allotments.
<PAGE>
acting as representatives (the "U.S. Representatives"), and providing for the
grant to the U.S. Underwriters, as defined in the U.S. Underwriting Agreement
(the U.S. Underwriters, together with the International Underwriters, being
hereinafter called the "Underwriters") of an option to purchase from the Company
and the Contributing Stockholders up to 1,584,000 additional shares of Common
Stock (the "U.S. Option Securities"; the U.S. Option Securities, together with
the U.S. Underwritten Securities, being hereinafter called the "U.S. Securities"
and the International Securities, together with the U.S. Securities, being
hereinafter called the "Securities"). It is further understood and agreed that
the U.S. Underwriters and the International Underwriters have entered into an
Agreement Between U.S. Underwriters and International Underwriters dated the
date hereof (the "Agreement Between U.S. Underwriters and International
Underwriters"), pursuant to which, among other things, the International
Underwriters may purchase from the U.S. Underwriters a portion of the U.S.
Securities to be sold pursuant to the U.S. Underwriting Agreement and the U.S.
Underwriters may purchase from the International Underwriters a portion of the
International Securities to be sold pursuant to the International Underwriting
Agreement. To the extent there are no additional International Underwriters
listed on Schedule I other than you, the term International Representatives as
used herein shall mean you, as International Underwriters, and the terms
International Representatives and International Underwriters shall mean either
the singular or plural as the context requires.
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with,
each International Underwriter as set forth below in this Section 1. Certain
terms used in this Section 1 are defined in Section 17 hereof.
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (file
number 333-13287) on Form S-1, including related preliminary prospectuses,
for the registration under the Act of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including the related preliminary prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either (A) prior to the Effective Date of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (B) after the Effective Date of such
registration statement, final prospectuses in accordance with Rules 430A
and 424(b)(1), (3) or (4). In the case of clause (B), the Company has
included in such registration statement, as amended at the Effective Date,
all information (other than, at the option of the Company, Rule 430A
Information) required by the Act and the rules thereunder to be included in
such registration statement and the Prospectuses. As filed, such amendment
and form of final prospectuses, or such final prospectuses (the
"Registration Statement"), shall contain all Rule 430A Information,
together with all other such required information, and, except to the
extent the International Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
you prior to the Execution Time or, to the extent not completed at the
Execution Time, shall contain only such specific additional
2
<PAGE>
information and other changes (beyond that contained in the latest
International Preliminary Prospectus) as the Company has advised you, prior
to the Execution Time, will be included or made therein.
It is understood that two forms of prospectus are to be used
in connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and sold
to persons other than United States and Canadian Persons. The two forms of
prospectus are identical except for the outside front cover page, the
inside front cover page, the discussion under the headings "Underwriting"
and "Subscription and Sale" and the outside back cover page. Such form of
prospectus relating to the U.S. Securities as first filed pursuant to
Rule 424(b) after the Execution Time or, if no filing pursuant to
Rule 424(b) is made, such form of prospectus included in the Registration
Statement at the Effective Date, is hereinafter called the "U.S.
Prospectus"; such form of prospectus relating to the International
Securities as first filed pursuant to Rule 424(b) after the Execution Time
or, if no filing pursuant to Rule 424(b) is made, such form of prospectus
included in the Registration Statement at the Effective Date, is
hereinafter called the "International Prospectus"; and the U.S. Prospectus
and the International Prospectus are hereinafter collectively called the
"Prospectuses."
(ii) On the Effective Date, the Registration Statement
did or will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein) and
on any date on which shares sold in respect of the Underwriters'
over-allotment option are purchased, if such date is not the Closing Date
(a "settlement date"), each Prospectus (and any supplements thereto) will,
comply in all material respects with the applicable requirements of the Act
and the rules thereunder; on the Effective Date and at the Execution Time,
the Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date and any settlement date, each
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or the
Prospectuses (or any supplement thereto) in reliance upon and in conformity
with information furnished herein or in writing to the Company by or on
behalf of any Underwriter through the Representatives specifically for
inclusion in the Registration Statement or the Prospectuses (or any
supplement thereto).
(iii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is
3
<PAGE>
chartered or organized with full corporate power and authority to own its
properties and conduct its business as described in the Prospectuses, and
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification.
(iv) The Company's authorized equity capitalization is
as set forth in the Prospectuses; the capital stock of the Company conforms
in all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters, will be fully paid and
nonassessable; the Securities have been duly authorized for listing,
subject to official notice of issuance and evidence of satisfactory
distribution on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market"); the certificates for the Securities are in valid and
sufficient form and, in all material respects, are duplicative of the
specimen certificate filed as an exhibit to the Registration Statement; the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities,
except which rights have been effectively satisfied or waived; and, except
as set forth in the Registration Statement, the Company has not issued or
granted any options, warrants or other rights to purchase, agreements or
other obligations to issue, or issued or granted any rights to convert any
obligations into or exchange any securities for, shares of capital stock of
or ownership interests in the Company, except for any of the foregoing
which have expired or terminated or which are otherwise no longer
outstanding.
(v) There is no franchise, contract or other document
of a character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not described
or filed as required; and the statements in the Prospectuses under the
headings "Certain United States Federal Income Tax Considerations" and
"Shares Eligible for Future Sale" fairly summarize the matters therein
described.
(vi) This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms.
(vii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(viii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction inside or outside of
4
<PAGE>
the United States in connection with the purchase and distribution of
the Securities by the Underwriters in the manner contemplated herein and in
the Prospectuses.
(ix) Neither the issue and sale of the Securities nor
the consummation of any other of the transactions contemplated herein nor
the fulfillment of the terms hereof will conflict with, result in a breach
or violation of or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter or by-laws
of the Company or (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company is a
party or bound or to which its property is subject, or (iii) any statute,
law, rule, regulation, judgment, order or decree applicable to the Company
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any
of its properties.
(x) No holders of securities of the Company have
pre-emptive rights or the right to the registration of such securities
under the Registration Statement, or if such rights exist, they have been
validly and legally satisfied or waived and will not be violated by the
transactions contemplated in this Agreement.
(xi) The consolidated financial statements and
schedules of the Company included in the Prospectuses and the Registration
Statement present fairly in all material respects the financial condition,
results of operations and cash flows of the Company as of the dates and for
the periods indicated, comply as to form with the applicable accounting
requirements of the Act and the rules and regulations thereunder and have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under the
caption "Selected Financial Data" in the Prospectuses and Registration
Statement fairly present, on the basis stated in the Prospectuses and the
Registration Statement, the information included therein.
(xii) No action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving
the Company or its property is pending or, to the best knowledge of the
Company, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to have a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto) (a "Material Adverse
Effect").
(xiii) The Company owns or leases all such properties as
are necessary to the conduct of its operations as presently conducted; the
Company is not in
5
<PAGE>
violation of any law, rule or regulation of any Federal, state or local
governmental or regulatory authority applicable to it or is not in
non-compliance with any term or condition of, or has failed to obtain and
maintain in effect, any license, certificate, permit or other governmental
authorization required for the ownership or lease of its property or the
conduct of its business, which violation, non-compliance or failure would
individually or in the aggregate have a Material Adverse Effect; and the
Company has not received notice of any proceedings relating to the
revocation or material modification of any such license, certificate,
permit or other authorization.
(xiv) The Company is not in violation or default of
(i) any provision of its charter or by-laws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which it is a party or bound or to which its property is subject, or
(iii) any statute, law, rule or regulation, or any judgment, order or
decree of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the Company or
any of its properties, as applicable.
(xv) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and delivered their report with respect
to the audited consolidated financial statements and schedules included in
the Prospectuses, are independent public accountants with respect to the
Company within the meaning of the Act and the applicable published rules
and regulations thereunder.
(xvi) There are no transfer taxes or other similar fees
or charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the execution
and delivery of this Agreement or the issuance by the Company or sale by
the Company of the Securities.
(xvii) The Company has filed all foreign, federal, state
and local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied against
it, to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested in
good faith or as would not have a Material Adverse Effect.
(xviii) No labor disturbance by or dispute with the
employees of the Company exists or is threatened or imminent that could
result in a Material Adverse Effect.
(xix) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are prudent and customary in the businesses in which they are engaged;
the Company has not been refused any insurance coverage sought or applied
for; and the Company has no reason to believe that it will not be able to
renew its existing insurance coverage as and when such
6
<PAGE>
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
Material Adverse Effect.
(xx) The Company possesses all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its businesses, and the
Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xxi) The Company is not in violation of any federal or
state law or regulation relating to occupational safety and health or to
the storage, handling or transportation of hazardous or toxic materials and
the Company has received all permits, licenses or other approvals required
of it under applicable federal and state occupational safety and health and
environmental laws and regulations to conduct its business, and the Company
is in compliance with all terms and conditions of any such permit, license
or approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, result in a Material Adverse Effect.
(xxii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxiii) The Company owns or has obtained licenses for the
patents, patent applications, trade and service marks, trade secrets and
other intellectual properties referenced or described in the Prospectuses
as being owned by or licensed to it (collectively, the "Intellectual
Property"). Except as set forth in the Prospectuses under the caption
"Business--Patents, Proprietary Rights and Trademarks," (a) to the
Company's knowledge, there are no rights of third parties to any such
Intellectual Property; (b) to the Company's knowledge, there is no material
infringement by third parties of any such Intellectual Property; (c) there
is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others challenging the Company's rights in or to any
such Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim; (d) to the Company's
knowledge, there is no pending or threatened action, suit, proceeding or
claim by others challenging the validity or scope of any such Intellectual
Property, and the Company is
7
<PAGE>
unaware of any facts which would form a reasonable basis for any such
claim; (e) there is no pending or, to the Company's knowledge,
threatened action, suit, proceeding or claim by others that the Company
infringes or otherwise violates any patent, trademark, copyright, trade
secret or other proprietary rights of others, and the Company is unaware
of any other fact which would form a reasonable basis for any such
claim; (f) to the Company's knowledge, there is no Patent or published
Patent application which contains claims that infringe any Intellectual
Property described in the Prospectuses as being owned by or licensed to
the Company or that interferes with the issued or pending claims of any
such Intellectual Property; and (g) to the Company's knowledge, there is
no prior art that may render any Patent licensed to the Company invalid
or any Patent application licensed to the Company unpatentable which has
not been disclosed to the Patent and Trademark Office. The Company owns
the Intellectual Property or has the rights to the Intellectual Property
that is necessary to conduct its business as described in the
Prospectuses.
(xxiv) Except as disclosed in the Registration Statement
and the Prospectuses, the Company (i) does not have any material lending or
other relationship with any bank or lending affiliate of Salomon Brothers,
Inc, Smith Barney Inc., or Credit Suisse First Boston (Europe) Limited, and
(ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any affiliate of
Salomon Brothers, Inc, Smith Barney Inc., Credit Suisse First Boston
(Europe) Limited, or any other Underwriter, except for cumulative dividends
and accrued interest payable upon redemption of the Company's Series A
Cumulative Senior Convertible Preferred Stock.
(xxv) The Company does not own or control, either
directly or indirectly, any other corporation or the capital stock of any
other corporation.
(xxvi) Except as disclosed in the Prospectuses, there are
no contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like payment
in connection with the Offering.
(xxvii) Except as disclosed in the Prospectuses, the
Company has good and marketable title to all properties and assets owned by
it, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use
made or to be made thereof by it; and except as disclosed in the
Prospectuses, the Company holds any leased real or personal property under
valid and enforceable leases with no exceptions that would materially
interfere with the use made or to be made thereof by them.
(xxviii) Since the date of the latest audited financial
statements included in the Prospectuses there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the condition
8
<PAGE>
(financial or otherwise), business, prospects, properties or results of
operations of the Company, and, except as disclosed in or contemplated by
the Prospectuses, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(xxix) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business)
or guarantees of indebtedness by the Company or other agreements or
transactions with, to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of
them, except as disclosed in the Registration Statement and the
Prospectuses.
(xxx) The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliated located in Cuba.
(xxxi) Unless otherwise agreed to in writing by the
Representatives, the Company has furnished to the Representatives a letter
substantially in the form of Exhibit A hereto from each officer, director
and stockholder of the Company addressed to the Underwriters, in which each
such person has agreed that, until such date which is (a) 270 days after
the Closing Date if such person is a Selling Stockholder or (b) 180 days
after the Closing Date if such person is not a Selling Stockholder, without
the prior written consent of Salomon Brothers Inc, such person will not,
directly or indirectly, offer, sell, contract to sell, grant any option or
warrant for the sale of, register, loan, pledge, grant any rights with
respect to, or otherwise transfer or dispose of any shares of capital stock
of the Company or securities convertible into or exchangeable or
exercisable for, or any rights to purchase or acquire, such shares of
capital stock, including, without limitation, Common Stock which now or
hereafter may be deemed to be beneficially owned by such person, subject to
certain exceptions specified therein. It is understood that as joint
book-running managers Salomon Brothers Inc and Smith Barney Inc., on the
one hand, and Credit Suisse First Boston Corporation, on the other hand,
have agreed not to release the Company or any stockholders of the Company
from any restriction on transactions relating to the Company's securities
without the written consent of the other.
(xxxii) The Amended and Restated License Agreement between
the Company and E. Khashoggi Industries, LLC ("EKI") (the "Amended and
Restated License Agreement") has been duly authorized, executed and
delivered and is a legal, valid and binding agreement, enforceable against
EKI in accordance with its terms.
(xxxiii) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
International Option Securities are to be purchased, as the case may be,
and (ii) completion of the distribution of the Securities, any offering
material in connection with the offering and sale of the
9
<PAGE>
Securities other than any Preliminary Prospectuses, the Prospectuses, the
Registration Statement and other materials, if any, permitted by the Act.
(xxxiv) The Company has not at any time during the last
five (5) years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer
or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(xxxv) The Company has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange
Act or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities
and has not effected any sales of shares of Common Stock which, if effected
by the issuer, would be required to be disclosed in response to Item 701 of
Regulation S-K, except as set forth in the Registration Statement.
Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each International Underwriter.
(b) Each Selling Stockholder, severally and not jointly,
represents and warrants to, and agrees with, each International Underwriter
that:
(i) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder hereunder and under the
U.S. Underwriting Agreement and upon sale and delivery of, and payment for,
such Securities, as provided herein, such Selling Stockholder will convey
good and marketable title to such Securities, free and clear of all liens,
encumbrances, equities and claims whatsoever.
(ii) Such Selling Stockholder has no reason to believe
that the discussion contained under the caption "Principal and Selling
Stockholders" contained in the Registration Statement and Prospectuses is
not true and correct.
(iii) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities and has not effected any sales of shares of Common Stock
which, if effected by the issuer, would be required to be disclosed in
response to Item 701 of Regulation S-K.
10
<PAGE>
(iv) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery pursuant
to the terms of this Agreement, under a Custody Agreement and Power of
Attorney duly authorized, executed and delivered by such Selling
Stockholder, in the form heretofore furnished to you (the "Custody
Agreement and Power of Attorney") with U.S. Stock Transfer Corporation, as
Custodian (the "Custodian"); the Custody Agreement and Power of Attorney is
a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms; the Securities represented by the certificates
so held in custody for each Selling Stockholder are subject to the
interests hereunder of the Underwriters, the Company and the other Selling
Stockholders; the arrangements for custody and delivery of such
certificates, made by such Selling Stockholder hereunder and under the
Custody Agreement and Power of Attorney, are not subject to termination by
any acts of such Selling Stockholder, or by operation of law, whether by
the death or incapacity of such Selling Stockholder or the occurrence of
any other event; and if any such death, incapacity or any other such event
shall occur before the delivery of such Securities hereunder, certificates
for the Securities will be delivered by the Custodian in accordance with
the terms and conditions of this Agreement and the Custody Agreement and
Power of Attorney as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received
notice of such death, incapacity or other event.
(v) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as may
have been obtained under the Act and such as may be required under the blue
sky laws of any jurisdiction inside or outside the United States in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectuses.
(vi) Except as disclosed in the Prospectuses, there are
no contracts, agreements or understandings between the Selling Stockholders
and any person, including the Company, that would give rise to a valid
claim against the Selling Stockholder, the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
the Offering.
(vii) Neither the sale of the Securities being sold by
such Selling Stockholder, nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder, or the
fulfillment of the terms hereof by such Selling Stockholder will conflict
with, result in a breach or violation of, or constitute a default under any
law or the charter or by-laws or trust documents of such Selling
Stockholder or the terms of any indenture or other agreement or instrument
to which such Selling Stockholder, or any of its subsidiaries is a party or
bound, or any judgment, order or decree applicable to such Selling
Stockholder, or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder, or any of its subsidiaries.
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<PAGE>
(viii) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in connection
with the offering and sale of the Securities.
(ix) Such Selling Stockholder has reviewed the
"Principal and Selling Stockholders" section of the Prospectuses and will
comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the
Closing Date and will advise one of its Attorneys and Smith Barney Inc.,
prior to the Closing Date if any statement to be made on behalf of such
Selling Stockholder contemplated hereunder would be inaccurate if made as
of the Closing Date.
(x) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or
right of first refusal or other similar right to purchase any of the
Securities that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement; such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering
made by the Prospectuses, other than such rights of participation as have
been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms
of this Agreement; and such Selling Stockholder does not own any warrants,
options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectuses.
(xi) Such Selling Stockholder has executed and
furnished to the Company a letter substantially in the form of Exhibit A
hereto addressed to the International Representatives, in which such
Selling Stockholder has agreed that, until such date which is 270 days
after the Closing Date, without the prior written consent of Salomon
Brothers Inc, such Selling Stockholder will not, directly or indirectly,
offer, sell, contract to sell, grant any option or warrant for the sale of,
register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of any shares of capital stock of the Company or
securities convertible into or exchangeable or exercisable for, or any
rights to purchase or acquire, such shares of capital stock, including,
without limitation, Common Stock which now or hereafter may be deemed to be
beneficially owned by such Selling Stockholder, subject to certain
exceptions provided therein. It is understood that as joint book-running
managers Salomon Brothers Inc and Smith Barney Inc., on the one hand, and
Credit Suisse First Boston Corporation, on the other hand, have agreed not
to release the Company or any stockholders of the Company from any
restriction on transactions relating to the Company's securities without
the written consent of the other.
(xii) Such Selling Stockholder will cooperate to the
extent necessary to cause the Registration Statement or any post-effective
amendment thereto to become effective at the earliest possible time.
(xiii) Such Selling Stockholder has no reason to
believe that the Preliminary Prospectus dated February 24, 1998
contained any untrue statements of fact that would be considered
material by an investor or failed to contain material facts necessary to
make the statements contained therein, in light of the circumstances
under which they were made, not misleading; it being understood that such
Selling Stockholder has neither verified, nor made any independent
investigation, search or inquiry of, any facts or statements made in the
Preliminary Prospectuses.
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<PAGE>
(c) EKI represents and warrants to, and agrees with, each
International Underwriter that:
(i) EKI has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized with full corporate
power and authority to own its properties and conduct its business, and is
duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification.
(ii) This Agreement has been duly authorized, executed
and delivered by EKI and constitutes a valid and binding obligation of EKI
enforceable in accordance with its terms.
(iii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction inside or outside of the United States in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectuses.
(iv) The Amended and Restated License Agreement has
been duly authorized, executed and delivered and is a legal, valid and
binding agreement, enforceable against EKI in accordance with its terms.
(v) No action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving
EKI or its property is pending or, to the best knowledge of EKI, threatened
that (i) could reasonably be expected to have a material adverse effect on
the performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
have a material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of EKI, taken as a whole,
whether or not arising from transactions in the ordinary course of
business.
(vi) EKI is not in violation or default of and
the consummation of the transactions herein contemplated will not give
rise to a claim of violation or default of (i) any provision of its
charter or by-laws, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
material agreement, obligation, condition, covenant or instrument to
which it is a party or bound or to which its property is subject, or
(iii) any statute, law, rule or regulation, or any judgment, order or
decree of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over EKI or any of its properties, as applicable.
(vii) On the Effective Date and at the Execution Time,
the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
each Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that EKI makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or
the Prospectuses (or any supplement thereto) in reliance upon and in
conformity with information furnished herein or in writing to EKI by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectuses (or any
supplement thereto).
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<PAGE>
2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company and each
Selling Stockholder agrees, severally and not jointly, to sell to the
International Underwriters the amount of International Underwritten
Securities set forth opposite such person's name on Schedule II, and each
International Underwriter agrees, severally and not jointly, to purchase from
the Company and the Selling Stockholders, at a purchase price of $______ per
share, the amount of the International Underwritten Securities set forth
opposite such International Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, each Contributing
Stockholder hereby grants an option to the several International Underwriters
to purchase, severally and not jointly, the amount of shares of the
International Option Securities set forth opposite their name of Schedule III
at the same purchase price per share as the International Underwriters shall
pay for the International Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the International
Underwritten Securities by the International Underwriters. Said option may
be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of the International Prospectus upon
written or telegraphic notice by the International Representatives to the
Company and the Contributing Stockholders setting forth the number of shares
of the International Option Securities as to which the several International
Underwriters are exercising the option and the settlement date. Delivery of
certificates for the shares of International Option Securities by the Company
and the Contributing Stockholders, and payment therefor to the Company and
the Contributing Stockholders, shall be made as provided in Section 3 hereof.
The maximum number of shares of the International Option Securities to be
sold by the Company and the Contributing Stockholders is set forth in
Schedule III hereof. If for any reason any Contributing Stockholder fails or
is unable to sell any portion of the International Option Securities set
forth opposite their name in Schedule III hereof, the Company agrees to issue
and sell to the International Underwriters such additional number of
securities at the same purchase price per share as the International
Underwriters shall pay for the International Underwritten Securities. In the
event that the International Underwriters exercise less than their full
over-allotment option, the number of shares of the International Option
Securities to be sold by each party listed on Schedule III shall be, as
nearly as practicable, in the same proportion to each other as are the number
of shares of the International Option Securities listed opposite their
respective names on said Schedule III. The number of shares of the
International Option Securities to be purchased by each International
Underwriter shall be the same percentage of the total number of shares of the
International Option Securities to be purchased by the several International
Underwriters as such International Underwriter is purchasing of the
International Underwritten Securities, subject to such adjustments as you in
your absolute discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the
International Underwritten Securities and the International Option Securities
(if the option provided for in
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<PAGE>
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
________________, 1998, or at such time on such later date not more than three
Business Days after the foregoing date as the International Representatives and
the U.S. Representatives shall designate, which date and time may be postponed
by agreement among the International Representatives, the U.S. Representatives,
the Company and the Selling Stockholders or as provided in Section 9 hereof
(such date and time of delivery and payment for the International Securities
being herein called the "Closing Date"). Delivery of the International
Securities shall be made to the International Representatives for the respective
accounts of the several International Underwriters against payment by the
several International Underwriters through the International Representatives of
the respective aggregate purchase prices of the International Securities being
sold by the Company and each of the Selling Stockholders to or upon the order of
the Company and the Selling Stockholders by wire transfer payable in same-day
funds to two separate accounts specified by the Company and one separate account
specified by the Selling Stockholders. Delivery of the International
Underwritten Securities and the International Option Securities shall be made
through the facilities of The Depository Trust Company unless the International
Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes,
if any, involved in the transfer to the several International Underwriters of
the International Securities to be purchased by them from such Selling
Stockholder and the respective International Underwriters will pay any
additional stock transfer taxes involved in further transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third business day prior to the Closing Date, the Contributing Stockholders
and the Company, if applicable, will deliver the International Option Securities
(at the expense of the Company) to the International Representatives, at 388
Greenwich Street, New York, New York, on the date specified by the International
Representatives (which shall be within three Business Days after exercise of
said option) and certificates for the International Option Securities in such
names and denominations as the International Representatives shall have
requested for the respective accounts of the several International Underwriters,
against payment by the several International Underwriters through the
International Representatives of the purchase price thereof to or upon the order
of the Contributing Stockholders and the Company, if applicable, by wire
transfer payable in same-day funds to one account specified by the Contributing
Stockholders and one account specified by the Company, if applicable. If
settlement for the International Option Securities occurs after the Closing
Date, the Company and the Contributing Stockholders will deliver to the
International Representatives on the settlement date for the International
Option Securities, and the obligation of the International Underwriters to
purchase the International Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
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It is understood and agreed that the Closing Date shall occur
simultaneously with the "Closing Date" under the U.S. Underwriting Agreement,
and that the settlement date, if any, shall occur simultaneously with the
"settlement date" under the U.S. Underwriting Agreement.
4. OFFERING BY UNDERWRITERS. It is understood that the
several Underwriters propose to offer the International Securities for sale
to the public as set forth in the International Prospectus.
5. AGREEMENTS.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereto, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectuses or any Rule 462(b)
Registration Statement unless the Company has furnished you a copy for your
review prior to filing and will not file any such proposed amendment or
supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective
pursuant to Rule 430A, or filing of the Prospectuses is otherwise required
under Rule 424(b), the Company will cause the Prospectuses, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the International
Representatives of such timely filing. The Company will promptly advise
the International Representatives (A) when the Registration Statement, if
not effective at the Execution Time, shall have become effective, (B) when
the Prospectuses, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule
462(b) Registration Statement shall have been filed with the Commission,
(C) when, prior to termination of the offering of the Securities, any
amendment to the Registration Statement shall have been filed or become
effective, (D) of any request by the Commission or its staff for any
amendment of the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectuses or of any additional
information, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order or the suspension of any such qualification and, if
issued, to obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which either of
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the Prospectuses as then supplemented would include any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were
made not misleading, or if it shall be necessary to amend the Registration
Statement or supplement either of the Prospectuses to comply with the Act
or the rules thereunder, the Company promptly will (i) prepare and file
with the Commission, subject to the second sentence of paragraph (a) of
this Section 5, an amendment or supplement which will correct such
statement or omission or effect such compliance and (ii) supply any
supplemented Prospectuses to you in such quantities as you may reasonably
request.
(iii) As soon as practicable, the Company will make
generally available to its security holders and to the International
Representatives an earnings statement or statements of the Company which
will satisfy the provisions of Section 11(a) of the Act and Rule 158 under
the Act.
(iv) The Company will furnish to the International
Representatives and counsel for the International Underwriters, without
charge, signed copies of the Registration Statement (including exhibits
thereto) and to each other International Underwriter and each Selling
Stockholder a copy of the Registration Statement (without exhibits thereto)
and, so long as delivery of a prospectus by an International Underwriter or
dealer may be required by the Act or otherwise required, as many copies of
each International Preliminary Prospectus and the International Prospectus
and any supplement thereto as the International Representatives may
reasonably request. The Company will pay the expenses of printing or other
production of all documents relating to the offering.
(v) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the International Representatives may designate, will
maintain such qualifications in effect so long as required for the
distribution of the International Securities and will pay any fee of the
National Association of Securities Dealers, Inc., in connection with its
review of the offering.
(vi) The Company will not, for a period of 270 days
following the Execution Time, without the prior written consent of Salomon
Brothers Inc and the International Representatives, offer, sell or contract
to sell, or otherwise dispose of (or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement
or otherwise) by the Company or any affiliate of the Company or any person
in privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other shares of Common Stock
or any securities convertible into, or exchangeable for, shares of Common
Stock; PROVIDED, HOWEVER, that the Company may issue and sell Common Stock
pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan of the Company in effect at the
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Execution Time and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding at the
Execution Time.
(vii) For a period of 270 days following the Execution
Time, the Company will not, without the prior written consent of Smith
Barney Inc. and the U.S. Representatives, release or waive any of the
obligations of its stockholders pursuant to any agreements between the
Company and its stockholders which restrict the transfer, encumbrance,
offer or disposal of the Company's securities.
(b) Each International Underwriter agrees that (i) it is not
purchasing any of the International Securities for the account of a United
States or Canadian Person, (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any of the International Securities or
distribute any International Prospectus to any person inside the United
States or Canada, or to a United States or Canadian Person, and (iii) any
dealer to whom it may sell any of the International Securities will represent
that it is not purchasing for the account of a United States or Canadian
Person and agree that it will not offer or resell, directly or indirectly,
any of the International Securities inside the United States or Canada, or to
a United States or Canadian Person or to any other dealer who does not so
represent and agree; PROVIDED, HOWEVER, that the foregoing shall not restrict
(A) purchases and sales between the U.S. Underwriters on the one hand and the
International Underwriters on the other hand pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, (B) stabilization
transactions contemplated under the Agreement Between U.S. Underwriters and
International Underwriters, conducted through Smith Barney Inc. (or through
the U.S. Representatives and International Representatives) as part of the
distribution of the Securities, and (C) sales to or through (or distributions
of International Prospectuses or International Preliminary Prospectuses to)
persons not United States or Canadian Persons who are investment advisors, or
who otherwise exercise investment discretion, and who are purchasing for the
account of a United States or Canadian Person.
(c) The agreements of the International Underwriters set forth
in paragraph (b) of this Section 5 shall terminate upon the earlier of the
following events:
(i) a mutual agreement of the U.S. Representatives and
the International Representatives to terminate the selling restrictions set
forth in paragraph (b) of this Section 5 and in Section 5(b) of the U.S.
Underwriting Agreement; or
(ii) the expiration of a period of 30 days after the
Closing Date, unless (A) the Representatives shall have given notice to the
Company that the distribution of the International Securities by the
International Underwriters has not yet been completed, or (B) the
Representatives shall have given notice to the Company that the
distribution of the U.S. Securities by the U.S. Underwriters has not yet
been completed. If such notice by the Representatives or the International
Representatives is given, the agreements set forth in such paragraph
(b) shall survive until the earlier of
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(1) the event referred to in clause (i) of this subsection (c) or (2) the
expiration of an additional period of 30 days from the date of any such
notice.
(d) Each International Underwriter severally represents and
agrees that:
(i) it has not offered or sold and, prior to the
expiry of six months from the closing of the offering of the International
Securities, will not offer or sell any International Securities to persons
in the United Kingdom, except to persons whose ordinary activities involve
acquiring, holding, managing or disposing of investments (whether as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which have not resulted in and will not result in an offer to
the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulation 1995;
(ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the International Securities, in, from
or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on, and will only
issue or pass on, in the United Kingdom any document received by it in
connection with the issue of the International Securities to a person
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or a person to whom
the document may otherwise lawfully be issued or passed on.
(e) Unless otherwise agreed to by the Representatives, each
Selling Stockholder agrees that, until such date which is 270 days after the
Closing Date, without the prior written consent of Salomon Brothers Inc and the
International Representatives, such Selling Stockholder will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for the
sale of, register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of any shares of capital stock of the Company or securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, such shares of capital stock, including, without limitation, Common
Stock which now or hereafter may be deemed to be beneficially owned by such
Selling Stockholder, subject to certain exceptions provided therein. It is
understood that as joint book-running managers Salomon Brothers Inc and Smith
Barney Inc., on the one hand, and Credit Suisse First Boston Corporation, on the
other hand, have agreed not to release any Selling Stockholder from any
restriction on transactions relating to the Company's securities without the
written consent of the other. Each Selling Stockholder also agrees and consents
to the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the securities held by such Selling Stockholder except
in compliance with this restriction.
6. CONDITIONS TO THE OBLIGATIONS OF THE INTERNATIONAL UNDERWRITERS. The
obligations of the International Underwriters to purchase the International
Underwritten
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<PAGE>
Securities and the International Option Securities, as the case may be, shall
be subject to the accuracy of the representations and warranties on the part
of the Company, EKI and the Selling Stockholders contained herein as of the
Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company, EKI and the
Selling Stockholders made in any certificates pursuant to the provisions
hereof, to the performance by the Company, EKI and the Selling Stockholders
of their respective obligations to be performed at or before the Closing Date
and to the following additional conditions:
(a) If the Registration Statement has not become effective prior
to the Execution Time, unless the U.S. Representatives and the International
Representatives agree in writing to a later time, the Registration Statement
will become effective not later than (i) 6:00 PM New York City time on the date
of determination of the public offering price, if such determination occurred at
or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the
Business Day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City time on
such date; if filing of either of the Prospectuses, or any supplement thereto,
is required pursuant to Rule 424(b), the Prospectuses, and any such supplement,
will be filed in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have furnished to the International
Representatives and the Selling Stockholders the opinion of Gibson, Dunn &
Crutcher LLP, counsel for the Company, dated the Closing Date, to the effect
that:
(i) The Company and has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
Delaware, with full corporate power and authority to own its properties and
conduct its business as described in the Prospectuses, and is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such qualification,
except in jurisdictions in which the failure to be so qualified would not
have a Material Adverse Effect, and, to the knowledge of such counsel after
due inquiry, the Company has no subsidiaries;
(ii) The Company's authorized equity capitalization is
as set forth in the Prospectuses; the capital stock of the Company conforms
in all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock (including the
Securities being sold hereunder by the Selling Stockholders) have been duly
and validly authorized and issued and are fully paid and nonassessable; the
certificates for the Securities are in valid and sufficient form; and, to
the knowledge of such counsel after due inquiry, the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the Securities, except which rights have been
validly and legally satisfied or waived; and, except as set forth in the
Prospectuses, to the knowledge of such counsel after due inquiry, no
options, warrants or other rights to purchase, agreements or other
obligations to
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<PAGE>
issue, or rights to convert any obligations into or exchange any securities
for, shares of capital stock of or ownership interests in the Company are
outstanding, except for any of the foregoing which have expired or
terminated or which are otherwise no longer outstanding or those set forth
in the Registration Statement;
(iii) Upon delivery of the shares of Common Stock of the
Company pursuant to this Agreement and payment therefor as contemplated
herein, the Underwriters will acquire good and marketable title to such
shares of Common Stock free and clear of any lien, claim, security
interest, or other encumbrance, restriction on transfer or other defect in
title;
(iv) To the knowledge of such counsel following due
inquiry but without search of court or agency records, there is no pending
or threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company of a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectuses, and there
is no franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectuses, or to be filed as
an exhibit thereto, which is not described or filed as required; the
descriptions contained in the Prospectuses under the heading "Certain
United States Federal Income Tax Considerations" constitute fair summaries
of those statutes and regulations discussed therein applicable to the
offering of the Securities; and the statements in the Prospectuses under
the heading "Shares Eligible for Future Sale" fairly summarize the matters
therein described;
(v) The Registration Statement has become effective
under the Act; any required filing of the Prospectuses, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or
threatened, and the Registration Statement and each of the Prospectuses
(other than the financial statements and other financial information
contained therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the applicable requirements of the
Act and the rules thereunder; and the descriptions in the Registration
Statement and the Prospectuses of statutes, legal and governmental
proceedings and contracts and other documents are accurate and fairly
present the information required to be shown; provided however, that such
counsel may exclude descriptions of statutes and legal and governmental
proceedings set forth in the Intellectual Property Portion (as defined in
Section 6(c)(iv) below) and the Regulatory Portion (as defined in Section
6(d)(i) below) of the Registration Statement and Prospectuses, and under
the headings "Risk Factors--Environmental Perception of EarthShell
Products" and "Business--The EarthShell Solution--Environmental Impact"
of the Registration Statement and Prospectuses);
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(vi) This Agreement has been duly authorized, executed
and delivered by the Company;
(vii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended;
(viii) No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required on behalf
of the Company in connection with the sale of the International Securities
as contemplated herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any jurisdiction and the
securities laws of any jurisdiction outside the United States in connection
with the purchase and distribution of the Securities by the International
Underwriters in the manner contemplated in this Agreement and in the
Prospectuses;
(ix) Neither the issue and sale of the Securities, nor
the fulfillment of the terms hereof will conflict with, result in a breach
or violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter or by-laws
of the Company or (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company is a
party or bound or to which its property is subject which is listed as an
exhibit to the Registration Statement or described in the Prospectuses, or
(iii) any statute, law, rule, or regulation, or any judgment, order or
decree applicable to the Company of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its properties, except for
any violation, breach or imposition which would not have a Material Adverse
Effect;
(x) To the knowledge of such counsel after due
inquiry, no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement except for
such rights as are specified in (a) the Registration Rights Agreement dated
February 28, 1995, (b) the Registration Rights Agreement dated September
16, 1993, (c) the Agreement between EKI and Jimmy Argyropolous dated
October 13, 1992, and (d) the Registration Rights Agreements between the
Company, Eva Ein, Kenny Loggins and Barry DeVorzon dated April 23, 1993, in
each of cases (a) through (d), which rights have been legally and validly
satisfied or waived; and
(xi) To such counsel's knowledge after due inquiry,
there are no contracts or other documents of a character required to be
filed as an exhibit to the Registration Statement or required to be
described in the Registration Statement or Prospectuses that are not filed
or described as required.
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In addition, such opinion shall state that such counsel has participated in the
preparation of the Registration Statement and Prospectuses as counsel to the
Company. Such participation included conferences with officers of the Company
and the Company's independent accountants, but did not include verification by
such counsel of the facts stated in the Registration Statement and the
Prospectuses and, therefore, would not necessarily reveal any material
misstatements of fact or omission to state a material fact. On the basis of
such participation, nothing has come to such counsel's attention which causes
such counsel to believe that either the Registration Statement or the
Prospectuses (except for the financial statements and other financial
information contained therein as to which such counsel expresses no opinion) as
of their respective dates and as of the Closing Date contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the States of Delaware
(limited to the Delaware General Corporation Law only) and California or the
Federal laws of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the International
Underwriters and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Reference to the Prospectuses in this paragraph (b) include any supplements
thereto at the Closing Date.
(c) The Company shall have furnished to the International
Representatives and the Selling Stockholders the opinion of Workman, Nydegger &
Seeley, patent counsel for the Company, dated the Closing Date, to the effect
that:
(i) EKI is listed on the records of the United States
Patent and Trademark Office as the sole holder of record of each of the
patents listed under the heading "U.S. Patents Held by the Company" on
Schedule IV attached hereto (the "U.S. Patents") and each of the patent
applications listed under the heading "U.S. Patent Applications Submitted
by the Company" on Schedule V attached hereto (the "U.S. Applications").
Such counsel knows of no claims of third parties to any ownership interest
or lien with respect to any of the U.S. Patents or U.S. Applications that
would conflict with the Company's License Rights under the Amended and
Restated License Agreement.
(ii) EKI is listed in the records of the appropriate
foreign office as the sole holder of record of each of the foreign patents
listed under the heading "Non-U.S. Patents Held by the Company" on Schedule
VI hereof (the "Non-U.S. Patents") (collectively, the U.S. Patents and
Non-U.S. Patents are referred to herein as the "Patents") and each of the
foreign patent applications listed under the heading "Non-U.S. Patent
Applications Submitted by the Company" on Schedule VII attached hereto (the
"Non-U.S. Applications") (collectively, the U.S. Applications and the
Non-U.S. Applications are referred to herein as the "Applications"). Such
counsel knows of no
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claims of third parties to any of the Non-U.S. Patents or Non-U.S.
Applications that would conflict with the Company's License Rights under
the Amended and Restated License Agreement.
(iii) Pursuant to the Amended and Restated License
Agreement, ECC's License Rights apply with respect to all of the U.S.
Patents, Non-U.S. Patents, U.S. Applications and Non-U.S. Applications
listed in Schedules IV, V, VI and VII. To the best of such counsel's
knowledge, no other person or entity has obtained any rights from EKI that
would diminish the exclusive rights the Company obtained under the Amended
and Restated License Agreement.
(iv) Such counsel has reviewed the statements under
the Registration Statement/Prospectuses captions "Risk
Factors--Protection of Proprietary Technology," "Business--The
Technology," and "Business--Patents, Proprietary Rights and Trademarks"
(collectively, the "Intellectual Property Portion") of the Registration
Statement and the Prospectuses. Insofar as such statements constitute a
summary of EKI's Patents and Applications and the Company's License
Rights, and matters related thereto, such counsel believes them to
fairly, accurately and completely summarize the legal matters, documents
and proceedings relating to such Patents and Applications and license
rights described therein. Nothing has come to the attention of such
counsel which causes it to believe that the information in the
Intellectual Property Portion contains any untrue statement of a
material fact or omits to state a material fact which is required to be
stated therein or necessary to make the statements therein not
misleading.
(v) Such counsel has no knowledge of any facts that
(i) would preclude the Company from having clear, exclusive rights to the
patents and Applications as granted by the Amended and Restated License
Agreement; (ii) would lead such counsel to conclude that any of the
Patents are invalid or unenforceable; or (iii) that any patent that may
ultimately issue from one or more of the Applications would be invalid or
unenforceable. Such counsel has no knowledge of any facts that cause it to
believe that the Company lacks any rights to use all intellectual property
necessary to conduct its business as now or proposed to be conducted or as
described in the Registration Statement or the Prospectuses. Such counsel
has knowledge of no facts that would preclude the Company from using the
Patents against third parties to prevent such third parties from engaging
in infringing conduct.
(vi) Such counsel has been advised by the Company of
certain specifications for compositions and processes for use in making
foamed starch based food containers and more specifically for a container
for the McDonald's Quarter Pounder with Cheese and a container for the
McDonald's Big Mac (such specifications are attached hereto as Schedule
VIII). Such counsel is not aware of any patent owned by a party other than
EKI that would be infringed by making food containers using the Schedule
VIII specifications. Such counsel has also been advised of pre-commercial
specifications for compositions and processes for use in making cellulose
ether based inorganically filled
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<PAGE>
sheets which might be useable in making food and drink containers. Such
counsel is not aware of any patent owned by a party other than EKI that
would be infringed by making food containers using specifications for
compositions and processes for use in making cellulose ether based
inorganically filled sheets.
(vii) Such counsel is not aware of any material defect
of form in the preparation or filing of the Applications on behalf of EKI.
To such counsel's knowledge none of the Applications (excepting specific
claims therein) has been finally rejected by the examining agency.
(viii) To the best of such counsel's knowledge, the
Company has complied with the United States Patent and Trademark Office
duty of candor and disclosure during the prosecution leading to the
issuance of each of the U.S. Patents.
(ix) The Amended and Restated License Agreement has
been duly authorized, executed and delivered and is a legal, valid and
binding agreement, enforceable against EKI in accordance with its terms.
(x) Such counsel knows of no pending or threatened
action, suit, proceeding or claim by governmental authorities or others
that the Company is infringing or otherwise violating any patents or trade
secrets.
(xi) Such counsel is not aware of any pending or
threatened actions, suits, proceedings or claim by governmental authorities
or others challenging the validity or scope of the Patents.
(xii) Such counsel is not aware of any infringement on
the part of any third party of any patent or trade secret in violation of
rights held by the Company.
(d) The Company shall have furnished to the International
Representatives and the Selling Stockholders the opinion of Olsson, Frank &
Weeda, P.C., special regulatory counsel for the Company, dated the Closing Date,
to the effect that:
(i) The statements under the captions "Risk
Factors--FDA Regulation," and "Business--Government Regulation"
(collectively, the "Regulatory Portion") in the Registration Statement and
the Prospectuses and any amendment or supplement thereto, to the extent
that they reflect matters of law, summaries of law or regulations, or
regulatory status of the Company, are correct and complete in all material
respects, subject to the qualifications set forth therein;
(ii) Each of the components of the Company's Big Mac
sandwich container ("Big Mac Container") is either approved by the Food and
Drug Administration (the "FDA") as an indirect food additive for its
intended use, is codified in the regulations of the FDA as "generally
recognized as safe" ("GRAS"), or is regarded by the Company and its
consultants (including such counsel) as GRAS for its intended
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<PAGE>
use. Sale of products manufactured using the formulation of Ali-ite used
in manufacturing the prototype Big Mac Container does not violate the laws
and regulations of the FDA.
(iii) Nothing has come to the attention of such counsel
which causes such counsel to believe that the information contained in
(a) the Registration Statement, or any amendments thereof contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (b) the Prospectuses, or any
amendments thereof, contained or contains an untrue statement of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) The Company shall have furnished to the International
Representatives and the Selling Stockholders the opinion of Paul, Hastings,
Janofsky & Walker LLP, environmental counsel for the Company, dated the
Closing Date, to the effect that nothing has come to the attention of such
counsel which causes such counsel to believe that the information contained
in (a) the Registration Statement, or any amendments thereof contained or
contains an untrue statement of a material fact or omitted or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (b) the Prospectuses, or any amendments
thereof, contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(f) The Selling Stockholders shall have furnished to the
International Representatives the opinion of Milbank, Tweed, Hadley & McCloy,
counsel for the Selling Stockholders, dated the Closing Date, to the effect
that:
(i) Each Selling Stockholder is the record owner of
the Securities to be sold by such Selling Stockholder pursuant to this
Agreement or the U.S. Underwriting Agreement; and
(ii) Upon payment for and delivery of the Securities in
accordance with the terms of this Agreement and the U.S. Underwriting
Agreement, and assuming the Underwriters are acquiring the Securities
purchased by them in good faith without notice of any adverse claim (as
defined in Section 8102(a)(1) of the California Uniform Commercial Code),
the Underwriters will be the owners of the Securities purchased by them,
free and clear of any adverse claim.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the States of Delaware,
New York or California or the Federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the International Underwriters, and (B) as to
matters of fact, to the
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extent they deem proper, on certificates of responsible officers of the
Selling Stockholders and the Contributing Stockholders and public officials.
(g) The International Representatives shall have received from
Latham & Watkins, counsel for the International Underwriters, such opinion or
opinions, dated the Closing Date, with respect to the issuance and sale of the
International Securities, the Registration Statement, the Prospectuses (together
with any supplement thereto) and other related matters as the International
Representatives may reasonably require, and the Company and each Selling
Stockholder shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters.
(h) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board, the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectuses, any supplements to the
Prospectuses and this Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material respects on and as
of the Closing Date with the same effect as if made on the Closing Date and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectuses (exclusive of any supplement
thereto), there has been no Material Adverse Effect.
(i) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by the Chairman of the Board, the
President and the principal financial or accounting officer of such Selling
Stockholder or by or on behalf of such Selling Stockholder, individually, dated
the Closing Date, to the effect that the representations and warranties of such
Selling Stockholder in this Agreement and in the Custody Agreement and Power of
Attorney are true and correct in all material respects on and as of the Closing
Date to the same effect as if made on the Closing Date.
(j) At the Execution Time and at the Closing Date, Deloitte &
Touche LLP shall have furnished to the International Representatives and the
Selling Stockholders letters, dated respectively as of the Execution Time and
as of the Closing Date, in form and substance satisfactory to the
International Representatives, confirming that they are independent
accountants within the meaning of the Act and the applicable published rules
and regulations thereunder and that they have performed a review of the
financial information of the Company contained in the
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Registration Statement and Prospectuses, in accordance with Statement on
Accounting Standards No. 71 and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules and pro forma financial statements
included in the Registration Statement and the Prospectuses and reported on
by them comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company; their limited review,
in accordance with standards established under Statement on Auditing
Standards No. 71 of the unaudited interim financial information, if any,
carrying out certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments set
forth in such letter; a reading of the minutes of the meetings of the
stockholders, directors and the Executive, Compensation, Audit, Conflicts
and Stock Option committees of the Company; and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to December 31, 1997, nothing came to their attention which caused them to
believe that:
(1) any unaudited financial statements, if any,
included in the Registration Statement and the Prospectuses do not
comply in form in all material respects with applicable accounting
requirements of the Act and with the published rules and regulations
of the Commission with respect to registration statements on Form S-1;
and said unaudited financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement and the Prospectuses;
(2) with respect to the period subsequent to
December 31, 1997, there were any changes in the long-term debt of the
Company or capital stock of the Company or decreases in the
stockholders' equity of the Company as compared with the amounts shown
on the December 31, 1997 consolidated balance sheet included in the
Registration Statement and the Prospectuses, or for the period
subsequent to December 31, 1997 there were any decreases, as compared
with the corresponding period in the preceding year in net revenues or
income before income taxes or in total or per share amounts of net
income of the Company, except in all instances for changes or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation by the Company as to the significance
thereof unless said explanation is not deemed necessary by the
International Representatives; or
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(3) the information included in the Registration
Statement and Prospectuses in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary Financial
Information), Item 402 (Executive Compensation) and Item 503(d) (Ratio
of Earnings to Fixed Charges) is not in conformity with the applicable
disclosure requirements of Regulation S-K.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain information of
an accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and its subsidiaries) set forth in the
Registration Statement and the Prospectuses, including the information set
forth under the captions "Selected Financial Data" and "Experts" in the
Prospectuses, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
(iv) on the basis of a reading of the unaudited pro
forma financial statements included in the Registration Statement and the
Prospectuses (the "pro forma financial statements"); carrying out certain
specified procedures; inquiries of certain officials of the Company who
have responsibility for financial and accounting matters; and proving the
arithmetic accuracy of the application of the pro forma adjustments to the
historical amounts in the pro forma financial statements, nothing came to
their attention which caused them to believe that the pro forma financial
statements do not comply in form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
References to the Prospectuses in this paragraph (j) include
any supplement thereto at the date of the letter.
(k) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (j) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the Company, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectuses (exclusive
of any supplement thereto) the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the sole judgment of the International
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectuses (exclusive of any supplement thereto).
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(l) On or prior to the Execution Time, the National Association
of Securities Dealers shall have approved the Underwriters' participation in the
distribution of the Securities to be sold by the Selling Stockholders.
(m) At the Execution Time, unless otherwise agreed to in writing
by the Representatives, the Company shall have furnished to the Representatives
a letter substantially in the form of Exhibit A hereto from each officer and
director of the Company and stockholders addressed to the Representatives, in
which each such person agreed that, until such date which is (a) 270 days after
the Closing Date if such person is a Selling Stockholder or (b) 180 days after
the Closing Date if such person is not a Selling Stockholder, without the prior
written consent of Salomon Brothers Inc, such person will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for the
sale of, register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of any shares of capital stock of the Company or securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, such shares of capital stock, including, without limitation, Common
Stock which now or hereafter may be deemed to be beneficially owned by such
person, subject to certain exceptions set forth therein. It is understood that
as joint book-running managers Salomon Brothers Inc and Smith Barney Inc., on
the one hand, and Credit Suisse First Boston Corporation, on the other hand,
have agreed not to release the Company or any stockholders of the Company from
any restriction on transactions relating to the Company's securities without the
written consent of the other.
(n) On or prior to the Execution Time, the Nasdaq National
Market shall have approved the quotation of the Securities on the Nasdaq
National Market.
(o) Prior to the Closing Date, the Company shall have furnished
to the International Representatives such further information, certificates and
documents as the International Representatives may reasonably request.
(p) The closing of the purchase of the U.S. Underwritten
Securities to be issued and sold by the Company pursuant to the U.S.
Underwriting Agreement shall occur concurrently with the closing described
herein.
(q) The Company shall have caused the conversion for all Selling
Stockholders of the shares of Series A Cumulative Senior Convertible Preferred
Stock of the Company into shares of Common Stock.
(r) The Company shall have caused the recapitalization and stock
split to become effective in which each share of Common Stock will be converted
into 262 shares of Common Stock.
(s) The Company shall have caused the Company's Certificate of
Incorporation and by-laws to be amended to, among other things, change the
Company's name to EarthShell Corporation from EarthShell Container Corporation.
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(t) The Company shall have arranged for proceeds from the sale
of Common Stock contemplated hereunder to be paid to Imperial Bank in
satisfaction of all amounts owing under the Company's Credit Facility and for
termination of such Credit Facility in connection therewith.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Latham & Watkins, counsel for the International
Underwriters, at 650 Town Center Drive, 20th Floor, Costa Mesa, California
92626, on the Closing Date.
7. REIMBURSEMENT OF INTERNATIONAL UNDERWRITERS' EXPENSES. If the
sale of the Securities provided for herein is not consummated because any
condition to the obligations of the International Underwriters set forth in
Section 6 hereof is not satisfied, because of any termination pursuant to
Section 10 hereof or because of any refusal, inability or failure on the part of
the Company or any Selling Stockholder to perform any agreement herein or comply
with any provision hereof other than by reason of a default by any of the
International Underwriters, the Company will reimburse the International
Underwriters severally through Smith Barney Inc. on demand for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the International Securities. If the Company is required to make any payments
to the International Underwriters under this Section 7 because of any Selling
Stockholder's refusal, inability or failure to satisfy any condition to the
obligations of the International Underwriters set forth in Section 6, such
Selling Stockholders shall, together with any other Selling Stockholders so
refusing, unable or failing to satisfy such conditions, on a pro rata basis,
reimburse the Company on demand for all amounts so paid.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and EKI jointly and severally agree to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter within
the meaning of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for
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the registration of the Securities as originally filed or in any amendment
thereof, or in any U.S. or International Preliminary Prospectus or in either of
the Prospectuses, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company and EKI will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any International Underwriter through the International
Representatives specifically for inclusion therein. This indemnity agreement
will be in addition to any liability which the Company and EKI may otherwise
have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls the Company or any
Underwriter within the meaning of either the Act or the Exchange Act, each other
Selling Stockholder to the same extent as the foregoing indemnity from the
Company and EKI to each Underwriter, but only with reference to written
information furnished to the Company by or on behalf of such Selling Stockholder
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Selling Stockholder may otherwise have. Notwithstanding anything to the
contrary in this Agreement, the aggregate liability any Selling Stockholder
shall have to all International Underwriters and other persons and entities
pursuant to this Agreement (whether pursuant to Section 1(b), 8(b), 8(e) or
otherwise), shall not exceed an amount equal to the net proceeds (after
deducting the Underwriters' discount) received by such Selling Stockholder from
the sale of the Securities pursuant to this Agreement.
(c) Each International Underwriter severally agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act and each Selling
Stockholder and, to the same extent as the foregoing indemnity to each
International Underwriter, but only with reference to written information
relating to such International Underwriter furnished to the Company by or on
behalf of such International Underwriter through the International
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any International Underwriter may otherwise have. The Company
and each Selling Stockholder acknowledge that the statements set forth in the
last paragraph of the cover page regarding delivery of the International
Securities, the stabilization legend in block capital letters on page 2 and,
under the heading "Subscription and Sale," (i) the sentences related to
concessions and reallowances and (ii) the paragraph related to stabilization in
the Prospectuses constitute the only information furnished in writing by or on
behalf of the several International Underwriters for inclusion in the
Prospectuses.
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(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a), (b) or (c) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a), (b) or (c) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and expenses
of any separate counsel retained by the indemnified party or parties except as
set forth below); PROVIDED, HOWEVER, that such counsel shall be satisfactory to
the indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the indemnified
party shall have the right to employ separate counsel (including local counsel),
and the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company, the Selling Stockholders and
the International Underwriters agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, one or more of the Selling Stockholders and one
or more of the International Underwriters may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company, by the
Selling Stockholders and by the International Underwriters from the offering of
the International Securities; PROVIDED, HOWEVER, that in no case shall any
International Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the International Securities) be
responsible for any amount
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in excess of the underwriting discount or commission applicable to the
Securities purchased by such International Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company, the Selling Stockholders and the International Underwriters
shall contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company, of the Selling
Stockholders, and of the International Underwriters in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company and by the
Selling Stockholders shall be deemed to be equal to the total net proceeds from
the offering (before deducting expenses) received by each of them, and benefits
received by the International Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the International Prospectus. Relative fault shall be determined
by reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company, the Selling
Stockholders or the International Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company, the Selling
Stockholders and the International Underwriters agree that it would not be just
and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (e), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an International Underwriter within the
meaning of either the Act or the Exchange Act and each director, officer,
employee and agent of an International Underwriter shall have the same rights to
contribution as such International Underwriter, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, each officer
of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (e).
9. DEFAULT BY AN INTERNATIONAL UNDERWRITER. If any one or more
International Underwriters shall fail to purchase and pay for any of the
International Securities agreed to be purchased by such International
Underwriter or International Underwriters hereunder and such failure to purchase
shall constitute a default in the performance of its or their obligations under
this Agreement, the remaining International Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the amount
of International Securities set forth opposite their names in Schedule I hereto
bears to the aggregate amount of International Securities set forth opposite the
names of all the remaining International Underwriters) the International
Securities which the defaulting International Underwriter or International
Underwriters agreed but failed to purchase; PROVIDED, HOWEVER, that in the event
that the aggregate amount of International Securities which the defaulting
International Underwriter or International Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of International Securities
set forth in Schedule I hereto, the remaining International Underwriters shall
have the right to purchase all, but shall not be under any obligation to
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<PAGE>
purchase any, of the International Securities, and if such nondefaulting
International Underwriters do not purchase all the International Securities,
this Agreement will terminate without liability to any nondefaulting
International Underwriter, the Selling Stockholders or the Company. In the
event of a default by any International Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the International Representatives shall determine in
order that the required changes in the Registration Statement and the
Prospectuses or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting International
Underwriter of its liability, if any, to the Company, the Selling Stockholders
and any nondefaulting International Underwriter for damages occasioned by its
default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in
the absolute discretion of the International Representatives, by written notice
given to the Company prior to delivery of and payment for the International
Securities, if at any time prior to such time (i) a banking moratorium shall
have been declared either by Federal or New York State authorities, (ii) trading
in securities on the New York Stock Exchange or the Nasdaq National Market shall
have been suspended or limited or minimum prices shall have been established on
such Exchange or National Market, or (iii) there shall have occurred any
outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war or other calamity or crisis the effect of which on
financial markets is such as to make it, in the sole judgment of the
International Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the International
Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each of the Selling Stockholders and of the
International Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any International Underwriter, any Selling Stockholder or the Company
or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the International
Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the International Representatives,
will be mailed, delivered or telefaxed to the General Counsel, care of Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
Manager, Investment Banking, or, if sent to the Company, will be mailed,
delivered or telefaxed to (805) 899-3519 facsimile number and confirmed to it
at 800 Miramonte Drive, Santa Barbara, California 93109, Attention of the
Legal Department; or if sent to any Selling Stockholder, will be mailed,
delivered or telefaxed to (805) 899-3519 and confirmed to him at 800
Miramonte Drive, Santa Barbara, California, 93109, Attention: Simon K.
Hodson, D. Scott Houston, as attorneys in fact, c/o EarthShell Corporation,
with a copy to Milbank, Tweed, Hadley & McCloy, telefaxed to (213) 629-5063,
Attention: Kenneth J. Baronsky, and confirmed to him at 601 South Figueroa
Street, Los Angeles, California 90017.
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13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"International Preliminary Prospectus" shall have the meaning set
forth under "U.S. Preliminary Prospectus."
"Preliminary Prospectus" shall have the meaning set forth under "U.S.
Preliminary Prospectus."
"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing
pursuant to Rule 424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration Statement at the
Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution
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Time, in the form in which it shall become effective) and, in the event any
post-effective amendment thereto or any Rule 462(b) Registration Statement
becomes effective prior to the Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided by
Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the initial registration statement.
"U.S. Preliminary Prospectus" and the "International Preliminary
Prospectus", respectively, shall mean any preliminary prospectus with respect to
the offering of the U.S. Securities and the International Securities, as the
case may be, referred to in paragraph (i) above and any preliminary prospectus
with respect to the offering of the U.S. Securities and the International
Securities, as the case may be, included in the Registration Statement at the
Effective Date that omits Rule 430A Information; and the U.S. Preliminary
Prospectus and the International Preliminary Prospectus are hereinafter
collectively called the "Preliminary Prospectuses".
"United States or Canadian Person" shall mean any person who is a
national or resident of the United States or Canada, any corporation,
partnership, or other entity created or organized in or under the laws of the
United States or Canada or of any political subdivision thereof, or any estate
or trust the income of which is subject to United States or Canadian Federal
income taxation, regardless of its source (other than any non-United States or
non-Canadian branch of any United States or Canadian Person), and shall include
any United States or Canadian branch of a person other than a United States or
Canadian Person. "U.S." or "United States" shall mean the United States of
America (including the states thereof and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction.
37
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several International Underwriters.
Very truly yours,
EarthShell Corporation
By:
-------------------------------------
Chief Executive Officer and President
Selling Stockholders
By:
-------------------------------------
Attorney-in-Fact
E. Khashoggi Industries, LLC
By:
-------------------------------------
Chief Executive Officer and President
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Smith Barney Inc.
Credit Suisse First Boston (Europe) Limited
By: Smith Barney Inc.
By:
----------------------------------
Vice President
38
<PAGE>
For themselves and the other
several International Underwriters
named in Schedule I to the
foregoing Agreement.
Smith Barney Inc.
By:
-------------------------------------
Vice President
39
<PAGE>
EXHIBIT A
LOCK-UP AGREEMENT
January __, 1998
Salomon Brothers Inc.
Credit Suisse First Boston
As Representatives of the Several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Reference is made to the proposed initial public offering (the
"Offering") of the Common Stock, $.01 par value per share (the "Common Stock"),
of EarthShell Corporation, a Delaware corporation (the "Company"), pursuant to
which Salomon Brothers Inc and Credit Suisse First Boston, together with certain
of their affiliated international entities, will serve as representatives (the
"Representatives") of the various underwriters (the "Underwriters").
The undersigned understands that the Underwriters propose to enter
into a U.S. Underwriting Agreement and an International Underwriting Agreement
(the "Underwriting Agreements") with the Company providing for the purchase by
the Underwriters of the Common Stock and that the Underwriters propose to
reoffer the Common Stock in a public offering.
In consideration of the execution of the Underwriting Agreements by
the Representatives, the undersigned agrees that, until such date which is (a)
270 days after the consummation (the "Closing Date") of the Offering if the
undersigned is selling Common Stock in the Offering (including shares, if any,
sold as part of the over-allotment option granted to the Underwriters) or (b)
180 days after the Closing Date of the Offering if the undersigned is not
selling Common Stock in the Offering (including shares, if any, sold as part of
the over-allotment option granted to the Underwriters) (such 270-day or 180-day
period is hereafter referred to as the "Lock-up Period"), without the prior
written consent of Salomon Brothers Inc, the undersigned will not, directly or
indirectly, offer, sell, contract to sell, grant any option or warrant for the
sale of, register, loan, pledge, grant any rights with respect to, or otherwise
transfer or dispose of (collectively, a "Disposition") any shares of capital
stock of the Company or securities convertible into or exchangeable or
exercisable for, or any rights to purchase or acquire, such shares of capital
stock, including, without limitation, Common Stock which now or hereafter may be
deemed to be beneficially owned by the undersigned (collectively, the
"Securities") (beneficial ownership to be determined in accordance with the
rules and regulations of the
A-1
<PAGE>
Securities and Exchange Commission); provided, however, that the undersigned may
transfer shares of (i) capital stock to one or more affiliates (including
partners of any partnership) or one or more members of the undersigned's
immediate family, or a trust, the sole beneficiaries of which are members of
such individual's immediate family, provided, that the transferee agrees in
writing to be bound by the terms of this letter agreement, (ii) Series A
Cumulative Senior Convertible Preferred Stock (the "Preferred Stock") to the
Company pursuant to the redemption provisions of the Certificate of Designation
of the Preferred Stock (the "Certificate of Designation"), (iii) Preferred Stock
to the Company in exchange for Common Stock pursuant to the conversion
provisions of the Certificate of Designation and (iv) Common Stock to the
Underwriters in the Offering, including pursuant to the over-allotment option
granted to the Underwriters.
The foregoing restriction is expressly agreed to preclude the
undersigned from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relate to or derives any significant part of its value from
Securities.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's capital stock against any
transfer of shares of capital stock of the Company in contravention of the
restrictions set forth above. The undersigned confirms that it understands that
the Underwriters and the Company will rely upon the representations set forth in
this letter in proceeding with the Offering.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this letter agreement, and that, upon
request, the undersigned will execute any additional documents necessary or
desirable in connection with the enforcement hereof.
All authority herein conferred or agreed to be conferred shall survive
the death of incapacity of the undersigned and any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
A-2
<PAGE>
If, for any reason, the Closing Date of the Offering does not occur
prior to May 31, 1998, or if the Underwriting Agreement shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreement), this
agreement shall be terminated.
-----------------------------------
Signature
-----------------------------------
Printed Name
Accepted as of the date hereof:
SALOMON BROTHERS INC
CREDIT SUISSE FIRST BOSTON
SALOMON BROTHERS
INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
As Representative of the Several
Underwriters
By: SALOMON BROTHERS INC
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
A-3
<PAGE>
EXHIBIT 5.1
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
March 22, 1998
C 23155-00003
EarthShell Container Corporation
800 Miramonte Drive
Santa Barbara, California 93109
Re: REGISTRATION STATEMENT ON FORM S-1
(REGISTRATION NO. 333-13287)
Ladies and Gentlemen:
We are acting as special counsel for EarthShell Container Corporation, a
Delaware corporation (the "Company"), in connection with the registration of up
to an aggregate of 15,180,000 shares of the Company's common stock, par value
$.01 per share (the "Shares"), on Registration Statement on Form S-1 (File No.
333-13287), including amendments and exhibits thereto (the "Registration
Statement"), filed by the Company with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"). Of
the 15,180,000 Shares, 1,980,000 are subject to an option granted to the
Underwriters (as defined below) to cover over-allotments. The Selling
Stockholders (as defined in the Registration Statement) propose to sell
2,673,684 shares of the 15,180,000 Shares (4,653,684 of the 15,180,000 Shares if
the over-allotment option is exercised in full) to a group of underwriters (the
"Underwriters") represented by Salomon Smith Barney and Credit Suisse First
Boston for offering to the public.
Based on the foregoing and on such investigation as we have deemed
necessary, and in reliance thereon, and subject to the effectiveness of the
Registration Statement under the Act, we are of the opinion that upon conclusion
of the transactions contemplated by us to be taken prior to the sale of the
Shares, the Shares when sold in the manner described in the Registration
Statement and in accordance with the underwriting agreement to be entered into
among the Company, the Underwriters and the Selling Stockholders, will be duly
authorized, legally issued, fully paid and nonassessable.
<PAGE>
We are admitted to practice in California. We are not admitted to practice
in Delaware. However, we are generally familiar with the Delaware General
Corporation Law and have made such review thereof as we consider necessary for
the purpose of rendering this opinion. Subject to the foregoing, this opinion is
limited to the Delaware General Corporation Law and the present federal laws of
the United States.
Our opinion does not address or include the accuracy, completeness, fairness
or adequacy of the disclosures contained in the Registration Statement under the
securities or other laws and regulations of the United States or any state or
other jurisdiction. No opinion is expressed by us as to matters of conflict
<PAGE>
EarthShell Container Corporation
March 22, 1998
Page 2
or choice of law. We undertake no obligation to advise you as a result of
developments occurring after the date hereof or as a result of facts or
circumstances brought to our attention after the date hereof.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the General Rules and Regulations of the Commission. This opinion is
rendered solely for your benefit and may not be otherwise copied, quoted or
relied upon without our prior written consent.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE>
EXHIBIT 10.15
[LETTERHEAD]
March 18, 1998
Mr. John Daoud
Secretary/Director
EARTHSHELL CONTAINER CORPORATION
300 Miramonte Drive
Santa Barbara, CA 93109-1419
Re: #00709056790 Note #3
Dear Mr. Daoud:
Imperial Bank has approved an additional extension of the Earthshell Container
Corporation subject credit facility to April 15, 1998 from the current maturity
date of March 21, 1998 as evidenced by a certain note dated December 31, 1997
and a certain letter dated February 5, 1998 respectively. Effective upon the
Bank's receipt of your acceptance, the new maturity date will be April 15, 1998.
Except as modified and extended hereby, the existing documentation as amended
concerning your obligations remains in full force and effect.
Sincerely,
/s/ Donald D. Douthwright
Donald D. Douthwright
Regional Vice President
ACKNOWLEDGED AND ACCEPTANCE
EARTHSHELL CONTAINER CORPORATION
By: /s/ JOHN DAOUD
--------------------------
Its: Secretary/Director
<PAGE>
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
BETWEEN
EARTHSHELL CORPORATION
AND
DAVID H. KENNEDY
This Employment Agreement (the "Agreement") is entered into this
16th day of February, 1998, by and between EarthShell Corporation, a Delaware
corporation with its principal office located in Santa Barbara, California
(the "Company"), and David H. Kennedy, an individual ("Executive"). This
Agreement shall become effective on the first business day following the
consummation of the Company's initial public offering (the "Effective Date")
AGREEMENT
1. TERM. The term of Executive's employment under this Agreement
shall commence on the Effective Date and shall terminate at the time set
forth in Section 5 (the "Employment Term").
2. SERVICES PROVIDED TO THE COMPANY. Commencing as of the
Effective Date, Executive shall be employed by the Company as its General
Counsel and Executive agrees to such employment. During the Employment Term,
Executive shall devote all of his regular working hours to the business and
welfare of the Company and its subsidiaries. Executive, however, may spend a
reasonable amount of time with respect to charitable and civic activities
(including serving on the board of directors of charitable organizations) and
may make personal investments or conduct private business affairs to the
extent that such activities do not materially interfere with the services
required under this Agreement. Executive shall report directly to the Chief
Executive Officer of the Company with respect to the Company's legal affairs
and he shall report directly to the Chairman of the Company's Board of
Directors and the Company's Audit Committee with respect to regulatory and
securities matters. Executive shall be secondarily responsible (after the
Company's Chief Financial Officer and Chief Operating Officer) for investor
relations. During the Employment Term, Executive agrees to use his best
efforts to advance the business and welfare of the Company, and to render his
services under this Agreement fully, faithfully, diligently, competently and
to the best of his ability. Executive warrants that he is free to enter into
and fully perform the terms of this Agreement.
3. COMPENSATION TO EXECUTIVE.
(a) BASE SALARY. During the term of this Agreement, the
Company shall pay to Executive a base salary in the amount of $360,000 per
annum, payable in accordance with the normal payment pattern of the Company
(not to be less frequently than monthly).
(b) STOCK OPTIONS. Pursuant to the Company's 1995 Stock
Incentive Plan (the "Plan"), on the Effective Date, the Company shall grant
to Executive options to acquire 50,000 shares of the Company's common stock
(based on a 262 for one stock split) at an exercise price equal to the price
per share at which the Company's common stock is first sold to the public
<PAGE>
in its initial public offering. Such options shall vest at the rate of 25%
on each anniversary of the Effective Date. All options shall become fully
vested on the fourth anniversary of the Effective Date.
(c) ADDITIONAL COMPENSATION. Executive shall receive a
"signing" bonus in the amount of $15,000, payable within thirty (30) days
following the Effective Date. Executive may also be entitled to receive (i)
an annual bonus, the amount of which shall be determined by the Compensation
Committee (the "Compensation Committee") of the Company's Board of Directors
(the "Board"), in its sole discretion, and (ii) options or other rights to
acquire the Company's common stock under such terms and conditions as are
determined by the Stock Option Committee (the "Option Committee") of the
Board in its sole discretion. In making such determinations, the
Compensation Committee and Option Committee shall consider, among other
things, the annual financial results of the Company and Executive's
contributions thereto.
4. EMPLOYEE BENEFITS. The Company shall provide to Executive
each of the following benefits:
(a) BUSINESS EXPENSES. The Company shall pay or reimburse
Executive for all reasonable out-of-pocket expenses incurred by Executive in
the course of providing his services hereunder and which are consistent with
the Company's expense reimbursement guidelines or policies. Such
reimbursement shall be made by the Company within thirty (30) days after
receipt of a statement therefor from Executive setting forth in reasonable
detail the expenses for which reimbursement is requested, accompanied by
reasonable documentation evidencing such expenses.
(b) INSURANCE COVERAGE AND BENEFITS. During the term of this
Agreement, the Company shall provide Executive, at the Company's expense,
with coverage under the major medical, hospitalization, disability and other
insurance programs maintained by the Company for its officers generally, or
if none is maintained for its officers generally, its employees generally.
In addition, Executive shall receive during the term of this Agreement all
other Company-provided benefits, including vacation and sick pay benefits,
that are, from time to time, made available by the Company to its officers
generally or, if not made to its officers generally, its employees generally.
(c) RELOCATION EXPENSES. Executive shall be employed at the
Company's headquarters in Santa Barbara, California. Executive shall be
reimbursed for all reasonable out-of-pocket expenses incurred by Executive in
moving his family, household and personal possessions to Santa Barbara,
California, including transportation costs and travel and meal expenses, and
the real estate commissions incurred by Executive in selling his current
residence (not to exceed 6% of the selling price of the residence).
(d) TEMPORARY HOUSING. Following the Effective Date and
through June 30, 1998, the Company shall provide Executive with housing in
the form of hotel accommodations in the Santa Barbara area. It is expected
that Executive's family will relocate to the Santa Barbara area following the
end of the current school term.
2
<PAGE>
Executive understands and agrees that the Company reserves the right to
change his employee benefits provided such change applies generally to all of
the Company's employees. This includes, but is not limited to, health and
welfare benefits and any deferred compensation, profit-sharing or pension
arrangements.
5. TERMINATION.
(a) Executive's employment hereunder may be terminated upon
thirty (30) days written notice by Executive or the Company for any reason or
for no reason whatsoever, provided that if the Company terminates Executive's
employment for other than Cause, or should Executive terminate his employment
for Good Reason, Executive shall be entitled to severance pay equal to 100%
of his annual base salary. All payments and benefits due Executive hereunder
(other than for COBRA benefits, compensation and vacation pay accrued through
the date of termination) shall cease upon termination of Executive's
employment pursuant to this Section 5.
(b) Executive shall not be entitled to any severance payment
if his employment shall be terminated for "Cause." For purposes of this
Agreement, "Cause" shall be defined as the following occurrences:
(i) A material breach by Executive of the provisions of
this Agreement (or the Confidentiality Agreement referred to in
Section 6);
(ii) Executive's substantial misconduct or dishonesty,
commission of an act of fraud upon the Company or other deliberate act or
omission detrimental or damaging in a significant way to the goodwill of
the Company or materially damaging to the Company's relationship with its
licensees, joint venturers, customers or suppliers;
(iii) Executive's failure or refusal to perform
faithfully and diligently his duties and responsibilities under this
Agreement or violation of any duty of loyalty (including, without
limitation, self-dealing to the Company's detriment);
(iv) Executive's medically-verifiable inability to perform
a substantial portion of his duties under this Agreement due to physical
or mental incapacity; or
(v) Executive's death.
(c) Executive may terminate his employment hereunder for Good
Reason, in which event Executive shall be entitled to receive the severance
pay set forth in Section 5(a). For purposes of this Agreement, "Good Reason"
shall mean, without Executive's express written consent, the occurrence (a
"Change") of any of the following circumstances:
(i) a significant adverse alteration or diminution in the
nature of Executive's duties or responsibilities from those in effect
immediately prior to such
3
<PAGE>
Change, other than actions that are fully corrected by the Company within
ten (10) days after receipt of written notice from Executive;
(ii) any failure by the Company to comply with any material
provision of this Agreement that has not been cured within ten (10) days
after notice of such noncompliance has been given by Executive to the
Company; or
(iii) any requirement by the Company that Executive
perform his services on a permanent basis at a location that is more than
thirty (30) miles from the Company's headquarters in Santa Barbara,
California.
(d) Executive acknowledges and agrees that the provisions of
this Section 5 state his entire and exclusive rights, entitlements and
remedies against the Company, its successors, assigns, affiliates and
representatives for any termination of employment by the Company. As a
material inducement to the Company to enter into this Agreement, Executive
represents to the Company that he will make no other claims in any such event.
6. CONFIDENTIAL AND PROPRIETARY INFORMATION. Executive agrees to
execute and deliver to the Company its standard non-disclosure,
non-competition and non-solicitation agreement (the "Confidentiality
Agreement").
7. GENERAL PROVISIONS.
(a) NOTICES. Any notice to be given pursuant to this
Agreement shall be in writing and, in the absence of receipted hand delivery,
shall be deemed duly given when mailed, if the same shall be sent by
certified or registered mail, return receipt requested, or by a nationally
recognized overnight courier, and the mailing date shall be deemed the date
from which all time periods pertaining to a date of notice shall run.
Notices shall be addressed to the parties at the following addresses:
If to the Company, to: EarthShell Corporation
800 Miramonte Drive
Santa Barbara, California 93109
Attention: Chairman of the Board
If to Executive, to: David H. Kennedy
c/o EarthShell Corporation
800 Miramonte Drive
Santa Barbara, California 93109
(b) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the Company and any successors whether
by merger, consolidation, transfer of substantially all assets or similar
transaction, and it shall be binding upon and shall inure to the benefit of
Executive and his heirs and legal representatives. This Agreement is
personal to Executive and shall not be assignable by Executive.
4
<PAGE>
(c) WAIVER OF BREACH. The waiver by the Company or Executive
of a breach of any provision of this Agreement by the other shall not operate
or be construed as a waiver of any subsequent breach by the other.
(d) ENTIRE AGREEMENT/AMENDMENT. This Agreement shall
constitute the entire agreement between the parties hereto with respect to
the subject matter hereof, and shall supersede all previous oral and written
and all contemporaneous oral negotiations, commitments, agreements and
understandings relating hereto. Any amendment to this Agreement shall be
effective only if it is in writing and signed by the parties to this
Agreement.
(e) APPLICABLE LAW. The validity of this Agreement and the
interpretation and performance of all of its terms shall be construed and
enforced in accordance with the laws of the State of California without
reference to choice or conflict of law principles.
(f) SEVERABILITY. Any provision of this Agreement that is
deemed invalid, illegal or unenforceable in any jurisdiction shall, as to
that jurisdiction and subject to this paragraph, be ineffective to the extent
of such invalidity, illegality or unenforceability, without affecting in any
way the remaining provisions hereof in such jurisdiction or rendering that or
any other provision of this Agreement invalid, illegal or unenforceable in
any other jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall
be modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(g) ARBITRATION OF FUTURE DISPUTES. In the event of any
dispute concerning the validity, interpretation, enforcement or breach of
this Agreement or in any way related to Executive's employment with the
Company or the termination of such employment (including any associated
claims involving any officers, directors, employees or agents of the
Company), excepting only the parties' rights under the Confidentiality
Agreement to seek the equitable remedies provided thereunder, the dispute
shall be resolved by arbitration in Santa Barbara, California, in accordance
with the then existing Model Employment Dispute Rules of the American
Arbitration Association, and judgment upon any arbitration award may be
entered by any state or federal court having jurisdiction thereof. The
parties intend this arbitration provision to be valid, enforceable,
irrevocable and construed as broadly as possible. If either party hereto
retains the services of an attorney to enforce any provision of this
Agreement, the prevailing party shall be entitled to its court costs and
reasonable attorney fees, as determined and awarded by the arbitrator.
(h) ASSIGNMENT. The Company shall have the right to assign
its respective rights and obligations hereunder to any entity which at any
time may be a direct or indirect subsidiary of the Company, or any successor
in interest of the Company whether by merger, consolidation, purchase of
assets or otherwise, or any other person or entity controlling or which at
any time controls or is under common control with the Company or any of its
respective subsidiaries or successors.
(i) COMPLIANCE WITH LAWS AND POLICIES. Executive agrees that
he will at all times comply with all applicable laws and all current and
future policies of the Company.
5
<PAGE>
(j) COUNTERPARTS. This Agreement may be executed by the
parties in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first above written.
EARTHSHELL CORPORATION,
a Delaware corporation
By: /s/ ESSAM KHASHOGGI
---------------------------------------
Title: Chairman
-------------------------------------
DAVID H. KENNEDY
/s/ DAVID H. KENNEDY
-------------------------------------------
6
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year
Ended
31-Dec-97
-----------
<S> <C> <C>
Actual Net Loss......................................... $ 18,992
Less: Amortization of Loan Discount..................... (230)
Less: Interest Expense.................................. (3,246)
-----------
Pro Forma Net Loss Available to Common Stockholders..... $ 15,516
-----------
-----------
Pro Forma Common Shares Outstanding:
Common Stock, issued and outstanding.................... 82,530,000
Shares assumed issuable related to
conversion of Series A Preferred Stock................ 6,988,850
Shares to be issued the proceeds from
which will be used to pay accrued dividends
at $19.00 per share................................... 481,573
Shares to be issued the proceeds from
which will be used to pay notes payable,
account payable and accrued interest
at $19.00 per share................................... 2,378,829
-----------
Pro Forma Common Shares Outstanding..................... 92,379,252
-----------
-----------
Pro Forma Net Loss Per Common Share..................... $0.17
-----------
-----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement,
Registration No. 333-13287, of EarthShell Container Corporation on Form S-1
of our report (which report contains an explanatory paragraph related to the
Company's ability to continue as a going concern) dated February 20, 1998
(except for Note 10 as to which the date is March 23, 1998) appearing in the
Prospectus which is a part of the Registration Statement and to the
references to us under the headings "Selected Financial Data" and "Experts"
in such Prospectus.
Deloitte & Touche LLP
Los Angeles, California
March 23, 1998
<PAGE>
EXHIBIT 23.2
CONSENT
We hereby consent to the reference to this firm under the heading
"Legal Matters" contained in the Prospectus that forms a part of the
Registration Statement on Form S-1 (File No. 333-13287) for EarthShell
Container Corporation, a Delaware corporation (the "Company"). In giving
this consent we do not admit that we are within a category of person whose
consent is required under Section 7 of the Securities Act of 1933, as
amended, or the general rules and regulations promulgated thereunder.
WORKMAN, NYDEGGER & SEELEY
March 20, 1998
By: /s/ DAVID SEELEY
-------------------------------
David Seeley, Vice President
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF EARTHSHELL CORPORATION]
January 16, 1998
George M. Savage
Executive Vice President
Cal Recovery, Inc.
725 C Alfred Nobel Drive
Hercules, CA 94547
Dear Mr. Savage:
As we recently discussed, EarthShell Container Corporation (the "Company")
intends to complete an initial public offering of its common stock. In
connection with the initial public offering, the Company has filed a
Registration Statement with the Securities and Exchange Commission which
references certain information contained in the studies you have performed
and identifies the studies as the source of such information. Attached is
the excerpt from the Registration Statement regarding the studies. Please
consent to the Company's use of this information and its identification of
the studies in the Registration Statement by executing and dating this letter
in the space provided below.
Sincerely,
/s/ D. SCOTT HOUSTON
- ----------------------------
D. Scott Houston
Chief Financial Officer
Agreed and consented to this 23rd day of January, 1998 as modified.
/s/ G. M. SAVAGE
- ---------------------------
Name and date of applicable studies:
Documented in the attached prior correspondence to EarthShell dated 12/19/97.
<PAGE>
According to research on the performance of various formulations of the
EARTHSHELL sandwich container commissioned by the Company and performed by Cal
Recovery Inc., an international waste management consulting company, when
crushed or broken, such EARTHSHELL sandwich containers were shown to be
biodegradable in a composting environment and observed to physically dissolve
in water. As a result, the Company believes that EARTHSHELL products
substantially reduce the risk to wildlife when compared to polystyrene food
service disposables and may help mitigate the litter concern created by
their improper disposal.
<PAGE>
EXHIBIT 23.5
[LETTERHEAD OF EARTHSHELL CORPORATION]
Via FAX and MAIL
November 21, 1997
Dr. Vincent T. Breslin
Assistant Professor
The Research Foundation of
State University of New York
Stony Brook, NY 11794-3366
Dear Dr. Breslin:
I tried to contact you by phone last week but was unsuccessful. As you
may know, EarthShell Container Corporation (the "Company") intends to
complete an initial public offering of its common stock. In connection with
the initial public offering, the Company has filed a Registration Statement
with the Securities and Exchange Commission which references certain
information contained in a report prepared by you entitled "The Assessment of
the Compostability of EarthShell Disposable Packaging" (the "Study") and
identifies the Study as the source of such information. Attached is the
excerpt from the Registration Statement regarding the Study. We would
appreciate it if you would consent to the Company's use of this information
and its identification of the Study in the Registration Statement by
executing and dating this letter in the space provided below.
If you have any questions, please call. Thank you.
Sincerely,
/s/ D. SCOTT HOUSTON
- -------------------------
D. Scott Houston
Chief Financial Officer
Agreed and consented to this 25th day of November, 1997.
/s/ VINCENT T. BRESLIN
- ----------------------------------
Vincent T. Breslin
/s/ IVAR STRAND
- ----------------------------------
Ivar Strand
Contracts and Grants Administrator
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,437
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,973
<PP&E> 4,606,605
<DEPRECIATION> (865,476)
<TOTAL-ASSETS> 3,778,102
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0
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