<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-13287
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
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 FEBRUARY 17, 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 the 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 this 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 Discount and Proceeds to
the Company will be $ , and , respectively, and to the Selling
Stockholders will be $ , and , respectively.
--------------------
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 is expected 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 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.
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"), 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
3
<PAGE>
contract with design engineers to construct turnkey manufacturing lines for
lease to licensees or contribution to joint ventures. The Company intends to use
$44.0 million of the proceeds of this Offering to fund the initial procurement
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. EKI has obtained 52 U.S.
and 26 foreign patents and has 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 September 30, 1997, had
expended approximately $66.0 million for research and development, patent
expenses and general and administrative costs. 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 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; secure additional
patent protection; pay accrued dividends; and for
general corporate purposes, including anticipated
operating losses.
Proposed Nasdaq National Market
symbol.......................... ERTH
</TABLE>
(1) Excludes options outstanding as of September 30, 1997 to purchase 1,084,680
shares of Common Stock and warrants to purchase 37,321 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
IMMEDIATELY PRIOR TO THE OFFERING, 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. 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
NINE MONTHS ENDED (INCEPTION)
YEAR ENDED DECEMBER 31, SEPTEMBER 30, THROUGH
---------------------------------------------- --------------------- SEPTEMBER 30,
1993(1) 1994 1995 1996 1996 1997 1997
----------- --------- --------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development
expenses.................... $ 3,309 $ 10,930 $ 9,100 $ 10,159 $ 8,100 $ 6,242 $ 39,741
General and administrative
expenses.................... 2,500 3,428 2,363 3,406 1,867 1,409 13,106
Interest (income) expenses,
net......................... (147) (290) 478 1,692 1,111 2,422 4,154
Depreciation and
amortization................ 601 797 44 311 212 369 2,122
Patent expenses............... 1,520 1,717 1,929 1,382 1,071 551 7,099
Net loss...................... (7,783) (16,582) (13,914) (16,950) (12,361) (10,993) (66,222)
Pro forma net loss per
share(2)(3)................. $ (.26) $ (.22)
Weighted average number of
shares used in computing pro
forma net loss per
share(3).................... 90,633,384 90,717,390
Supplemental pro forma net
loss per share.............. (.24) (.19)
Weighted average number of
shares used in computing
supplemental pro forma net
loss per share (3).......... 92,786,910 92,870,916
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(4)
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 272 $ 272 $ 136,743
Working capital (deficit).............................................. (42,160) (50,772) 135,228
Total assets........................................................... 2,733 2,733 139,204
Notes payable, payable to majority shareholder, accrued interest and
accrued dividends.................................................... 40,917 49,529 --
Deficit accumulated during development stage........................... (66,222) (74,834) (74,834)
Stockholders' equity (deficit)(5)...................................... (39,725) (48,337) 137,663
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Pro forma to give effect to the assumed conversion of Series A Preferred
Stock into Common Stock and the accrual of preferred dividends of $7,016,000
(as of December 31, 1996) and $8,612,000 (as of September 30, 1997) payable
upon such conversion.
(3) As a result of the planned 262-for-one stock split and the significant pro
forma changes in the capitalization of the Company, pro forma and
supplemental pro forma net loss per share and weighted average shares
outstanding information are presented only for the most recent fiscal year
and interim period. Pro forma net loss per share has been calculated by
dividing net loss plus dividends 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 (453,263
shares as of September 30, 1997 and 369,257 shares as of December 31, 1996);
and (iv) the net shares issuable related to stock options using the Treasury
Stock Method (745,277 shares). Supplemental pro forma net loss per share has
been calculated by dividing pro forma net loss less interest expense 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 (453,263 shares as of September 30, 1997 and
369,257 shares as of December 31, 1996); (iv) the net shares issuable
related to stock options using the Treasury Stock Method (745,277 shares)
and (v) the number of shares (priced at $19.00 per share) the proceeds from
which will be used to repay the note payable, account payable and accrued
interest owed to majority stockholder ($31,917,000) and the $9,000,000 note
payable to bank (an aggregate of 2,153,526 shares).
(4) 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
$31,917,000 in indebtedness to EKI, $9,000,000 in note payable to Imperial
Bank and the payment of preferred dividends of $8,612,000. See "Use of
Proceeds" and "Capitalization."
(5) No cash dividends were declared or paid in any of the periods presented
except as noted in note (2) 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 September 30, 1997, the Company had incurred aggregate net
operating losses of approximately $66.0 million. At September 30, 1997, the
Company had a working capital deficit of approximately $42.0 million and a
stockholders' deficit of $40.0 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 September 30,
1997, the Company's outstanding borrowings from EKI and Imperial Bank totaled
$32.0 million and $9.0 million, respectively. The Imperial Bank line of credit
was increased to $14.0 million in December 1997 and is due and payable on March
21, 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 have 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 $32.0 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 $8.6 million (as
of September 30, 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 $47,751,996 million in net proceeds
(4,653,684 shares and $83,114,796 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 $17.62. 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 $8.6 million as of September 30, 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 84,534,588
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 (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) shares 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 constructing turnkey manufacturing lines for lease to
licensees or contribution to joint ventures (approximately $44.0 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 for additional patent applications for its licensed
technology; (v) establish a fund for the enforcement and protection of patents
((iv) and (v) together, approximately $10.0 million); and (vi) pay accrued
dividends on the Series A Preferred Stock (approximately $8.6 million as of
September 30, 1997).
In addition, approximately $49.0 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 $35.0 million in principal, accrued interest and
accounts payable as of the date hereof), and Imperial Bank (anticipated to be
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 September 30, 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
September 30, 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 $54.0 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, the Company will be
required to pay accrued dividends thereon (approximately $8.6 million as of
September 30, 1997) following completion of the Offering. 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 September 30, 1997, the actual
capitalization of the Company (adjusted for the planned 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>
SEPTEMBER 30, 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........................................................ $ 31,917 $ 31,917 $ --
Note payable to bank................................................. 9,000 9,000 --
Dividends payable.................................................... -- 8,612 --
---------- ------------- ---------------
Total indebtedness and dividends payable......................... $ 40,917 $ 49,529 --
---------- ------------- ---------------
---------- ------------- ---------------
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.................................................... 70 -- --
Common stock, par value $.01 per share: 200,000,000 shares
authorized; 82,530,000 shares issued and outstanding; (pro forma
89,518,850); 100,045,166 shares issued and outstanding as adjusted
(3)................................................................ $ 825 $ 895 1,000
Additional paid-in capital (preferred and common).................... 25,602 25,602 211,497
Deficit accumulated during the development stage..................... (66,222) (74,834)(4) (74,834)(4)
---------- ------------- ---------------
Total stockholders' equity (deficit)............................. $ (39,725) $ (48,337) $ 137,663
---------- ------------- ---------------
---------- ------------- ---------------
</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 $8,612,000 in dividends (as of September 30,
1997) 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 $31,917,000 in indebtedness to EKI,
$9,000,000 in a note payable to Imperial Bank and the payment of preferred
dividends of $8,612,000. See "Use of Proceeds" and "Capitalization."
(3) Excludes 1,084,680 shares issuable upon exercise of outstanding stock
options (as of September 30, 1997). See "Management-- Stock Option Plans."
(4) Gives effect to $8,612,000 of dividends payable (as of September 30, 1997)
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 September 30, 1997
was $48.3 million, or $.54 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 September 30, 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 September 30, 1997 would have been
approximately $137.8 million, or $1.38 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 $17.62 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)..................................................... $ (.54)
Increase per share attributable to new stockholders....... 1.92
---------
Pro forma net tangible book value per share after
Offering.................................................. 1.38
---------
Dilution per share to new stockholders...................... $ 17.62
---------
---------
</TABLE>
- ------------------------------
(1) The table excludes shares issuable and proceeds that would be received upon
exercise of options outstanding on September 30, 1997. See
"Management--Stock Option Plans" and "Description of Capital Stock."
The following table summarizes, as of September 30, 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 1,084,680 shares issuable upon the exercise
of outstanding stock options (as of September 30, 1997). 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 85.1% if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares purchased by new
stockholders to 15,180,000 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, 1995 and 1996,
and for each of the years in the three-year period ended December 31, 1996, 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 and 1994 are
derived from audited financial statement balance sheets 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. The selected financial
data for the nine months ended September 30, 1996 and 1997, and for the period
from inception, November 1, 1992, through September 30, 1997, have been derived
from the unaudited financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the financial position and the results of operations for these periods. The
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results to be expected for the entire year. As of the end of
its December 31, 1997 fiscal year, the Company anticipates that its aggregate
net operating loss will be approximately $74.4 million and its accumulated
deficit will be approximately $74.0 million.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ----------------------
1993 (1) 1994 1995 1996 1996 1997
----------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses................ $ 3,309 $ 10,930 $ 9,100 $ 10,159 $ 8,100 $ 6,242
General and administrative expenses.............. 2,500 3,428 2,363 3,406 1,867 1,409
Interest (income) expenses, net.................. (147) (290) 478 1,692 1,111 2,422
Depreciation and amortization.................... 601 797 44 311 212 369
Patent expenses.................................. 1,520 1,717 1,929 1,382 1,071 551
Net loss......................................... (7,783) (16,582) (13,914) (16,950) (12,361) (10,993)
Pro forma net loss per share (2)(3).............. $ (.26) $ (.22)
Weighted average shares used in computing pro
forma net loss per share (3).................... 90,633,384 90,717,390
Supplemental pro forma net loss per share........ (.24) (.19)
Weighted average number of shares used in
computing supplemental pro forma net loss per
share (3)....................................... 92,786,910 92,870,916
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
THROUGH
SEPTEMBER 30,
1997
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses................ $ 39,741
General and administrative expenses.............. 13,106
Interest (income) expenses, net.................. 4,154
Depreciation and amortization.................... 2,122
Patent expenses.................................. 7,099
Net loss......................................... (66,222)
Pro forma net loss per share (2)(3)..............
Weighted average shares used in computing pro
forma net loss per share (3)....................
Supplemental pro forma net loss per share........
Weighted average number of shares used in
computing supplemental pro forma net loss per
share (3).......................................
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, --------------------------
------------------------------------------
1993 1994 1995 1996 ACTUAL PRO FORMA (2)
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 16,170 $ 2,885 $ 266 $ 21 $ 272 $ 272
Working capital (deficit)......................... 15,230 (124) (14,569) (31,489) (42,160) (50,772)
Total assets...................................... 17,640 3,250 2,228 2,817 2,733 2,733
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... 624 3,267 13,560 29,873 40,917 49,529
Deficit accumulated during development stage...... (7,783) (24,365) (38,279) (55,229) (66,222) (74,834)
Stockholders' equity (deficit) (5)................ 16,700 118 (12,678) (28,732) (39,725) (48,337)
<CAPTION>
PRO FORMA AS
ADJUSTED(4)
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 136,743
Working capital (deficit)......................... 135,228
Total assets...................................... 139,204
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... --
Deficit accumulated during development stage...... (74,834)
Stockholders' equity (deficit) (5)................ 137,663
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Pro forma to give effect to the assumed conversion of Series A Preferred
Stock of the Company outstanding into Common Stock and the accrual of
preferred dividends of $7,016,000 (as of December 31, 1996) and $8,612,000
(as of September 30, 1997) payable upon such conversion.
(3) As a result of the planned 262-for-one stock split and the significant pro
forma changes in the capitalization of the Company, pro forma and
supplemental pro forma net loss per share and weighted average shares
outstanding information are presented only for the most recent fiscal year
and interim period. Pro forma net loss per share has been calculated by
dividing net loss plus dividends 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 (453,263
shares as of September 30, 1997 and 369,257 shares as of December 31, 1996);
and (iv) the net shares issuable related to stock options using the Treasury
Stock Method (745,277 shares). Supplemental pro forma net loss per share has
been calculated by dividing pro forma net loss less interest expense 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 (453,263 shares as of September 30, 1997 and
369,257 shares as of December 31, 1996); (iv) the net shares issuable
related to stock options using the Treasury Stock Method (745,277 shares)
and (v) the number of shares (priced at $19.00 per share) the proceeds from
which will be used to repay the $31,917,000 indebtedness owed to majority
stockholder and the $9,000,000 note payable to bank (an aggregate of
2,153,526 shares).
(4) 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
$31,917,000 in indebtedness to EKI, $9,000,000 in note payable to Imperial
Bank and the payment of preferred dividends of $8,612,000. See "Use of
Proceeds" and "Capitalization."
(5) No cash dividends were declared or paid in any of the periods presented
except as noted in note (2) 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 INTERIM 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
ALI-ITE composite material. 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 $66.0 million
from its inception in November 1992 through September 30, 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
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
The Company's net loss decreased $1.4 million from $12.4 million for the
nine months ended September 30, 1996 to $11.0 million for the nine months ended
September 30, 1997.
20
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL products decreased $1.9 million
from $8.1 million for the nine months ended September 30, 1996 to $6.2 million
for the nine months ended September 30, 1997. The amount of research and
development services billed by EKI to the Company decreased $1.5 million from
$7.0 million for the nine months ended September 30, 1996 to $5.6 million for
the nine months ended September 30, 1997. In 1996, the Company incurred higher
research and development expenses primarily due to development of the Company's
sandwich container pilot line at a research facility in Rock Hill, South
Carolina operated by Genpak. The Company completed its efforts with Genpak near
the end of 1996 and relocated the pilot line to Santa Barbara, California.
Accordingly, costs related to this off-site manufacturing effort have not been
incurred during 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses decreased $458,000 from $1.9 million for the nine months ended
September 30, 1996 to $1.4 million for the nine months ended September 30, 1997.
This decrease was primarily due to the recognition of compensation expense of
$650,000 related to the stock options of one executive which vested during 1996
which were not incurred during 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $157,000 from $212,000 for the nine months ended September 30,
1996 to $369,000 for the nine months ended September 30, 1997. The increase in
depreciation expense was mainly a result of the purchase of commercial scale
pilot manufacturing equipment.
PATENT EXPENSES. Legal fees under the Prior Patent Allocation Agreement
with EKI decreased $549,000 from $1.1 million for the nine months ended
September 30, 1996 to $551,000 for the nine months ended September 30, 1997. The
decrease was primarily a result of filing fewer new patent applications.
INTEREST EXPENSE. Total interest expense increased $1.3 million from $1.1
million for the nine months ended September 30, 1996 to $2.4 million for the
nine months ended September 30, 1997. The increase in interest expense was
mainly due to additional borrowings from EKI and additional borrowings against
the Company's line of credit during the first nine months of 1997.
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 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.
21
<PAGE>
DEPRECIATION EXPENSE. 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/EXPENSE. 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 $548,000 for the year ended
December 31,1995 to $380,000 for the year ended December 31, 1994. 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 EXPENSE. 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
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
22
<PAGE>
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. 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 September 30,
1997, the Company had incurred aggregate net operating losses of approximately
$66.0 million; as of the end of its December 31, 1997 fiscal year, the Company
anticipates that its aggregate net operating loss will be approximately $74.4
million.
Funds to finance the operation of the Company through September 30, 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 September 30, 1997, the
Company has borrowed approximately $10.7 million from EKI (excluding the
payables owed to EKI) and $9.0 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 September 30, 1997,
the Company received approximately $42.8 million in cash from financing
activities. Outstanding loans from, and payables owed to, EKI totaled $31.9
million as of September 30, 1997. Credit extended under the Imperial Bank line
of credit as of September 30, 1997 totaled $9.0 million.
From inception through September 30, 1997, the Company had used
approximately $37.4 million of cash for operating activities and approximately
$5.1 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 $5.8 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 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
23
<PAGE>
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. Proceeds
available for working capital are currently estimated to be approximately $54.0
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 $34.3 million from its
inception through December 31, 1996. 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.
24
<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 is expected 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 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.
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 $44.0 million of the
proceeds of this Offering to fund the initial procurement 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
25
<PAGE>
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. EKI has obtained 52 U.S.
and 26 foreign patents and has 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 September 30, 1997, had
expended approximately $66.0 million for research and development, patent
expenses and general and administrative costs. 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 fully addresses 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 unacceptable performance limitations and have
not proven to be economically viable as disposable packaging.
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.
26
<PAGE>
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.
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:
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<PAGE>
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 intends to engage 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 $44.0 million of the
proceeds of the Offering to support the development of sufficient production
capacity to meet anticipated customer demand for EARTHSHELL products. 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 manufacturing processes
used to make them. EKI has received 52 U.S. and 26 foreign patents with regard
to the compounds, manufacturing processes and product designs applicable to
EARTHSHELL products and has 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.
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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.
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
29
<PAGE>
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, 1994, 1995 and 1996 and the nine months
ended September 30, 1997 were approximately $10.9 million, $9.1 million, $10.2
million and $6.2 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 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."
30
<PAGE>
The Company will be dependent 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 $44.0 million of the proceeds of the Offering to
construct turnkey manufacturing lines in cooperation with its licensees and
joint ventures. 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 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.
31
<PAGE>
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 test of the EARTHSHELL Big Mac sandwich container manufactured
on a fully-integrated commercial production line prior to the national
introduction of the product.
McDonald's primary packaging supplier, Perseco, has entered into a supply
agreement with Sweetheart, a leading manufacturer of disposable packaging,
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
obligation to purchase EARTHSHELL Big Mac sandwich 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
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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
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 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
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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 of America) 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 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 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
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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 is aware of 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. EKI will
be obligated to pay, and the Company will be obligated to reimburse EKI pursuant
to the Patent Allocation Agreement, an additional consideration of up to $3.5
million for this technology, which may be offset in whole or in part based on
the amount of equipment that the Company and its licensees purchase from the
current owner of the technology during the first five years following the
introduction of EARTHSHELL products, and an additional $3.0 million if the
Company uses any part of this technology.
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 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
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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,
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, plastic
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 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.
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
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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 becomes effective February
19, 1998, will add 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 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
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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, 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 $9.5 million, $8.4 million, $9.1
million and $5.6 million in 1994, 1995, 1996 and the nine months ended September
30, 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
$1.7 million, $1.9 million, $1.4 million and $551,000 in 1994, 1995, 1996 and
the nine months ended September 30, 1997, respectively.
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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 September 30, 1997,
the indebtedness owed to EKI totaled $31.9 million, including a note payable in
the amount of $29.5 million, $594,000 in accrued interest and $1.8 million 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 shareholder 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 in 1996 and 1997. 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 September 30, 1997, the Company had six 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 September 30, 1997. The Company anticipates that during the one-year
period following completion of the Offering, the Company will add an additional
19 employees, of whom 13 will be involved in product development, five will be
involved in administration and one 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).................... 42 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
John Daoud (2)(3)...................... 62 Secretary and Director
James P. Argyropoulos (1)(5)........... 53 Director
Ellis B. Jones (3)(4).................. 43 Director
Layla Khashoggi........................ 40 Director
William Marquard (3)................... 77 Director
Graham H. Phillips..................... 58 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, 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 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
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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.
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 1997, 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 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
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<PAGE>
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 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 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 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.
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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 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
43
<PAGE>
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 $ --
Chief Executive Officer
Graham H. Phillips(2)........................... 1997 191,667 -- 5,240 --
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 2.
(2) 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>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ RATES
NUMBER OF % OF TOTAL OF STOCK
SHARES OPTIONS 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 30 $ 15.20 1/8/02 $ 247,574 $ 535,755
Graham H. Phillips.................... 5,240 10 $ 15.20 11/4/02 $ 82,525 $ 178,585
Richard K. Hulme...................... 5,240 10 $ 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.
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 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
46
<PAGE>
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 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
47
<PAGE>
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.
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<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. 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.
Any costs incurred by EKI or the Company in connection with filing,
prosecuting, and maintaining patents or patent applications prior to September
30, 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 $1.7 million, $1.9 million, $1.4
million and $551,000 in connection with the applications during 1994, 1995, 1996
and the nine months ended September 30, 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 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
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<PAGE>
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 and 1996.
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
$9.5 million, $8.4 million, $9.1 million and $5.6 million to EKI for these
services under the Prior Technical Services Agreement during 1994, 1995, 1996
and for the nine months ending September 30, 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 September 30, 1997,
the indebtedness owed to EKI totaled $31.9 million, including a note payable in
the amount of $29.5 million, $594,000 in accrued interest and $1.8 million 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 shareholder 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 in 1996 and 1997. 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
February 1, 1997, 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) 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 (2) NUMBER CLASS BEING OFFERED
- ------------------------- ---------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Essam Khashoggi.......... 73,419,212(4)(5) 82.0% -- -- --
Simon K. Hodson.......... 15,720(5)(6) * -- -- --
Richard K. Hulme......... 267,240(7)(9) * -- -- --
D. Scott Houston......... 199,906(7) * -- -- --
James P. Argyropolous.... 1,053,240(8) 1.2% -- -- --
John Daoud............... 68,120(5) * -- -- --
Ellis Jones.............. 23,580(9) * -- -- --
Layla Khashoggi(10)...... 15,720(5) * -- -- --
William Marquard......... 15,720(5) * -- -- --
Graham H. Phillips....... 267,240(7) * -- -- --
Jerold H. Rubinstein..... 15,720(5) * -- -- --
All Directors and
Executive Officers as a
Group (11 Persons)..... 75,513,962(4)(5)(7)(8)(9) 84.2% -- -- --
E. Khashoggi Industries
LLC.................... 63,771,848 70.3% -- -- --
E. Khashoggi Industries
Inc. 7,478,790 8.2% -- -- --
Anaconda Opportunity
Fund, L.P.............. -- -- 1,805 6.8% 233,487
Carillon Bond Fund....... -- -- 500 1.9% 64,672
Charitable Lead Trust
Dtd. 2/3/83............ -- -- 310 1.2% 40,097
Financial Management
Advisors High Income,
L.P.................... -- -- 640 2.4% 82,781
Financial Management
Advisors High Yield
Capital Appreciation,
L.P.................... -- -- 811 3.0% 104,898
FMA High Yield Income LP,
Liquidating Trust...... -- -- 555 2.1% 71,788
David A. Gardner......... -- -- 500 1.9% 9,054
Hare & Co................ -- -- 2,000 7.5% 258,889
Mousseteek Free.......... -- -- 310 1.2% 40,097
G. Lynn Shostack......... -- -- 500 1.9% 27,162
Springtime Limited....... 1,048,000 1.0% 1,000 3.7% 297,494
W.S. Investments L.P..... -- -- 312 1.2% 40,355
Whittier Ventures, LLC... -- -- 500 1.9% 12,934
Williams, Jones &
Associates, Inc........ -- -- 4,875 18.3% 220,662
Remaining Selling
Stockholders, as a
group, each of whom
owns less than 1% of
the outstanding Common
Stock or Series A
Preferred Stock (57
persons)............... 1,731,296 2.2% 1,624 6.1% 1,169,405
<CAPTION>
COMMON SHARES BENEFICIALLY OWNED
AFTER OFFERING (1)
------------------------------------
PERCENT OF
NAME AND ADDRESS(3) NUMBER CLASS
- ------------------------- ---------- ----------
<S> <C> <C>
Essam Khashoggi.......... 73,419,212(4)(5) 73.4%
Simon K. Hodson.......... 15,720(5)(6) *
Richard K. Hulme......... 267,240(7)(9) *
D. Scott Houston......... 199,906(7) *
James P. Argyropolous.... 1,053,240(9) 1.1%
John Daoud............... 68,120(5) *
Ellis Jones.............. 23,580(9) *
Layla Khashoggi(10)...... 15,720(5) *
William Marquard......... 15,720(5) *
Graham H. Phillips....... 267,240(7)(8) *
Jerold H. Rubinstein..... 15,720(5) *
All Directors and
Executive Officers as a
Group (11 Persons)..... 75,513,962(4)(5)(7)(8)(9) 75.3%
E. Khashoggi Industries
LLC.................... 63,771,848 63.0%
E. Khashoggi Industries
Inc. 7,478,790 7.4%
Anaconda Opportunity
Fund, L.P.............. 239,432 *
Carillon Bond Fund....... 66,325 *
Charitable Lead Trust
Dtd. 2/3/83............ 41,121 *
Financial Management
Advisors High Income,
L.P.................... 84,895 *
Financial Management
Advisors High Yield
Capital Appreciation,
L.P.................... 107,573 *
FMA High Yield Income LP,
Liquidating Trust...... 73,620 *
David A. Gardner......... 121,945 *
Hare & Co................ 265,298 *
Mousseteek Free.......... 41,121 *
G. Lynn Shostack......... 103,836 *
Springtime Limited....... 2,759,280 2.7%
W.S. Investments L.P..... 40,387 *
Whittier Ventures, LLC... 118,065 *
Williams, Jones &
Associates, Inc........ 1,056,577 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 (57
persons)............... 1,806,653 1.8%
</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 64,588,764 shares held by EKI of which Mr. Khashoggi indirectly
owns a 90% beneficial interest and 8,814,728 shares held by Mr. Khashoggi's
other affiliated entities. Mr. Khashoggi has sole voting and dispositive
power with respect to all such 73,403,492 shares.
(5) Includes options to purchase 15,720 shares of Common Stock issued to
directors under the 1995 Stock Incentive Plan.
(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
directors under the 1995 Stock Incentive Plan.
(9) Includes options to purchase 10,480 shares of Common Stock issued to
directors under the 1995 Stock Incentive Plan.
(10) Ms. Khashoggi is Mr. Essam Khashoggi's spouse.
52
<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 September 30, 1997, there were 82,530,000 shares of Common Stock
outstanding, held of record by 83 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 September 30, 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 49 stockholders. Concurrently with or shortly following the
consummation of the Offering, the Company will 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 anticipated
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,
53
<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
54
<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 63.7% of the Common Stock will be owned upon
completion of the Offering by EKI. 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.
55
<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
74,482,932 shares, and have owned such shares for Rule 144 purposes since the
incorporation of the Company. Of the shares owned by non-affiliates, 11,535,598
shares have been held by such non-affiliates in excess of two years.
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 least 25% of such registrable securities may
require the Company to use commercially reasonable efforts
56
<PAGE>
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 September 30, 1997, there were outstanding stock options to purchase
an aggregate of 1,084,680 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, subject to certain exceptions, have agreed
with the Underwriters 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
59
<PAGE>
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 Corporation 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 Corporation............................................
------------
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.
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
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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. Subject to certain exceptions, all Selling Stockholders of the Company have
agreed to the foregoing restrictions for a period 270 days from the date of this
Prospectus.
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,
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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.
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 Underwriters and Representatives have informed the Company that they do
not expect discretionary sales by the Underwriters to exceed 5% 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".
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, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996, and for
the period from inception through December 31, 1996 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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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EARTHSHELL CORPORATION
Independent Auditors' Report.............................................................. F-2
Balance Sheets as of December 31, 1995 and
1996 and (unaudited) September 30, 1997 and pro forma September 30, 1997................ F-3
Statements of Operations for the years ended
December 31, 1994, 1995 and 1996, and for the
period from November 1, 1992 (inception)
through December 31, 1996 and (unaudited) the
nine months ended September 30, 1996 and 1997 and inception through September 30,
1997.................................................................................. F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 and
(unaudited) the nine months ended
September 30, 1997 and pro forma September 30, 1997..................................... F-5
Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996, and for the
period from November 1, 1992 (inception)
through December 31, 1996 and (unaudited)
the nine months ended September 30, 1996 and 1997 and inception through September 30,
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 1995, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception through December 31, 1996.
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 EarthShell Container Corporation as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 and for the
period from inception through December 31, 1996 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, 1996 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 14, 1997
F-2
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
-------------------------- SEPTEMBER 30, 1997
1995 1996 1997 (NOTE 1)
------------ ------------ -------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 266,046 $ 21,179 $ 271,978 $ 271,978
Prepaid insurance.......................... 68,862 12,443 23,042 23,042
Other assets............................... 1,641 26,877 1,699 1,699
------------ ------------ -------------- ---------------
Total current assets....................... 336,549 60,499 296,719 296,719
PROPERTY AND EQUIPMENT, NET.................. 1,891,122 2,756,935 2,435,909 2,435,909
------------ ------------ -------------- ---------------
TOTAL........................................ $ 2,227,671 $ 2,817,434 $ 2,732,628 $ 2,732,628
------------ ------------ -------------- ---------------
------------ ------------ -------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Notes payable and accrued interest to
majority stockholder..................... $ 12,984,736 $ 22,215,793 $ 30,137,180 $ 30,137,180
Note payable to bank....................... 6,904,775 9,000,000 9,000,000
Dividends payable.......................... 8,612,005
Payable to majority stockholder............ 574,857 752,192 1,780,404 1,780,404
Accounts payable and accrued expenses...... 1,346,179 1,676,642 1,539,624 1,539,624
------------ ------------ -------------- ---------------
Total current liabilities................ 14,905,772 31,549,402 42,457,208 51,069,213
------------ ------------ -------------- ---------------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 100,000
shares authorized; 35,000 Series A shares
designated; 26,675 Series A shares issued
and outstanding as of December 31, 1995
and 1996 and (unaudited) September 30,
1997..................................... 267 267 267
Additional paid-in preferred capital....... 24,472,734 24,472,734 24,472,734
Common stock, $.01 par value, 1,000,000
shares authorized; 315,000 issued and
outstanding as of December 31, 1995 and
1996 and (unaudited) September 30, 1997
(Pro forma 89,518,850 shares)............ 3,150 3,150 3,150 895,189
Additional paid-in common capital.......... 1,124,573 2,020,843 2,020,843 25,601,805
Deficit accumulated during the development
stage.................................... (38,278,825) (55,228,962) (66,221,574) (74,833,579)
------------ ------------ -------------- ---------------
Total stockholders' equity (deficit)..... (12,678,101) (28,731,968) (39,724,580) (48,336,585)
------------ ------------ -------------- ---------------
TOTAL........................................ $ 2,227,671 $ 2,817,434 $ 2,732,628 $ 2,732,628
------------ ------------ -------------- ---------------
------------ ------------ -------------- ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION NINE MONTHS ENDED INCEPTION
YEAR ENDED DECEMBER 31, THROUGH SEPTEMBER 30, THROUGH
------------------------------------- DECEMBER 31, -------------------------- SEPTEMBER
1994 1995 1996 1996 1996 1997 30,1997
----------- ----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
EXPENSES:
Related party research and
development................. $ 9,472,220 $ 8,427,239 $ 9,060,523 $30,269,213 $7,039,412 $ 5,562,162 $ 35,831,375
Other research and
development................. 1,458,076 672,992 1,098,787 3,229,855 1,060,659 679,478 3,909,333
Related party general and
administrative expenses..... 1,233,600 67,200 67,200 1,734,400 50,400 50,400 1,784,800
Other general and
administrative expenses..... 2,194,031 2,294,301 3,338,263 9,959,538 1,803,233 1,357,615 11,317,153
Depreciation and
amortization................ 796,826 44,047 310,776 1,752,831 224,961 369,161 2,121,992
Related party patent
expenses.................... 1,716,560 1,929,266 1,382,185 6,547,740 1,070,614 551,370 7,099,110
----------- ----------- ----------- ------------ ----------- ----------- -------------
Total expenses.............. 16,871,313 13,435,045 15,257,734 53,493,577 11,249,279 8,570,186 62,063,763
Related party interest
expense....................... -- 509,926 1,453,966 1,963,892 1,022,825 1,549,109 3,513,001
Other interest (income) expense,
net........................... (290,033) (31,577) 237,637 (231,707) 87,715 872,517 640,810
----------- ----------- ----------- ------------ ----------- ----------- -------------
LOSS BEFORE INCOME TAXES........ 16,581,280 13,913,394 16,949,337 55,225,762 12,359,819 10,991,812 66,217,574
INCOME TAXES.................... 800 800 800 3,200 800 800 4,000
----------- ----------- ----------- ------------ ----------- ----------- -------------
NET LOSS........................ $16,582,080 $13,914,194 $16,950,137 $55,228,962 $12,360,619 $10,992,612 $ 66,221,574
----------- ----------- ----------- ------------ ----------- ----------- -------------
----------- ----------- ----------- ------------ ----------- ----------- -------------
PRO FORMA NET LOSS PER SHARE
(Note 1)...................... ($ .26) ($ .22)
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES USED IN COMPUTING PRO
FORMA NET LOSS PER SHARE (Note
1)............................ 90,633,384 90,717,390
SUPPLEMENTAL PRO FORMA NET LOSS
PER SHARE..................... (.24) (.19)
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING
SUPPLEMENTAL PRO FORMA NET
LOSS PER SHARE (NOTE 1)....... 92,786,910 92,870,916
----------- -----------
----------- -----------
</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, 1994...... 26,675 $ 267 $ 24,472,734 315,000 $ 3,150 $ 6,850 $ (7,782,551)
Net loss...................... (16,582,080)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1994.... 26,675 267 24,472,734 315,000 3,150 6,850 (24,364,631)
Contribution to equity........ 1,117,723
Net loss...................... (13,914,194)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1995.... 26,675 267 24,472,734 315,000 3,150 1,124,573 (38,278,825)
Contribution to equity........ 650,000
Issuance of stock warrant..... 246,270
Net loss...................... (16,950,137)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1996.... 26,675 267 24,472,734 315,000 3,150 2,020,843 (55,228,962)
Net loss (unaudited).......... (10,992,612)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED) 26,675 267 24,472,734 315,000 3,150 2,020,843 (66,221,574)
Conversion (on a pro forma
basis) of preferred stock to
common stock (unaudited).... (26,675) (267) (24,472,734) 26,675 267 24,472,734
Accrual of preferred stock
dividends (unaudited)....... (8,612,005)
Stock Split 262:1
(unaudited)................. 89,177,175 891,772 (891,772)
------- ------ ------------ --------- ---------- ----------- --------------
PRO FORMA BALANCE, SEPTEMBER
30, 1997
(Unaudited) (Note 1)........ -- $ -- $ -- 89,518,850 $ 895,189 $25,601,805 $ (74,833,579)
------- ------ ------------ --------- ---------- ----------- --------------
------- ------ ------------ --------- ---------- ----------- --------------
<CAPTION>
TOTAL
--------------
<S> <C>
BALANCE, JANUARY 1, 1994...... $ 16,700,450
Net loss...................... (16,582,080)
--------------
BALANCE, DECEMBER 31, 1994.... 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 warrant..... 246,270
Net loss...................... (16,950,137)
--------------
BALANCE, DECEMBER 31, 1996.... (28,731,968)
Net loss (unaudited).......... (10,992,612)
--------------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED) (39,724,580)
Conversion (on a pro forma
basis) of preferred stock to
common stock (unaudited)....
Accrual of preferred stock
dividends (unaudited)....... (8,612,005)
Stock Split 262:1
(unaudited).................
--------------
PRO FORMA BALANCE, SEPTEMBER
30, 1997
(Unaudited) (Note 1)........ $ (48,336,585)
--------------
--------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, THROUGH 30,
---------------------------------------- DECEMBER 31, ---------------------------
1994 1995 1996 1996 1996 1997
------------ ------------ ------------ ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................... $(16,582,080) $(13,914,194) $(16,950,137) $(55,228,962) $(12,360,619) $(10,992,612)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 796,826 44,047 310,776 1,752,831 224,961 369,161
Issuance of stock options to
officer........................ 650,000 650,000 650,000
Amortization of debt issue
costs.......................... 41,045 41,045 205,225
Loss on sale or disposal of
property and equipment......... 65,099 65,639
Net loss on sale of
investments.................... 32,496 32,496
Accretion of discounts on
investments.................... (294,867) (410,084)
Changes in operating assets and
liabilities:
Prepaid expenses and other
assets......................... (53,676) 52,533 31,183 (39,320) 49,291 14,579
Accounts payable and accrued
expenses....................... 449,566 580,914 330,463 1,676,642 9,984 (137,018)
Payable to majority
stockholder.................... 643,221 7,866,439 7,346,761 16,480,048 5,579,936 7,512,064
Accrued interest on notes payable
to majority stockholder........ 234,510 196,631 431,141 497,644 162,535
------------ ------------ ------------ ------------- ------------ ------------
Net cash used in operating
activities................. (14,943,415) (5,135,751) (8,043,278) (34,548,524) (5,348,803) (2,866,066)
------------ ------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments--U.S.
government securities............ (3,496,532) (36,918,254)
Proceeds from sales and redemptions
of investments................... 16,594,712 2,704,011 37,295,842
Proceeds from sale of property and
equipment........................ 72,670 225,000 297,670
Purchase of property and
equipment........................ (676,311) (1,918,152) (1,176,589) (5,773,556) (987,675) (48,135)
------------ ------------ ------------ ------------- ------------ ------------
Net cash provided by (used
in) investing activities... 12,494,539 1,010,859 (1,176,589) (5,098,298) (987,675) (48,135)
------------ ------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of notes
payable to stockholders.......... 2,000,000 6,210,000 2,335,000 10,545,000 6,365,000 2,125,000
Proceeds from drawings on line of
credit with bank................. 7,110,000 7,110,000 1,890,000
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) (2,470,000) (850,000)
------------ ------------ ------------ ------------- ------------ ------------
Net cash provided by
financing activities....... 2,000,000 4,210,000 8,975,000 39,668,001 6,365,000 3,165,000
------------ ------------ ------------ ------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. (448,876) 85,108 (244,867) 21,179 28,522 250,799
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.............. 629,814 180,938 266,046 266,046 21,179
------------ ------------ ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 180,938 $ 266,046 $ 21,179 $ 21,179 $ 294,568 $ 271,978
------------ ------------ ------------ ------------- ------------ ------------
------------ ------------ ------------ ------------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION--
Cash paid for:
Income taxes..................... $ 800 $ 800 $ 800 $ 3,200 $ 800 $ 800
Interest......................... $ 500 $ 275,415 $ 199,494 $ 475,746 $ 5,391 $ 667,343
Warrants issued with debt........ $ 246,270 $ 246,270
<CAPTION>
INCEPTION
THROUGH
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................... $(66,221,574)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 2,121,992
Issuance of stock options to
officer........................ 650,000
Amortization of debt issue
costs.......................... 246,270
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......................... (24,741)
Accounts payable and accrued
expenses....................... 1,539,624
Payable to majority
stockholder.................... 23,992,112
Accrued interest on notes payable
to majority stockholder........ 593,676
-------------
Net cash used in operating
activities................. (37,414,590)
-------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments--U.S.
government securities............ (36,918,254)
Proceeds from sales and redemptions
of investments................... 37,295,842
Proceeds from sale of property and
equipment........................ 297,670
Purchase of property and
equipment........................ (5,821,691)
-------------
Net cash provided by (used
in) investing activities... (5,146,433)
-------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of notes
payable to stockholders.......... 12,670,000
Proceeds from drawings on line of
credit with bank................. 9,000,000
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.......... (3,320,000)
-------------
Net cash provided by
financing activities....... 42,833,001
-------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. 271,978
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD..............
-------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 271,978
-------------
-------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION--
Cash paid for:
Income taxes..................... $ 4,000
Interest......................... $ 1,143,089
Warrants issued with debt........ 246,270
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash compensation of $650,000 represents 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 with the following weighted average assumptions:
risk-free interest rate of 6.0%; expected life of 4.25 years; and expected
volatility of 20.0%.
On December 31, 1994, the Company sold substantially all of its equipment and
leasehold improvements to EKI resulting in a gain of $1,117,723 which was
offset against the note receivable from EKI related to the sale. During
1995, the note receivable was eliminated, and the gain was recorded as a
contribution to additional paid-in common capital.
See notes to financial statements.
F-6
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
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 September 30, 1997, the Company
incurred accumulated losses of $66,221,574, and as of September 30, 1997, the
Company's current liabilities exceeded its current assets by $42,160,489. 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.
F-7
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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
The Company anticipates a 262-for-one stock split of its Common Stock. All
pro forma and supplemental pro forma amounts included in the accompanying
financial statements and footnotes reflect the assumed stock split.
As of September 30, 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, the Company will declare dividends of $8,612,005 in accordance with
the terms of the Series A cumulative senior convertible preferred stock. At
December 31, 1996 cumulative undeclared dividends totaled $7,016,000.
Pro forma loss per common and common equivalent share for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 have been
determined by dividing net loss plus dividends by the weighted average common
and common equivalent shares outstanding during the period (82,530,000 shares),
the conversion of Series A preferred stock into Common Stock (6,988,850 shares),
plus the assumed sales of shares at $19.00 per share to fund dividends payable
(453,263 shares as of September 30, 1997 and 369,257 shares as of December 31,
1996) which will be repaid from proceeds of the planned offering. Supplemental
pro forma loss per common and common equivalent share for the year ended
December 31, 1996 and the nine months ended September 30, 1997 have been
determined by dividing pro forma net loss less interest expense by the weighted
average common and common equivalent shares outstanding during the period stock
issued and outstanding (82,530,000 shares), the conversion of Series A preferred
stock into Common Stock (6,988,850 shares), plus the assumed sales of shares at
$19.00 per share to fund dividends payable (453,263 shares as of September 30,
1997 and 369,257 shares as of December 31, 1996) and to repay the $31,917,000 in
indebtedness owed to the majority stockholder and the $9,000,000 note payable to
bank (2,153,526 shares), all of which will be repaid from proceeds of the
F-8
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
planned offering. As required by rules promulgated by the Securities and
Exchange Commission, shares, options, warrants or convertible preferred shares
issued at prices below the offering price in the twelve months prior to the
initial public offering and the number of shares whose net proceeds are required
to fund the repayment of debt have been included in the calculation of weighted
average common and common equivalent shares as if outstanding using the treasury
stock method. Loss per share for all periods prior to the year ended December
31, 1996 has not been presented as such information is not indicative of the
Company as an on-going entity.
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.
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 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.
UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations as of such
dates and for such periods.
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)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30, 1997
1995 1996 (UNAUDITED)
------------ ------------ ------------------
<S> <C> <C> <C>
Furniture and lab equipment................... $ 426,089 $ 1,327,273 $ 1,602,232
Deposits on equipment......................... 1,513,187 1,788,592 1,561,768
------------ ------------ ------------------
1,939,276 3,115,865 3,164,000
Accumulated depreciation and amortization..... (48,154) (358,930) (728,091)
------------ ------------ ------------------
Property and equipment, net................... $ 1,891,122 $ 2,756,935 $ 2,435,909
------------ ------------ ------------------
------------ ------------ ------------------
</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. Total rent expense
included in 1995 and 1996 general and administrative expenses was $67,200 for
each year. For the nine months ended September 30, 1996 and 1997, the Company
paid or accrued $7,039,412 and $5,562,162, respectively, for services performed
under the Prior Technical Services Agreement and $50,400 in sublease payments
for each of the respective periods.
F-10
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Included in 1994, 1995, and 1996 research and development expenses are
$9,472,220, $8,427,239, and $9,060,523, respectively, in project costs incurred
under the Prior Technical Services Agreement and/or the Management Services
Agreement.
Projects conducted by EKI for the Company include development efforts
related to the technology, such as development of commercial production
processes. In addition, during 1993 and 1994, the Company leased certain
Company-owned equipment to EKI for use by EKI employees on Company projects.
During 1993 and 1994, $156,000 and $348,000, respectively, of lease income
related to this arrangement was reported net of an equal amount of lease charges
paid by the Company to EKI under its various projects. No such transactions
occurred in 1996 or 1995. 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 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 $1,716,560, $1,929,266, and
$1,382,185, were paid to or on behalf of EKI during 1994, 1995 and 1996,
respectively. In addition, legal fees of $551,370 and $1,070,614 were paid to or
on behalf of EKI for the nine months ended September 30, 1997 and 1996,
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 September 30, 1997, all of the notes
accrued interest at 8.25% and 8.50%, respectively, and were payable on demand.
During the nine months ended September 30, 1997, $4,247,280 of billings due
under the Prior Technical Services Agreement and Prior Patent Allocation
Agreement and $1,386,572 of interest due to EKI were converted to notes payable.
In addition, several other notes were issued to EKI for cash loans totaling
$2,125,000. As a result, total notes payable to EKI increased from $21,784,652
as of December 31,
F-11
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
1996 to $29,543,504 as of September 30, 1997. These notes payable were combined
into one note payable dated September 30, 1997.
The amount payable to the majority stockholder of $574,857, $752,192 and
$1,780,404 as of December 31, 1995 and 1996 and September 30, 1997 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 September 30, 1997, notes payable include a $29,543,504 note payable
due to EKI, the majority stockholder, as described in Note 3, and $9,000,000
outstanding on a line of credit less an original issue discount of $246,270
related to the stock warrants described in Note 8.
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 February 20, 1998
and increased to $13,000,000. The extension of credit has been guaranteed by
EKI, Mr. Essam Khashoggi, the Chairman of the Board and indirect controlling
shareholder 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 September 30, 1997 the bank's prime
lending rate was 8.50% and the outstanding principal was $9,000,000.
5. COMMITMENTS
At December 31, 1996 and for the nine months ended September 30, 1997, the
unpaid balances due to vendors for equipment purchases totaled $186,798 and
$66,709, respectively.
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 26,675 shares of Series A cumulative
senior convertible preferred stock at $1,000 per share. Dividends, when
declared, are payable on a quarterly basis at 8% per annum. At December 31,
1996, and September 30, 1997 cumulative undeclared dividends totaled $7,016,000
and $8,612,005, respectively. Each share of preferred stock is convertible into
262 shares of common stock (assuming completion of the anticipated 262-for-one
stock split of the 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 $1,015 per share
F-12
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
6. CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
between September 30, 1997 and September 30, 1998 and at a price of $1,000 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.
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 17,500 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 2,945 shares were
granted. Options for 160 fully vested shares were granted to directors in 1995
under the 1995 Plan at an exercise price of $2,000 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 400 shares were canceled during 1995. In January 1996, options for
1,575 shares were granted under the 1995 Plan at an exercise price of $2,000 per
share vesting over two years. Of these options, 1,000 shares were granted
whereby the individual will be reimbursed $1,300 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 500 shares were canceled during 1996. At
December 31, 1996, options exercisable into 2,545 shares of Common Stock were
outstanding at a per share exercise price of $1,000 for options issued under the
1994 Plan and $2,000 for options issued under the 1995 Plan. During the nine
months ended September 30, 1997, options for 360 shares were granted to
directors under the 1995 Plan of which 180 shares were granted at an exercise
price equal to 80% of the initial public offering price (as adjusted to take
account of the anticipated stock split) 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 180 shares were granted at an
exercise price of $3,982 per share vesting on the day immediately prior to the
stockholders' meeting held on November 3, 1997. At September 30, 1997, options
for 4,140 shares were outstanding, of which 3,254 were exercisable.
F-13
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
7. STOCK OPTIONS (CONTINUED)
Stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- -------------------------
<S> <C> <C>
Outstanding at January 1,1994....................................... -0-
Options granted..................................................... 2,945 $1,000
---------
Outstanding at December 31, 1994.................................... 2,945 $1,000
Options granted..................................................... 160 $2,000
Options canceled.................................................... (400) $1,000
---------
Outstanding at December 31, 1995.................................... 2,705
Options granted..................................................... 1,575 $2,000
Options canceled.................................................... (500) $2,000
---------
Outstanding at December 31, 1996.................................... 3,780
Options granted (unaudited)......................................... 360 80% of Offering Price
---------
Outstanding at September 30, 1997 (unaudited)....................... 4,140
---------
---------
</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
$17,277,664. The pro forma net loss for the nine months ended September 30, 1997
would have been $11,771,893.
The weighted average 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 average
assumptions: risk-free interest rate of 6.8%; expected life of 6.4 years; and
expected volatility of 20.0%.
The weighted average fair value of stock options granted during 1997 was
$354,643. 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 4.25 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.
F-14
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
8. STOCK WARRANTS (CONTINUED)
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).
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 1995
-------------- --------------
<S> <C> <C>
Federal:
Depreciation................................................ $ 88,176 $ 96,934
Capitalized operating expenses.............................. 3,952,663 2,435,923
Capitalized research and development........................ 2,744,130 1,655,379
Accrued interest to related party........................... 146,588
Deferred contributions...................................... 359,721
Net operating loss carryforward............................. 11,671,200 8,843,661
-------------- --------------
18,962,478 13,031,897
-------------- --------------
State:
Depreciation................................................ 3,747 1,883
Capitalized operating expenses.............................. 1,081,170 666,296
Capitalized research and development........................ 3,617,279 2,268,314
Accrued interest to related party........................... 40,096
Deferred contributions...................................... 93,981
Net operating loss carryforward............................. 105,953 378,400
-------------- --------------
4,942,226 3,314,893
-------------- --------------
Deferred tax asset............................................ 23,904,704 16,346,790
Valuation allowance........................................... (23,904,704) (16,346,790)
-------------- --------------
Net deferred tax asset...................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The increases in the valuation allowance of $7,557,914 at December 31, 1996
as compared to December 31, 1995 and $6,189,088 at December 31, 1995 as compared
to December 31, 1994 were 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 $34,327,059 as of December 31, 1996 that expire through 2011.
For state income tax purposes, the Company has net operating loss carryforwards
of $1,139,281 as of December 31, 1996 that expire through 2001.
Income tax expense for 1996, 1995 and 1994 consists of the minimum state
franchise tax expense.
F-15
<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................................................................ 40
Certain Transactions...................................................... 49
Principal and Selling Stockholders........................................ 51
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Certain United States Federal Income Tax Considerations................... 58
Underwriting.............................................................. 62
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 65
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>
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 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 2,637,684 shares are being sold by the 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 this 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
DISCOUNTS AND PROCEEDS TO THE SELLING
PRICE TO 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 the Selling Stockholders have granted 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 Discount and Proceeds to the Company
will be $ , and , respectively, and to the Selling Stockholders
will be $ , and , respectively.
------------------
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
December , 1997, 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 "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.
<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 Corporation..........................................
------------
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
62
<PAGE>
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.
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.
63
<PAGE>
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.
Subject to certain exceptions, 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 not 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 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 5% 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."
64
<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 Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 25
Management................................................................ 40
Certain Transactions...................................................... 49
Principal and Selling Stockholders........................................ 51
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Certain United States Federal Income Tax Considerations................... 58
Subscription and Sale..................................................... 62
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 65
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 Underwriting Agreement.*
1.2 Form of International Subscription 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 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.+
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 September 30, 1997 in the principal amount of $29,543,504 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.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Deloitte & Touche LLP.
23.3 Consent of Workman, Nydegger & Seeley.*
23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).+
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 February 17, 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 February 17, 1998
Essam Khashoggi
Vice Chairman of the
/s/ SIMON K. HODSON Board, Chief Executive
- ------------------------------ Officer and President February 17, 1998
Simon K. Hodson (Principal Executive
Officer)
* Chief Financial Officer
- ------------------------------ (Principal Financial and February 17, 1998
D. Scott Houston Accounting Officer)
*
- ------------------------------ Secretary and Director February 17, 1998
John Daoud
- ------------------------------ Director February 17, 1998
James P. Argyropoulos
*
- ------------------------------ Director February 17, 1998
Ellis Jones
*
- ------------------------------ Director February 17, 1998
Layla Khashoggi
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director February 17, 1998
Graham H. Phillips
*
- ------------------------------ Director February 17, 1998
William A. Marquard
*
- ------------------------------ Director February 17, 1998
Jerold H. Rubinstein
</TABLE>
*By: /s/ SIMON K. HODSON
-------------------------
Simon K. Hodson February 17, 1998
ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of International Subscription 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
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 September 30, 1997 in the principal amount of $29,543,504 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.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Deloitte & Touche LLP.
23.3 Consent of Workman, Nydegger & Seeley.*
23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).+
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EARTHSHELL CONTAINER CORPORATION
The undersigned, Simon K. Hodson, does hereby certify that:
1. He is the President of EarthShell Container Corporation, a
Delaware corporation (the "Corporation").
2. The name of the Corporation is EarthShell Container Corporation.
The date of filing of its original Certificate of Incorporation with the
Secretary of State of Delaware was October 27, 1992. The Corporation was
originally incorporated under the name EarthCrete Container Corporation. The
name EarthCrete Container Corporation was changed to EarthShell Container
Corporation on May 27, 1993.
3. This Amended and Restated Certificate of Incorporation and the
amendments set forth herein have been duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware and by the majority vote of each class of stockholders entitled to
vote thereon pursuant to a duly called and held meeting of stockholders under
Section 222 of the General Corporation Law of the State of Delaware.
4. The Corporation's Certificate of Incorporation is hereby amended
and restated in its entirety as follows:
ARTICLE I: NAME
The name of the Corporation is EarthShell Corporation.
ARTICLE II: DEFINITIONS
For purposes of this Certificate of Incorporation, the following terms
shall have the meanings indicated, and all capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in
Section 203(c) of the Delaware General Corporation Law, as in effect on the date
hereof:
(A) "Board" shall mean the Board of Directors of the
Corporation.
(B) "Business Combination" shall have the meaning ascribed
to it in Section 203(c)(3) of the Delaware General Corporation Law;
provided, however, that for purposes hereof the term "interested
stockholder" appearing therein shall have the meaning ascribed to it in
Article II(E) hereof.
(C) "Disinterested Shares" shall mean the shares of Voting
Stock of the Corporation held by Persons other than an Interested
Stockholder, and each reference
<PAGE>
herein to a percentage or portion of the Disinterested Shares shall refer
to such percentage or portion of the votes entitled to be cast by the
holders of such Disinterested Shares.
(D) "Independent Directors" shall mean the members of the
Board who (i) were directors of the Corporation prior to any Person
becoming an Interested Stockholder (the "Pre-Existing Directors"),
(ii) were recommended for election or elected to succeed such Pre-Existing
Directors by a majority of such directors or (iii) were elected to succeed
the directors named in (ii) by a majority of the directors named in (i) and
(ii).
(E) "Interested Stockholder" shall mean any Person (other
than the Corporation and any direct or indirect majority-owned subsidiary
of the Corporation) that (1) is the Owner of 15% or more of the outstanding
Voting Stock, or (2) is an Affiliate or Associate of the Corporation and
was the Owner of 15% or more of the outstanding Voting Stock at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether such Person is an Interested Stockholder,
or (3) is an Affiliate or Associate of a Person described in (1) or (2)
preceding; provided, however, that the term "Interested Stockholder" shall
not include (i) any Person who (a) owned shares in excess of the 15%
limitation set forth herein as of ______________, 1998 [the date this
Amended and Restated Certificate of Incorporation is filed with the
Secretary of State of the State of Delaware] and either (1) continued to
own shares in excess of such 15% limitation or would have owned such shares
but for action by the Corporation or (2) is an Affiliate or Associate of
the Corporation and so continued (or so would have continued but for action
by the Corporation) to be the owner of 15% or more of the outstanding
Voting Stock of the Corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined
whether such Person is an Interested Stockholder or (b) acquired such
shares from a Person described in (a) above by gift, inheritance or in a
transaction in which no consideration was exchanged; or (ii) any Person
whose ownership of shares in excess of the 15% limitation set forth herein
is the result of action taken solely by the Corporation, provided that such
Person shall be an Interested Stockholder if thereafter such Person
acquires additional shares of Voting Stock except as a result of further
corporate action not caused, directly or indirectly, by such Person. For
the purpose of determining whether a Person is an Interested Stockholder,
(1) the Voting Stock deemed to be outstanding shall include stock deemed to
be owned by the Person through application of Section 203(c)(8) of the
Delaware General Corporation Law, except that the Voting Stock deemed to be
outstanding shall not include any other unissued stock of the Corporation
which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options,
or otherwise, and (2) a Person engaged in business as an underwriter of
securities shall not be deemed to own any Voting Stock acquired through
such Person's participation in good faith in a firm commitment underwriting
until the expiration of 40 days after the date of such acquisition.
(F) "Voting Stock" shall mean stock of the Corporation of
any class or series entitled to vote generally in the election of directors
of the Corporation, and, with respect to any entity that is not a
corporation, any equity interest entitled to vote generally in the election
of the governing body of such entity. Each reference herein to a
percentage or portion of shares of Voting Stock shall refer to such
percentage or portion of the votes entitled to be cast by the holders of
such shares.
ARTICLE III: REGISTERED OFFICE
The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, and the name of its registered agent at that address is
The Corporation Trust Company.
2
<PAGE>
ARTICLE IV: PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE V: AUTHORIZED CAPITAL STOCK
SECTION 1. NUMBER OF AUTHORIZED SHARES. The Corporation shall be
authorized to issue two classes of shares of stock to be designated,
respectively, "Common Stock" and "Preferred Stock"; the total number of shares
of all classes of stock that the Corporation shall have authority to issue is
Two Hundred Ten Million (210,000,000) shares, consisting of Two Hundred Million
(200,000,000) shares of Common Stock, par value $.01 per share, and Ten Million
(10,000,000) shares of Preferred Stock, par value $.01 per share.
(A) Effective as of the close of business on the date on which this
Amended and Restated Certificate of Incorporation shall have been filed, every
share of Common Stock outstanding prior to such effective date shall be deemed
to be converted into Two Hundred Sixty-Two (262) shares of Common Stock (the
"Split").
(B) No fractional shares of Common Stock may be issued as a result of
the Split. In lieu thereof, the Corporation shall pay, in cash, the fair market
value of any fractional shares.
SECTION 2. COMMON STOCK. All shares of Common Stock shall be one
class without series and shall be denominated "Common Stock."
SECTION 3. PREFERRED STOCK. Shares of Preferred Stock may be issued
from time to time in one or more series. Shares of Preferred Stock that are
redeemed, purchased or otherwise acquired by the Corporation may be reissued
except as otherwise provided by law. The Board is hereby authorized to fix or
alter the designations, powers and preferences, and relative, participating,
optional or other rights, if any, and qualifications, limitations or
restrictions thereof, including, without limitation, dividend rights (and
whether dividends are cumulative), conversion rights, if any, voting rights
(including the number of votes, if any, per share, as well as the number of
members, if any, of the Board or the percentage of members, if any, of the Board
each class or series of Preferred Stock may be entitled to elect), rights and
terms of redemption (including sinking fund provisions, if any), unissued series
of Preferred Stock, and the number of shares constituting any such series and
the designation thereof, and to increase or decrease the number of shares of any
such series subsequent to the issuance of shares of such series, but not below
the number of shares of such series then outstanding. Notwithstanding the
foregoing, the Board shall have no power to alter the rights of any shares of
Preferred Stock then outstanding without the consent of the required percentage
of the holders of such Preferred Stock.
SECTION 4. DISTRIBUTIONS UPON LIQUIDATION. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Corporation, the holders of each series of
Preferred Stock shall be entitled to receive, out of the net assets of the
Corporation, an amount for each share of such series of Preferred Stock equal to
the amount fixed and determined by the Board in the resolution or resolutions
creating such series and providing for the issuance of such shares, and no more,
before any of the assets of the Corporation shall be distributed or paid over to
the holders of shares of Common Stock. After payment in full of said amounts to
the holders of Preferred Stock of all series, the remaining assets and funds of
the Corporation shall be divided among and paid to the holders of shares of
Common Stock. If, upon such dissolution, liquidation or winding up, the assets
of the Corporation distributable as aforesaid among the holders of Preferred
Stock of all series shall be insufficient to permit full payment to them of said
preferential amounts, then such assets shall be distributed ratably among such
holders
3
<PAGE>
of Preferred Stock in proportion to the respective total amounts which they
shall be entitled to receive as provided in this Section 4.
ARTICLE VI: ANNUAL MEETINGS OF STOCKHOLDERS
The annual meeting of stockholders shall be held at such time, on such
date and at such place (within or without the State of Delaware) as provided in
the Bylaws of the Corporation. Subject to any requirement of applicable law,
the books of the Corporation may be kept outside the State of Delaware at such
place or places as may be designated from time to time by the Board or in the
Bylaws of the Corporation. Elections of directors need not be by written ballot
unless the Bylaws of the Corporation shall so provide.
ARTICLE VII: CALL OF SPECIAL MEETINGS OF STOCKHOLDERS
Special meetings of stockholders of the Corporation for any purpose or
purposes may be called at any time by a majority of the members of the Board of
Directors or by a committee of the Board of Directors which has been duly
designated by the Board of Directors and whose power and authority, as provided
in a resolution by the Board of Directors or by the Bylaws of the Corporation,
includes the power to call such meetings, but such special meetings of
stockholders of the Corporation may not be called by any other Person or Persons
or in any other manner; provided, however, that if a proposal requiring
stockholder approval is made by or on behalf of an Interested Stockholder or a
director who is an Affiliate or Associate of an Interested Stockholder, or if an
Interested Stockholder otherwise seeks action requiring stockholder approval,
then the affirmative vote of a majority of the Independent Directors shall also
be required to call a special meeting of stockholders for the purpose of
considering such proposal or obtaining such approval; and provided further that
if and to the extent that any special meeting of stockholders may be called by
any other Person or Persons specified in any certificate of designations filed
under Section 151(g) of the Delaware General Corporation Law (or its successor
statute as in effect from time to time), then such special meeting may also be
called by the Person or Persons, in the manner, at the times and for the
purposes so specified.
ARTICLE VIII: NUMBER OF DIRECTORS
The number of directors that shall constitute the whole Board shall be
as specified in the Bylaws of the Corporation, as the same may be amended from
time to time. Notwithstanding the foregoing, during any period in which the
holders of any one or more series of Preferred Stock, voting as a class, shall
be entitled to elect a specified number of directors by reason of dividend
arrearages or other contingencies giving them the right to do so, then and
during such time as such right continues, (A) the then otherwise authorized
number of directors shall be increased by such specified number of directors and
the holders of shares of such series of Preferred Stock, voting as a class,
shall be entitled to elect such specified number of directors in accordance with
the procedure set forth in the resolution or resolutions of the Board creating
such series and providing for the issuance of such shares and (B) each such
additional director shall serve until his or her successor shall be elected and
shall qualify, or until his or her right to hold such office terminates pursuant
to the resolution or resolutions of the Board creating such series of Preferred
Stock and providing for the issuance of shares of such series, whichever occurs
earlier. Whenever the holders of shares of such series of Preferred Stock are
divested of such right to elect directors pursuant to the resolution or
resolutions of the Board creating such series and providing for the issuance of
such shares, the terms of office of all directors elected by the holders of such
series of Preferred Stock pursuant to such rights, or elected to fill any
vacancies resulting from the death, resignation or removal of directors so
elected by the holders of such series, shall forthwith terminate and the
authorized number of directors shall be reduced accordingly.
4
<PAGE>
ARTICLE IX: STOCKHOLDER ACTION BY WRITTEN CONSENT
Any election of directors or other action by the stockholders of the
Corporation may be effected at an annual or special meeting of stockholders or
by written consent in lieu of such meeting.
ARTICLE X: ELECTION OF DIRECTORS
SECTION 1. VACANCIES. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may, unless the
Board of Directors determines otherwise, only be filled by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director; provided, however, that if the holders of any class or classes of
stock or series thereof are entitled to elect one or more directors, vacancies
and newly created directorships of such class or classes or series may only be
filled by a majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.
SECTION 2. STOCKHOLDER NOMINEES. Nominations by stockholders of
persons for election to the Board shall be made only in accordance with the
procedures set forth in the Bylaws of the Corporation.
ARTICLE XI: LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (the "Delaware Law"), a
director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation shall indemnify, in the manner and to the fullest extent
permitted by the Delaware Law, any person (or the estate of any person) who is
or was a party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether or not by or in the
right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer or manager of another corporation,
partnership, limited liability company, joint venture, trust or other
enterprise. The Corporation may indemnify, in the manner and to the fullest
extent permitted by the Delaware Law, any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was an
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as an employee or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise. The Corporation
may, to the fullest extent permitted by the Delaware Law, purchase and maintain
insurance on behalf of any such director, officer, employee or agent against any
liability which may be asserted against such person. To the fullest extent
permitted by the Delaware Law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and, in the manner provided by the Delaware Law, any such expenses
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding. The indemnification provided herein shall not be
deemed to limit the right of the Corporation to indemnify any other person for
any such expenses to the fullest extent permitted by the Delaware Law, nor shall
it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
5
<PAGE>
No repeal or modification of the foregoing paragraph shall adversely
affect any right or protection of a director of the Corporation existing by
virtue of the foregoing paragraph at the time of such repeal or modification.
ARTICLE XII: AMENDMENT OF CORPORATE DOCUMENTS
SECTION 1. CERTIFICATE OF INCORPORATION. The Corporation reserves
the right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred on stockholders herein are granted subject to
this reservation.
SECTION 2. BYLAWS. In furtherance, and not in limitation of the
powers conferred by statute, the Board of Directors is expressly authorized to
amend, repeal, alter, and rescind the Bylaws of the Corporation.
ARTICLE XIII: CONSTITUENCIES
The Board of Directors, when evaluating any proposed transaction that
would result in a person or entity becoming an Interested Stockholder or an
Interested Stockholder increasing his ownership of capital stock of the
Corporation, or any transaction or any proposed transaction with another party
which would constitute a Business Combination if the other party to the
transaction were an Interested Stockholder, shall, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to all relevant
factors, including without limitation, the independence and integrity of the
Corporation's operations, the social, economic and environmental effects on the
stockholders, employees, customers, suppliers and other constituents of the
Corporation and its subsidiaries and on the communities in which the Corporation
and its subsidiaries operate or are located or in which they serve.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President of the
Corporation, hereby affirms and acknowledges under penalty of perjury that the
filing of the Amended and Restated Certificate of Incorporation is the act and
deed of the Corporation.
------------------------------
Simon K. Hodson
7
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES
RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS
(Series A Cumulative Senior
Convertible Preferred Stock)
The undersigned, Simon K. Hodson, President of EarthShell Container
Corporation, a corporation organized and existing under the laws of the State of
Delaware (the "Corporation"), does hereby certify that:
FIRST: The Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation") authorizes the issuance of 100,000 shares of its
Preferred Stock, par value $.01 per share, in series (the "Preferred Stock").
By said Certificate of Incorporation, authority was expressly granted to and
vested in the Board of Directors of the Corporation within the limits and
restrictions stated in the Certificate of Incorporation, among other things,
from time to time, to fix or alter the dividend rate, conversion rate, voting
rights, rights and terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences, or the number of shares and
the designation or title of any wholly unissued series of the Preferred Stock.
SECOND: The Board of Directors of the Corporation duly adopted the
following resolutions by Unanimous Written Consent dated September 15, 1993:
RESOLVED, that pursuant to the authority presently granted to and
vested in the Board of Directors of the Corporation under the provisions of the
Certificate of Incorporation and pursuant to the provisions of Section 151 of
the General Corporation Law of the State of Delaware, this Board of Directors
hereby creates a series of Preferred Stock to consist of 35,000 shares, par
value $.01 per share, and hereby fixes the powers, preferences and relative
participating, voting, optional and other special rights, and the
qualifications, limitations and restrictions thereof, of said series of
Preferred Stock, which have not heretofore been set forth in the Certificate of
Incorporation as follows:
(1) DESIGNATION. The designation of the series so created shall be
"Series A Cumulative Senior Convertible Preferred Stock" (the "Series A
Preferred Stock").
(2) RANKING. With regard to rights to receive dividends and distributions
upon liquidation, dissolution or winding up of the Corporation, the Series A
Preferred Stock shall rank (i) senior to the Common Stock of the Corporation,
(ii) senior to any series of Preferred Stock of the Corporation the terms of
which specifically provide that such series shall rank junior to the Series A
Preferred Stock and (iii) on parity with any series of Preferred Stock of the
Corporation the terms of which do not specifically provide that such series
shall rank junior to the Series A Preferred Stock.
(3) DIVIDENDS.
(a) Holders of the Series A Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Corporation out
of funds legally available therefor (which for purposes of this Section 3 shall
be deemed to not include any surplus created by or otherwise resulting from the
sale of the Series A Preferred Stock), cumulative cash dividends at the rate per
share (as a percentage of the liquidation preference per share) equal to 8% per
annum, payable quarterly in arrears on the fifteenth day of each January, April,
July and
<PAGE>
October, in each year, with the first dividend payable on January 15, 1994.
Dividends on the Series A Preferred Stock shall accrue from the date of original
issue and shall be deemed to accrue from day to day whether or not earned or
declared. Each such dividend will be payable to holders of record as they
appear on the books of the Corporation on such record dates, which shall be 30
days prior to the payment dates thereof unless another record date, which shall
be no more than 45 days prior to such payment dates, shall be fixed by the Board
of Directors of the Corporation. The party that holds the Series A Preferred
Stock on an applicable record date for any dividend payment will be entitled to
receive such dividend payment and any other accrued and unpaid dividends which
were accrued prior to such dividend payment date, without regard to any sale or
disposition of such Series A Preferred Stock subsequent to the applicable record
date but prior to the applicable dividend payment date. The Corporation will
pay no interest on accrued and unpaid dividends on the Series A Preferred Stock.
(b) So long as any Series A Preferred Stock shall remain outstanding,
in no event shall any dividend (other than stock dividends) be paid upon, nor
shall any distribution be made in respect of, the Common Stock or any other
class of stock ranking junior to the Series A Preferred Stock, whether now or
hereafter authorized, or any class of stock ranking on a parity with the Series
A Preferred Stock with respect to dividends and rights on liquidation, whether
now or hereafter authorized ("Parity Stock"), nor shall any monies be set aside
for or applied to the purchase or redemption (through a sinking fund or
otherwise) of Common Stock or of any other class of stock junior to the Series A
Preferred Stock or of Parity Stock unless all dividends on the Series A
Preferred Stock for all past quarterly dividend periods shall have been paid,
but without interest, and the full dividend on all outstanding Series A
Preferred Stock for the then current quarterly dividend period shall have been
paid, or declared and set apart for payment; PROVIDED, HOWEVER, that in the
event of such failure to pay accrued dividends with respect to the outstanding
shares of Series A Preferred Stock and outstanding shares of Parity Stock,
dividends may be declared, paid or set apart for payment, pro rata, on shares of
Series A Preferred Stock and shares of Parity Stock so that the amounts of any
dividends declared, paid or set apart for payment on shares of Series A
Preferred Stock and shares of Parity Stock shall in all cases bear to each other
the same ratio that, at the time of such declaration, payment or setting apart
for payment, all accrued but unpaid dividends on shares of Series A Preferred
Stock and Parity Stock bear to each other.
(c) So long as any Series A Preferred Stock shall remain outstanding,
in no event shall the Corporation authorize, create or issue any class or series
of stock senior to or ranking higher in priority to the Series A Preferred Stock
except upon the affirmative vote or consent of the holders of at least 70% of
the outstanding Series A Preferred Stock as set forth in Section 5(a) hereof.
(4) LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or
winding up of this Corporation, whether voluntary or involuntary, the holders of
Series A Preferred Stock shall be entitled to receive, out of the assets of the
Corporation, whether such assets are capital or surplus of any nature, $1,000
per share, plus an amount equal to accrued dividends per share to the date of
distribution, whether earned or declared or not, but without interest, before
any payment shall be made or any assets distributed to the holders of the Common
Stock or the holders of any other class of stock junior in respect of
liquidation rights to the Series A Preferred Stock; but the holders of the
Series A Preferred Stock shall not be entitled to any further payments.
If upon such liquidation, dissolution or winding up, whether voluntary
or involuntary, the assets of the Corporation or proceeds thereof shall be
insufficient to make the full liquidating payment of $1,000 per share and
accrued and unpaid dividends on the Series A Preferred Stock and liquidating
payments on any other outstanding Parity Stock (including
2
<PAGE>
accrued and unpaid dividends, if any), then such assets and proceeds shall be
distributed among the holders of the Series A Preferred Stock and any other
outstanding Parity Stock ratably on a share for share basis in accordance with
the respective amounts which would be payable on all series of Parity Stock
(including accrued and unpaid dividends, if any) if all remaining liquidating
amounts payable were paid in full and nothing shall be paid to the holders of
the Common Stock or any other class of stock junior to the Series A Preferred
Stock.
Neither a consolidation nor merger of this Corporation with or into
one or more corporations, nor a sale of all or a substantial part of the assets
of this Corporation shall be deemed to be a liquidation, dissolution or winding
up, within the meaning of this Section 4 unless such consolidation, merger or
sale shall be in connection with a plan of liquidation, dissolution or winding
up of the business of the Corporation.
(5) VOTING RIGHTS.
(a) VOTING RIGHTS TIED TO PREFERENCES OF SERIES A PREFERRED
STOCK. The Series A Preferred Stock shall have the following class voting
rights (in addition to the voting rights set forth with respect to directors in
Section 5(c) hereof) which shall become effective as to certain events, not
relating to an acquisition of the Common Stock of the Corporation, which
reasonably can be expected to adversely affect the preference rights of the
Series A Preferred Stock. So long as any shares of the Series A Preferred Stock
remain outstanding, the Corporation 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 outstanding at the time, given in person or by proxy, (i) amend,
alter or repeal the provisions of the Series A Preferred Stock, whether by
merger, consolidation or otherwise, so as to affect adversely any right,
preference, privilege or voting power of the Series A Preferred Stock; PROVIDED,
HOWEVER, that any creation and issuance of other series of Preferred Stock shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers; (ii) amend the Certificate of Incorporation of the
Corporation; (iii) reclassify the Corporation's outstanding securities; or (iv)
enter into any transaction, other than pursuant to an agreement existing on the
date of this Certificate, with any Affiliate (other than a wholly owned
subsidiary), including without limitation, the purchase, sale, lease or exchange
of property or the rendering or purchase of any service to or from any Affiliate
(other than a wholly owned subsidiary), the lending or borrowing of monies to or
from any Affiliate (other than a wholly owned subsidiary), the guaranty of
liabilities of any Affiliate (other than a wholly owned subsidiary), the merger,
consolidation or other similar reorganization with any Affiliate (other than a
wholly owned subsidiary) and the payment of any compensation to any Affiliate
(other than a wholly owned subsidiary), other than the payment or provision of
reasonable compensation and related fringe benefits, reasonable out-of-pocket
expenses and indemnification rights to any of the officers, directors,
consultants and employees of the Corporation and the payment of reasonable fees
and reasonable out-of-pocket expenses to directors who are not employees of the
Corporation. "Affiliate" shall mean any person (a) that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with, the Corporation, including without limitation the officers
and directors of the Corporation, (b) that directly or indirectly owns or holds
5% or more of any equity interest in the Corporation or (c) 5% or more of whose
voting stock (or in the case of an entity which is not a corporation, 5% or more
of any equity interest) is owned directly or beneficially or held by the
Corporation. So long as any shares of the Series A Preferred Stock remain
outstanding, the Corporation 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, given in person or by proxy, (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 of Section 7 of this
Certificate.
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(b) VOTING RIGHTS RELATING TO TRANSACTIONS UPON WHICH THE COMMON
STOCK VOTES. Except with respect to transactions upon which the Series A
Preferred Stock shall be entitled to vote separately as a class pursuant to
Section 5(a) above and except with respect to the election of directors of the
Corporation on which the holders of the Common Stock vote, the Series A
Preferred Stock and the Common Stock shall vote together as a class on any
transaction with respect to which the Common Stock is entitled to vote pursuant
to applicable Delaware law or the Certificate of Incorporation. Each share of
Series A Preferred Stock shall be entitled to the number of votes per share
equal to (A) one (1) multiplied by (B) the number of shares of Common Stock into
which each share of Series A Preferred Stock is convertible on the record date
used to determine shares eligible to vote on such transaction.
(c) DIRECTOR VOTING RIGHTS.
(i) NUMBER OF DIRECTORS. So long as any shares of the
Series A Preferred 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 in person or by proxy one member of the Corporation's Board of
Directors whose term of office shall expire at the next succeeding annual
meeting of stockholders, with each such director to hold office until his
successor shall have been duly elected and qualified.
(ii) ADJUSTMENTS. In the event that the number of directors of
the Corporation is increased or decreased from seven (including the Series A
Preferred Stock director), the number of directors that the holders of the
Series A Preferred Stock shall be entitled to elect voting separately as a class
pursuant to Section 5(c)(i) shall be adjusted so that such number of directors
is increased or decreased so that such holders shall be entitled to elect the
same proportion of the number of directors of the Corporation as they would
otherwise be entitled to elect, rounded up if the adjusted number of directors
is greater than a whole number plus one-half and rounded down if the adjusted
number of directors is less than or equal to a whole number plus one-half;
PROVIDED, HOWEVER, that the holders of the Series A Preferred Stock shall at no
time be entitled to elect less than one director of the Corporation.
(iii) VACANCIES AND REMOVAL. In the event of a vacancy or
vacancies on the Board of Directors of the Corporation caused by the removal or
resignation of one or more directors elected by the holders of the Series A
Preferred Stock, except in the event that the Series A Preferred Stock shall
become entitled to elect fewer directors voting separately as a class pursuant
to this Section 5(c), such vacancy may be filled only by the directors (or the
remaining director, if only one) elected by the holders of the Series A
Preferred Stock or by a majority vote of the holders of the Series A Preferred
Stock then outstanding. Any person elected as a director by the holders of the
Series A Preferred Stock, or by the directors elected by them, may be removed
only by a majority vote of the holders of the Series A Preferred Stock
outstanding at the time of such removal.
(d) MAJORITY VOTE REQUIRED. The vote of a majority of the
outstanding Series A Preferred Stock shall be required as to all matters upon
which the Series A Preferred Stock is entitled to vote as a separate class
except as otherwise provided under applicable Delaware law or under Section 5(a)
of this Certificate.
(e) NO OTHER VOTING RIGHTS. Except as otherwise expressly
provided in this Certificate of Designation or otherwise expressly required by
law, the Series A Preferred Stock shall not have any voting rights with respect
to the affairs of the Corporation.
(f) NOTICE. So long as any shares of the Series A Preferred
Stock remain outstanding, the Corporation will provide the Series A Preferred
Stock with notice of each annual and special meeting of stockholders, including
without limitation any meeting at which
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matters on which the Series A Preferred Stock is entitled to vote pursuant to
Section 5(b) will be considered, to the same extent as the holders of the Common
Stock.
6. OPTIONAL CONVERSION RIGHTS.
(a) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time into the number of
shares of Common Stock which results from dividing $1,000 by the Conversion
Price in effect at the time of conversion. The initial Conversion Price shall
be $1,000 per share (the "Conversion Price"). Such Conversion Price shall be
subject to adjustment from time to time as provided herein.
(b) Any holder of shares of Series A Preferred Stock may
exercise the conversion rights as to such shares by delivering to the
Corporation during regular business hours, at the office of the then transfer
agent for the Series A Preferred Stock, or at the principal office of the
Corporation or at such other place as may be designated in writing delivered to
all holders of Series A Preferred Stock by the Corporation, the certificate for
the Series A Preferred Stock to be converted, duly endorsed for transfer to the
Corporation (if required by it), accompanied by written notice stating the
number of such shares that the holder elects to convert. Conversion shall be
deemed to have been effected on the date when such delivery is made, and such
date is referred to herein as the "Conversion Date." As promptly as practicable
thereafter, the Corporation shall issue and deliver to such holder at such
office a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided in Section 6(c)
below. The holder shall be deemed to have become a stockholder of record of the
Common Stock on the applicable Conversion Date. Upon conversion of only a
portion of the number of shares of Series A Preferred Stock represented by a
certificate surrendered for conversion, the Corporation shall issue and deliver
to such holder, at the expense of the Corporation, a new certificate covering
the number of shares of Series A Preferred Stock representing the unconverted
portion of the certificate so surrendered.
(c) No fractional shares of Common Stock or scrip shall be
issued upon conversion of Series A Preferred Stock. If more than one share
shall be surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion of such shares
shall be computed on the basis of the aggregate number of shares so
surrendered. Instead of any fractional shares of Common Stock which otherwise
would be issuable upon conversion of any shares of Series A Preferred Stock,
the Corporation shall pay a cash adjustment in respect of such fractional
interest based upon the "Market Price" (as defined in Section 6(h) below) of
the Common Stock at the close of business on the last business day prior to
the Conversion Date for such shares.
(d) With respect to each converted share of Series A Preferred
Stock, the Corporation shall be obligated to make payment of any accrued but
unpaid dividends existing at the time of conversion together with interest
thereon from the date of conversion to the date of payment at the rate of 8% per
annum. Payment shall be made at the time and in the manner declared by the
Board of Directors pursuant to Section 3 hereof. Payment shall be made to the
person registered as the holder of the converted shares at the time of
conversion.
(e) If any shares of Common Stock to be reserved for the
purpose of conversion of Series A Preferred Stock require registration or
listing with or approval of any governmental authority, stock exchange or other
regulatory body under any federal or state law or regulation or otherwise before
such shares may be validly issued or delivered upon conversion, the Corporation
shall, at its sole cost and expense, in good faith and as expeditiously as
possible, endeavor to secure such registration, listing or approval, as the case
may be.
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(f) All shares of Common Stock which may be issued upon
conversion of Series A Preferred Stock upon issuance will be validly issued,
fully paid and nonassessable. The Corporation will pay any and all documentary
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series A Preferred Stock pursuant
hereto. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of Series A
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such transfer has paid to
the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid.
(g) All certificates representing Series A Preferred Stock
surrendered for conversion shall be appropriately cancelled on the books of the
Corporation and the shares so converted represented by such certificates shall
be restored to the status of authorized but unissued shares of Preferred Stock
of the Corporation, but may not be reissued as part of the Series A Preferred
Stock.
(h) The "Market Price" per share of Common Stock at the time
as of which such "Market Price" is determined shall be deemed to be the average
of the Closing Prices for 20 business days selected by the Corporation out of
the 30 consecutive days immediately preceding the date as of which such "Market
Price" is determined, except that for purposes of Section 6(c) above, the
"Market Price" shall be the Closing Price on the last business day preceding the
event requiring such determination. For the purpose of the foregoing sentence,
a "business day" means a day on which the New York Stock Exchange or other
principal stock exchange or over-the-counter market on which the Common Stock is
traded was open for at least one-half of its normal business day. The "Closing
Price" on any day shall be the last sale price, regular way, as reported in a
composite published report of transactions which includes transactions on the
exchange or other principal markets in which the Common Stock is traded or, if
there is no such composite report as to any day, the last reported sale price,
regular way (or if there is no such reported sale on such day, the average of
the closing reported bid and asked prices) on the principal United States
securities trading market (whether a stock exchange, the National Association of
Securities Dealers Automated Quotation System or otherwise) on which the Common
Stock is traded; PROVIDED, HOWEVER, that if the Common Stock is not publicly
traded or listed during the time of any computation pursuant to this Section,
the "Market Price" for the purposes hereof shall be the fair value as determined
in good faith and certified to the Corporation by any person agreed upon by, and
mutually satisfactory to, the Chief Executive Officer or the President of the
Corporation and a member of the Board of Directors of the Corporation elected by
the holders of the Series A Preferred Stock; PROVIDED, HOWEVER, that if such
persons are unable to agree upon a mutually satisfactory person, or if at the
time there is no director in office who was elected by the holders of the
Series A Preferred Stock, then in each such case the "Market Price" shall be the
fair value as determined in good faith by the Board of Directors of the
Corporation.
Section 7. ADJUSTMENTS. The Conversion Price and the number of
shares of Common Stock issuable upon the conversion of each share of Series A
Preferred Stock shall be subject to adjustment from time to time as hereinafter
provided.
(a) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF COMMON
STOCK. If at any time after the date hereof the Corporation shall issue or sell
any shares of Common Stock (other than (i) shares of Common Stock issued upon
conversion of the Series A Preferred Stock and (ii) up to 17,500 shares of
Common Stock (subject to appropriate adjustment in proportion to any increase or
decrease in the number of shares of Common Stock outstanding as the result of
any recapitalization, reclassification, stock dividend, stock split or stock
combination) issued to employees, consultants and other persons providing
services to the Corporation pursuant to stock option plans approved by the
stockholders of the Corporation in
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accordance with applicable law) for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then, forthwith upon such issue or sale, the Conversion Price shall be reduced
to equal the Effective Price (as hereinafter defined) of the shares of Common
Stock so issued or sold. The "Effective Price" of shares of Common Stock issued
or sold shall mean the dollar amount determined by dividing the total number of
shares of Common Stock issued or sold by the Company in such issue (or deemed to
have been issued or sold) into the aggregate consideration received by the
Company (or deemed to have been received) for such issue.
(b) OTHER ADJUSTMENT EVENTS AND PROVISIONS. For the purposes
of this Section 7, the following clauses shall also be applicable:
(i) ISSUANCE OF RIGHTS, WARRANTS OR OPTIONS. In case at any
time the Corporation shall grant, issue or sell (whether directly or
by assumption in a merger or otherwise) any rights or warrants to
subscribe for or to purchase, or any options (other than Excluded
Options, as defined below) for the purchase of, Common Stock or any
stock or securities convertible into or exchangeable for Common Stock
(such convertible or exchangeable stock or securities being herein
called "CONVERTIBLE SECURITIES"), whether or not such rights, warrants
or options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon the exercise of such rights,
warrants or options or upon conversion or exchange of such Convertible
Securities (determined as provided below) shall be less than the
Conversion Price in effect immediately prior to the time of the
granting of such rights, warrants or options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the
exercise of such rights, warrants or options shall be deemed to be
outstanding as of the date of granting of such rights, warrants or
options and to have been issued for such price per share and the
Conversion Price shall be adjusted (as of the date of the granting of
such rights, warrants or options) as set forth in subsection 7(a)
above. Except as provided in clause (iii) of this subsection 7(b), no
further adjustments of any Conversion Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities
upon exercise of such rights, warrants or options or upon the actual
issue of such Common Stock upon conversion or exchange of such
Convertible Securities. For the purposes of this clause (i), the
price per share for which Common Stock is issuable upon the exercise
of any such rights, warrants or options or upon conversion or exchange
of any such Convertible Securities shall be determined by dividing (A)
the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such rights, warrants or options,
plus the minimum aggregate amount of additional consideration payable
to the Corporation upon the exercise of all such rights, warrants or
options, plus, in the case of such rights, warrants or options that
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
the conversion or exchange of all such Convertible Securities issuable
upon the exercise of such rights, warrants or options. For purposes
of this subparagraph (i), "Excluded Options" shall mean options to
purchase shares of Common Stock issuable pursuant to a stock option
plan for the benefit of employees, consultants and other persons
providing services to the Corporation and which is approved by the
stockholders of the Corporation in accordance with applicable law, so
long as the number of shares subject to such plan, together with the
number of shares subject to all other similar plans
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(including any shares issued upon the exercise of options which
options are then regranted and excluding any options which expire
unexercised and are not subject to regrant), does not exceed 17,500
shares of Common Stock (subject to appropriate adjustment in
proportion to any increase or decrease in the number of shares of
Common Stock outstanding as the result of any recapitalization,
reclassification, stock dividend, stock split or stock combination).
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. In case the
Corporation shall issue (whether directly or by assumption in a merger
or otherwise) or sell any Convertible Securities (other than the
shares of Series A Preferred Stock), whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon conversion or
exchange of such Convertible Securities (determined as provided below)
shall be less than the Conversion Price in effect immediately prior to
the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall be deemed to be outstanding as of
the date of the issue or sale of such Convertible Securities and to
have been issued for such price per share and the Conversion Price
shall be adjusted (as of the date of the issue or sale of such
Convertible Securities) as set forth in subsection 7(a) above;
PROVIDED that (A) except as provided in clause (iii) of this
subsection 7(b), no further adjustments of any Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (B) if any such issue or
sale of such Convertible Securities is made upon exercise of any
rights or warrants to subscribe for or to purchase or any option to
purchase any such Convertible Securities for which adjustments of any
Conversion Price have been or are to be made pursuant to other
provisions of this subsection 7(b), no further adjustment of any
Conversion Price shall be made by reason of such issue or sale. For
the purposes of this clause (ii), the price per share for which Common
Stock is issuable upon conversion or exchange of Convertible
Securities shall be determined by dividing (1) the total amount
received or receivable by the Corporation as consideration for the
issue or sale of such Convertible Securities, PLUS the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (2) the total
maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the
purchase price provided for in any rights, warrants or options
referred to in clause (i) above, or the additional consideration, if
any, payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, shall change (other
than under or by reason of provisions designed to protect against
dilution), then the Conversion Price in effect at the time of such
event shall forthwith be readjusted to the Conversion Price that would
have been in effect at such time had such rights, warrants, options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any such right, warrant or option
referred to in clause (i) above, or the rate at which any Convertible
Securities referred to in clause (i) or (ii) above, are convertible
into or exchangeable for Common Stock, shall change at any time under
or by reason of provisions with respect thereto designed to protect
against dilution, then, in case of the delivery of Common Stock upon
the exercise of any such right, warrant or option or upon conversion
or exchange of any such Convertible Security, the Conversion Price
then in effect hereunder shall forthwith be adjusted to such
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respective amount as would have obtained had such right, warrant,
option or Convertible Security never been issued as to such Common
Stock and had adjustments been made upon the issuance of the shares of
Common Stock delivered as aforesaid, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is thereby
decreased.
(iv) STOCK DIVIDENDS. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the
Corporation payable in Common Stock, then and in such event, the
Conversion Price then in effect shall be decreased by multiplying the
Conversion Price then in effect by a fraction:
(i) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance; and
(ii) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance plus the number of
shares of Common Stock issuable in payment of such dividend or
distribution.
(v) CONSIDERATION FOR STOCK. In case any shares of Common Stock
or Convertible Securities or any rights, warrants or options to
purchase any such Common Stock or Convertible Securities shall be
issued or sold:
(A) for cash, the consideration received therefor
shall be deemed to be the amount received by the Corporation
therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith;
(B) for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation
shall be deemed to be the fair value of such consideration as
determined, in good faith and in the exercise of reasonable
business judgment, by the Board of Directors, without deduction
of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith; or
(C) in connection with any merger or consolidation in
which the Corporation is the surviving corporation (other than
any consolidation or merger in which the previously outstanding
shares of Common Stock of the Corporation shall be changed into
or exchanged for the stock or other securities of another
corporation), the amount of consideration therefor shall be
deemed to be the fair value as determined, in good faith and in
the exercise of reasonable business judgment, by the Board of
Directors of such portion of the assets and business of the
non-surviving corporation as such Board of Directors may
determine to be attributable to such shares of Common Stock,
Convertible Securities, rights, warrants or options, as the case
may be.
(vi) RECORD DATE. In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them
(A) to receive a dividend or other distribution payable in Common
Stock or in Convertible Securities or (B) to subscribe for or purchase
Common Stock or Convertible Securities, then such record date shall be
deemed to be the date of the actual issue
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or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the actual making of
such other distribution or the date of the actual granting of such
right of subscription or purchase, as the case may be.
(vii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares directly or
indirectly owned or held by or for the account of the Corporation or
any of its subsidiaries, and the disposition of any such shares (other
than by retirement and/or cancellation) shall be considered an issue
or sale of Common Stock for the purposes of this subsection 7(b).
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Corporation
shall declare a dividend or make any other distribution (other than a
distribution referred to in subsection 7(b)) upon the Common Stock (other than
cash dividends payable out of legally available funds), then in each case the
Conversion Price in effect immediately prior to the declaration of such dividend
or making of such distribution shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior to the close of business on the date fixed for the determination of
stockholders entitled to receive such dividend or distribution by a fraction the
numerator of which shall be the Market Price on the date prior to the date fixed
for such determination, LESS, in the case of a dividend or distribution in cash,
the amount per share of Common Stock so declared or, in the case of any other
dividend or distribution, the then fair value (as determined, in good faith and
in the exercise of reasonable business judgment, by the Board of Directors) of
the portion of the property or assets so distributed applicable to one share of
Common Stock, and the denominator of which shall be such Market Price, such
adjustment to become effective immediately prior to the opening of business on
the day following the date fixed for the determination of stockholders entitled
to receive such distribution.
(d) SUBDIVISION OR COMBINATION OF STOCK. In case the
Corporation shall at any time subdivide the outstanding shares of Common Stock
into a greater number of shares, the Conversion Price in effect immediately
prior to such subdivision shall be proportionately reduced and, conversely, in
case the outstanding shares of Common Stock shall be combined into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
(e) ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE OF ASSETS,
REORGANIZATION, ETC. In case the Corporation (i) consolidates with or merges
into any other corporation and is not the continuing or surviving corporation of
such consolidation or merger, (ii) permits any other corporation to consolidate
with or merge into the Corporation and the Corporation is the continuing or
surviving corporation but, in connection with such consolidation or merger, the
Common Stock is changed into or exchanged for stock or other securities of any
other corporation or cash or any other assets, or (iii) transfers all or
substantially all of its property and assets to any other corporation, or (iv)
effects a capital reorganization or reclassification of the capital stock of the
Corporation in such a way that holders of Common Stock shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Common Stock, then, and in each such case, proper provision shall be made so
that, upon the basis and upon the terms and in the manner provided in this
subsection 7(e), each holder of a share of Series A Preferred Stock, upon
conversion of a share of Series A Preferred Stock at any time after the
consummation of such consolidation, merger, transfer, reorganization or
reclassification, shall be entitled to receive, in lieu of shares of Common
Stock issuable upon such conversion prior to such consummation, the stock,
securities, cash and assets to which such holder would have been entitled upon
such consummation if such holder had so converted such share of Series A
Preferred Stock immediately prior thereto at the aggregate Conversion Price in
effect immediately prior to such consummation as adjusted to the time of such
transaction (subject
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to adjustments subsequent to such corporate action as nearly equivalent as
possible to the adjustments provided for in this Section 7).
(f) NOTICE OF ADJUSTMENT. Whenever the number of shares of
Common Stock or other stock or property or assets issuable upon the conversion
of each share of Series A Preferred Stock or the Conversion Price is adjusted
pursuant to this Section 7, then and in each such case the Chief Financial
Officer of the Corporation shall prepare and execute a certificate (the
"Adjustment Certificate") setting forth, in reasonable detail, the event
requiring the adjustment, the Conversion Price resulting from such adjustment,
the method by which such adjustment was calculated (including a description of
the basis on which the Board of Directors made any determination hereunder), and
shall cause a copy of the Adjustment Certificate to be filed with the transfer
agent for the Series A Preferred Stock, if any, and a notice thereof mailed to
the holders of record of the outstanding shares of such Series A Preferred
Stock.
In any case which this Section 7 shall require that an adjustment be
made immediately following a record date or an effective date, the Corporation
may elect to defer (but only until five business days following the filing by
the Chief Financial Officer of the Corporation of the Adjustment Certificate
with said transfer agent) issuing to any holder of any share of Series A
Preferred Stock converted after such record date or effective date the shares of
Common Stock issuable upon such conversion over and above the shares of Common
Stock issuable upon such conversion on the basis of the Conversion Price prior
to adjustment, and paying to such holder any amount of cash in lieu of
fractional shares.
(g) OTHER NOTICES. If at any time:
(i) the Corporation shall declare any cash dividend on its
Common Stock;
(ii) the Corporation shall pay any dividend payable in stock
upon its Common Stock or make any distribution (other than regular
cash dividends) to the holders of its Common Stock;
(iii) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any
class or any other rights;
(iv) the Corporation shall authorize the distribution to all
holders of its Common Stock of evidences of its indebtedness or assets
(other than cash dividends or cash distributions payable out of
current earnings or dividends payable in Common Stock);
(v) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or any
repurchase, redemption or other acquisition for value of the Common
Stock of the Corporation, or consolidation or merger of the
Corporation with another corporation (other than a subsidiary of the
Corporation in which the Corporation is the surviving or continuing
corporation and no change occurs in the Corporation's Common Stock),
or sale of all or substantially all of its property and assets to
another corporation; or
(vi) there shall be a voluntary or involuntary dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors, or
winding up of the Corporation;
then, in any one or more of such cases, the Corporation shall give written
notice, to the holders of record of the outstanding shares of the Series A
Preferred Stock at the addresses shown on the books of the Corporation, of (A)
the date on which the books of the Corporation shall close or a record shall be
taken for such dividend, distribution or subscription rights or (B) the date
(or, if
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not then known, a reasonable approximation thereof by the Corporation) on which
such reorganization, reclassification, repurchase, redemption, acquisition,
consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment
for the benefit of creditors, winding up or other action, as the case may be,
shall take place. Such notice shall also specify (or, if not then known,
reasonably approximate) the date as of which the holders of Common Stock or
record shall participate in such dividend, distribution or subscription rights,
or shall be entitled to redeem or repurchase their Common Stock or shall be
entitled to exchange their Common Stock for securities or other property or
assets deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit
of creditors, winding up or other action, as the case may be. Such written
notice shall be given at least 20 days prior to the action in question and not
less than 15 days prior to the record date or the date on which the
Corporation's transfer books are closed in respect thereto.
(h) NO AVOIDANCE. The Corporation shall not amend its
Certificate of Incorporation, or participate in any reorganization, sale or
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action for the purpose of avoiding or seeking
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but shall at all times in good faith use
its best efforts, and assist in carrying out all such action as may be
reasonably necessary or appropriate in order to protect the conversion rights of
the holders of the Series A Preferred Stock set forth herein.
8. REDEMPTION. The Corporation shall have the right to
redeem in whole or in part, the Series A Preferred Stock upon sixty days notice
upon payment of the following prices together with accrued but unpaid dividends
to holders of the Series A Preferred Stock: (a) If redeemed between
September 30, 1996 and September 30, 1997, $1030 per share; (b) If redeemed
between September 30, 1997 and September 30, 1998, $1015 per share; and (c) If
redeemed after September 30, 1998, $1000 per share. In addition, not more than
sixty days in advance of a Registered Offering or Reorganization (as such terms
are hereinafter defined), the Corporation shall have the right to redeem in
whole or in part, the Series A Preferred Stock upon sixty days notice upon
payment of the following prices together with accrued but unpaid dividends to
holders of the Series A Preferred Stock: (i) If redeemed between September 30,
1994 and September 30, 1995, $1,070 per share; and (ii) If redeemed between
September 30, 1995 and September 30, 1996, $1,050 per share.
During the sixty day period following notice of redemption, holders of
the Series A Preferred Stock shall have the right to convert their Series A
Preferred Stock into shares of Common Stock in the manner contemplated by this
Certificate.
For purposes of this Section 8, (a) "Registered Offering" shall mean
the consummation of a public offering of Common Stock pursuant to an effective
registration statement under the Securities Act of 1933, as amended, for the
account of the Corporation at an aggregate offering price in excess of
$35,000,000 and (b) "Reorganization" shall mean, subject to the limitations in
the following sentence, the consummation of any consolidation or merger to which
the Corporation is not the surviving party, the sale of all or substantially all
of the assets of the Corporation in a single transaction or a series of related
transactions, or any statutory exchange of securities with another corporation.
The term "Reorganization" shall not include, and there shall be no right of
redemption under this Section 8 as a result of, any consolidation, merger, sale
of assets or statutory exchange consummated while the Corporation is (A) subject
to an order for relief by any bankruptcy court, (B) subject to any receiver,
trustee, custodian, conservator, liquidator, rehabilitator or similar officer
appointed for it or for all or any material part of its property, (C) subject to
any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
dissolution, custodianship, conservatorship, liquidation, rehabilitation or
similar proceeding relating to it or to all or any material part of its property
or (D) in material default under any agreement evidencing or otherwise relating
to indebtedness for borrowed money which default would permit the acceleration
of such indebtedness.
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IN WITNESS WHEREOF, the undersigned, being the President of the
Corporation, hereby affirms and acknowledges under penalty of perjury that the
filing of the Certificate of Designation, Preferences Relative, Participating,
Optional and Other Special Rights is the act and deed of the Corporation.
-----------------------------
Simon K. Hodson
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AMENDED AND RESTATED
BYLAWS
OF
EARTHSHELL CORPORATION
a Delaware corporation
ARTICLE I: OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of EarthShell
Corporation (the "Corporation") shall be at Corporate Trust Center, 1209 Orange
Street, City of Wilmington, County of New Castle, State of Delaware, and the
name of the registered agent in charge thereof shall be The Corporation Trust
Company.
SECTION 1.2 PRINCIPAL OFFICE. The principal office for the
transaction of the business of the Corporation shall be at such place as the
Board of Directors of the Corporation (the "Board") may determine. The Board is
hereby granted full power and authority to change said principal office from one
location to another.
SECTION 1.3 OTHER OFFICES. The Corporation may also have an office
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. All annual meetings of stockholders
and all other meetings of stockholders shall be held either at the principal
office of the Corporation or at any other place within or without the State of
Delaware that may be designated by the Board pursuant to authority hereinafter
granted to the Board.
SECTION 2.2 ANNUAL MEETINGS. Annual meetings of stockholders of the
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time and place and on such date as the Board shall determine by resolution.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of stockholders of
the Corporation for any purpose or purposes may only be called in accordance
with the provisions of the Certificate of Incorporation.
SECTION 2.4 NOTICE OF MEETINGS. Except as otherwise required by law,
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 days nor more than 60 days before the date of the meeting
to each stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to such stockholder personally, or by
depositing such notice in the U. S. mail, in a postage prepaid envelope,
directed to such stockholder at such stockholder's post office address furnished
by such stockholder to the Secretary of the Corporation for such purpose, or, if
such stockholder shall not have furnished an
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address to the Secretary for such purpose, then at such stockholder's post
office address last known to the Secretary, or by transmitting a notice thereof
to such stockholder at such address by telegraph, cable, wireless or fax.
Except as otherwise expressly required by law, no publication of any notice of a
meeting of stockholders shall be required. Every notice of a meeting of
stockholders shall state the place, date and hour of the meeting and, in the
case of a special meeting, shall also state the purpose for which the meeting is
called. Notice of any meeting of stockholders shall not be required to be given
to any stockholder to whom notice may be omitted pursuant to applicable Delaware
law or who shall have waived such notice, and such notice shall be deemed waived
by any stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
SECTION 2.5 QUORUM. Except as otherwise required by law, the holders
of record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
stockholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote contained in the Certificate of
Incorporation, these Bylaws or by statute, the stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding any withdrawal of stockholders that may leave
less than a quorum remaining, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
In the absence of a quorum at any meeting or any adjournment thereof, a majority
in voting interest of the stockholders present in person or by proxy and
entitled to vote thereat or, in the absence therefrom of all the stockholders,
any officer entitled to preside at, or to act as secretary of, such meeting may
adjourn such meeting from time to time. At any such adjourned meeting at which
a quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called.
SECTION 2.6 VOTING.
(A) Each stockholder shall, at each meeting of stockholders, be
entitled to vote in person or by proxy each share of the stock of the
Corporation that has voting rights on the matter in question and that
shall have been held by such stockholder and registered in such
stockholder's name on the books of the Corporation:
(i) on the date fixed pursuant to Section 6.5 of these
Bylaws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then
(a) at the close of business on the day next preceding the day
upon which notice of the meeting shall be given or (b) if notice
of the meeting shall be waived, at the close of business on the
day next preceding the day upon which the meeting shall be held.
(B) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in
the election of directors in such other corporation is held, directly
or indirectly, by the Corporation, shall
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neither be entitled to vote nor be counted for quorum purposes. Persons
holding stock of the Corporation in a fiduciary capacity shall be entitled
to vote such stock. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation
the pledgor shall have expressly empowered the pledgee to vote thereon, in
which case only the pledgee, or the pledgee's proxy, may represent such
stock and vote thereon. Stock having voting power standing of record in
the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise, or with respect to which two or more persons have the same
fiduciary relationship, shall be voted in accordance with the provisions of
the Delaware General Corporation Law.
(C) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by such stockholder's proxy appointed by
an instrument in writing, subscribed by such stockholder or by such
stockholder's attorney thereunto authorized and delivered to the
secretary of the meeting; provided, however, that no proxy shall be
voted or acted upon after three years from its date unless said proxy
shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the
effect of revoking the same unless such stockholder shall in writing
so notify the secretary of the meeting prior to the voting of the
proxy. At any meeting of stockholders, all matters, except as
otherwise provided in the Certificate of Incorporation, in these
Bylaws or by law, shall be decided by the vote of a majority in voting
interest of the stockholders present in person or by proxy and
entitled to vote thereat and thereon, a quorum being present. The
vote at any meeting of stockholders on any question need not be by
ballot, unless so directed by the chairman of the meeting. On a vote
by ballot, each ballot shall be signed by the stockholder voting, or
by such stockholder's proxy, if there be such proxy, and it shall
state the number of shares voted.
SECTION 2.7 JUDGES. If at any meeting of stockholders a vote by
written ballot shall be taken on any question, the chairman of such meeting may
appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of such
judge's ability. Such judges shall decide upon the qualification of the voters
and shall report the number of shares represented at the meeting and entitled to
vote on such question, shall conduct and accept the votes, and, when the voting
is completed, shall ascertain and report the number of shares voted respectively
for and against the question. Reports of judges shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation. The
judges need not be stockholders of the Corporation, and any officer of the
Corporation may be a judge on any question other than a vote for or against a
proposal in which such officer shall have a material interest.
SECTION 2.8 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND STOCKHOLDER
NOMINATIONS.
(A) At any meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (i) by or
at the direction of the Board or (ii) by any stockholder of the
Corporation who complies with the notice procedures set forth in this
Section 2.8(A) and Section 2.8(B). For business to be properly
brought before any meeting of the stockholders by a stockholder, the
stockholder must have given notice thereof in writing to the Secretary
of the Corporation not less than 90 days in advance of such meeting
or, if later, the tenth
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day following the first public announcement of the date of such meeting,
and such business must be a proper matter for stockholder action under the
General Corporation Law of the State of Delaware. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes
to bring before the meeting (1) a brief description of the business desired
to be brought before the meeting and the reasons for conducting such
business at the meeting, (2) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (3) the
class and number of shares of the Corporation that are beneficially owned
by the stockholder, and (4) any material interest of the stockholder in
such business. In addition, the stockholder making such proposal shall
promptly provide any other information reasonably requested by the
Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Section 2.8. The chairman
of any such meeting shall have the power and the duty to determine whether
any business proposed to be brought before the meeting has been made in
accordance with the procedure set forth in these Bylaws and shall direct
that any business not properly brought before the meeting shall not be
considered.
(B) Nominations for the election of directors may be made by the
Board or by any stockholder entitled to vote in the election of
directors; provided, however, that a stockholder may nominate a person
for election as a director at a meeting only if written notice of such
stockholder's intent to make such nomination has been given to the
Secretary of the Corporation not later than 90 days in advance of such
meeting or, if later, the tenth day following the first public
announcement of the date of such meeting. Each such notice shall set
forth: (i) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be nominated;
(ii) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting and nominate the person
or persons specified in the notice; (iii) a description of all
arrangements or understandings between the stockholder and each
nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (iv) such other information regarding each
nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
United States Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, by the Board; and (v) the
consent of each nominee to serve as a director of the Corporation if
so elected. In addition, the stockholder making such nomination shall
promptly provide any other information reasonably requested by the
Corporation. Notwithstanding the foregoing provisions of this
Section 2.8(B), in the event that the number of directors to be
elected to the Board is increased and there is no public announcement
naming either all of the nominees for director or specifying the size
of the increased Board made by the Corporation at least 100 days in
advance of such meeting, a stockholders notice required by this
Section 2.8(B) shall be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall
be delivered to the Secretary of the Corporation not later than the
tenth day following the day on which such public announcement is first
made by the Corporation. No person shall be eligible for election as
a director of the Corporation unless nominated in accordance with the
procedures set forth in this Section 2.8(B). The chairman of any
meeting of stockholders shall have the power and the duty to determine
whether a nomination has been made in accordance with
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the procedure set forth in this Section 2.8(B) and shall direct that any
nomination not made in accordance with these procedures be disregarded.
SECTION 2.9 RECORD DATE FOR STOCKHOLDER ACTION BY WRITTEN CONSENT.
In order that the Corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board, and which date shall not be more
than 10 days after the date upon which the resolution fixing the record date is
adopted by the Board. Any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board to fix a record date. The
Board shall promptly, but in all events within 10 days after the date upon which
such request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board within 10 days of the date upon which
such request is received, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting, when no prior
action by the Board is required by applicable law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded, addressed to the attention of the Secretary.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board and prior action by
the Board is required by applicable law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board adopts
the resolution taking such prior action.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 GENERAL POWERS. Subject to any requirements in the
Certificate of Incorporation, these Bylaws, and of the Delaware General
Corporation Law as to action which must be authorized or approved by the
stockholders, any and all corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be under the
direction of, the Board to the fullest extent permitted by law. Without
limiting the generality of the foregoing, it is hereby expressly declared that
the Board shall have the following powers, to wit:
(A) to select and remove all the officers, agents and employees
of the Corporation, prescribe such powers and duties for them as may
not be inconsistent with law, the Certificate of Incorporation or
these Bylaws, fix their compensation, and require from them security
for faithful service;
(B) to conduct, manage and control the affairs and business of
the Corporation, and to make such rules and regulations therefor not
inconsistent with law, the Certificate of Incorporation or these
Bylaws, as it may deem best;
(C) to change the location of the registered office of the
Corporation in Section 1.1 hereof; to change the principal office and
the principal office for the transaction of the business of the
Corporation from one location to another as provided in Section 1.2
hereof; to fix and locate from time to time one or more subsidiary
offices of the Corporation within or without the State of Delaware as
provided in Section 1.3 hereof; to designate any place within or
without the State of Delaware for the holding of any meeting or
meetings of stockholders; and to adopt, make and use a corporate seal,
and to prescribe the forms of certificates of
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stock, and to alter the form of such seal and of such certificates from
time to time, and in its judgment as it may deem best, provided such seal
and such certificate shall at all times comply with the provisions of law;
(D) to authorize the issue of shares of stock of the Corporation
from time to time, upon such terms and for such considerations as may
be lawful;
(E) to borrow money and incur indebtedness for the purposes of
the Corporation, and to cause to be executed and delivered therefor,
in the corporate name, promissory notes, bonds, debentures, deeds of
trust and securities therefor; and
(F) by resolution adopted by a majority of the authorized number
of directors, to designate an executive and other committees of the
Board, each consisting of one or more directors, to serve at the
pleasure of the Board, and to prescribe the manner in which
proceedings of such committee or committees shall be conducted.
SECTION 3.2 NUMBER AND TERM OF OFFICE. The authorized number of
directors of the Corporation shall be not less than 5 nor more than 11 until
this Section 3.2 is amended by a resolution duly adopted by the Board or by the
stockholders of the Corporation, in either case in accordance with the
provisions of Section 8.3 hereof. The exact number of directors shall be fixed
from time to time, within the limits specified, by resolution of the Board or
the stockholders, provided that the votes cast in favor of such resolution would
be sufficient to amend this Section 3.2 in accordance with the provisions of
Article III of the Certificate of Incorporation. Directors need not be
stockholders. Each of the directors of the Corporation shall hold office until
such director's successor shall have been duly elected and shall qualify or
until such director shall resign or shall have been removed in the manner
provided in these Bylaws.
SECTION 3.3 ELECTION OF DIRECTORS. The directors shall be elected by
the stockholders of the Corporation, and at each election, the persons receiving
the greater number of votes, up to the number of directors then to be elected,
shall be the persons then elected. The election of directors is subject to any
provisions contained in the Certificate of Incorporation relating thereto,
including any provision granting the holders of preferred stock the right to
elect directors.
SECTION 3.4 RESIGNATIONS. Any director of the Corporation may resign
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.5 VACANCIES. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors, or
any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum, or by a sole remaining director;
provided, however, that whenever the holders of any class or series of shares
are entitled to elect one or more directors, any vacancy or newly created
directorship of such class or series may be filled by a majority of the
directors elected by such class or series then in office, or by a sole remaining
director so elected. Each director so chosen to fill a vacancy shall hold
office until such director's successor shall have been elected and shall qualify
or until such director shall resign or shall have been removed. No reduction of
the authorized number of directors shall have the effect of removing any
director prior to the expiration of such director's term of office.
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SECTION 3.6 PLACE OF MEETING. The Board or any committee thereof may
hold any of its meetings at such place or places within or without the State of
Delaware as the Board or such committee may from time to time by resolution
designate or as shall be designated by the person or persons calling the meeting
or in the notice or a waiver of notice of any such meeting. Directors may
participate in any regular or special meeting of the Board or any committee
thereof by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board or such
committee can hear each other, and such participation shall constitute presence
in person at such meeting.
SECTION 3.7 REGULAR MEETINGS. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at
the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
SECTION 3.8 SPECIAL MEETINGS. Special meetings of the Board for any
purpose or purposes shall be called at any time by the Chairman of the Board or,
if the Chairman of the Board is absent or unable or refuses to act, by the Chief
Executive Officer or the President. Except as otherwise provided by law or by
these Bylaws, written notice of the time and place of special meetings shall be
delivered personally or by fax to each director, or sent to each director by
mail or by other form of written communication, charges prepaid, addressed to
such director at such director's address as it is shown upon the records of the
Corporation, or, if it is not so shown on such records and is not readily
ascertainable, at the place in which the meetings of the directors are regularly
held. In case such notice is mailed or telegraphed, it shall be deposited in
the U.S. mail or delivered to the telegraph company in the County in which the
principal office for the transaction of the business of the Corporation is
located at least 48 hours prior to the time of the holding of the meeting. In
case such notice is delivered personally or by fax as above provided, it shall
be delivered at least 24 hours prior to the time of the holding of the meeting.
Such mailing, telegraphing, delivery or faxing as above provided shall be due,
legal and personal notice to such director. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not be
given. Notice of any meeting of the Board shall not be required to be given to
any director who is present at such meeting, except a director who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 3.9 QUORUM AND MANNER OF ACTING. Except as otherwise
provided in these Bylaws, the Certificate of Incorporation or by applicable law,
the presence of a majority of the authorized number of directors shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board, and all matters shall be decided at any such meeting, a quorum
being present, by the affirmative votes of a majority of the directors present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, provided any action taken
is approved by at least a majority of the required quorum for such meeting. In
the absence of a quorum, a majority of directors present at any meeting may
adjourn the same from time to time until a quorum shall be present. Notice of
any adjourned meeting need not be given. The directors shall act only as a
Board, and the individual directors shall have no power as such.
SECTION 3.10 ACTION BY CONSENT. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if consent in writing is given thereto by all members of the
Board or of such committee, as the case may be, and such consent is filed with
the minutes of proceedings of the Board or of such committee.
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SECTION 3.11 COMPENSATION. Directors, whether or not employees of
the Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board, and, in
addition, a fixed fee, with or without expenses of attendance, may be allowed by
resolution of the Board for attendance at each meeting, including each meeting
of a committee of the Board. Such fees may be in the form of cash or other
lawful consideration, including, without limitation, stock grants and stock
options. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity as an officer, agent,
employee, or otherwise, and receiving compensation therefor.
SECTION 3.12 COMMITTEES. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Any such committee,
to the extent provided in the resolution of the Board and subject to any
restrictions or limitations on the delegation of power and authority imposed by
applicable law, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. Any such committee shall keep written minutes of its meetings and
report the same to the Board at the next regular meeting of the Board. Unless
the Board or these Bylaws shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by the chairman of the committee or by any
two members thereof; otherwise, the provisions of these Bylaws with respect to
notice and conduct of meetings of the Board shall govern.
ARTICLE IV: OFFICERS
SECTION 4.1 OFFICERS. The officers of the Corporation shall be a
Chief Executive Officer, a President, a Chief Operating Officer, a Chief
Financial Officer, one or more Vice Presidents (the number thereof and their
respective titles to be determined by the Board), a Secretary, and such other
officers as may be appointed at the discretion of the Board in accordance with
the provisions of Section 4.3 hereof.
SECTION 4.2 ELECTION. The officers of the Corporation, except such
officers as may be appointed or elected in accordance with the provisions of
Sections 4.3 or 4.5 hereof, shall be chosen annually by the Board at the first
meeting thereof, and each officer shall hold office until such officer shall
resign or shall be removed or otherwise disqualified to serve, or until such
officer's successor shall be elected and qualified.
SECTION 4.3 OTHER OFFICERS. In addition to the officers chosen
annually by the Board at its first meeting, the Board also may appoint or elect
such other officers as the business of the Corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
Bylaws or as the Board may from time to time specify, and shall hold office
until such officer shall resign or shall be removed or otherwise disqualified to
serve, or until such officer's successor shall be elected and qualified.
SECTION 4.4 REMOVAL AND RESIGNATION. Any officer may be removed,
either with or without cause, by resolution of the Board passed by a majority of
the directors at the time in office, at any regular or special meeting of the
Board, or except in case of an officer chosen by the Board, by any officer upon
whom such power of removal may be conferred by the Board.
SECTION 4.5 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
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SECTION 4.6 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall, subject to the control of the Board, have general supervision, direction
and control of the business and affairs of the Corporation and shall have such
other powers and duties with respect to the administration of the business and
affairs of the Corporation as may from time to time be assigned to the Chief
Executive Officer by the Board or as may be prescribed by these Bylaws.
SECTION 4.7 PRESIDENT. The President shall have such powers and
duties with respect to the administration of the business and affairs of the
Corporation as may from time to time be assigned to the President by the Board
or the Chief Executive Officer or as may be prescribed by these Bylaws.
SECTION 4.8 CHIEF OPERATING OFFICER. The Chief Operating Officer
shall be the chief operating officer of the Corporation and shall have such
other powers and duties with respect to the administration of the business and
affairs of the Corporation as may from time to time be assigned to the Chief
Operating Officer by the Board or the Chief Executive Officer or President or as
may be prescribed by these Bylaws.
SECTION 4.9 CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall have the general responsibility for maintaining the financial records of
the Corporation and such other powers and duties with respect to the
administration of the business and affairs of the Corporation as may from time
to time be assigned to the Chief Financial Officer by the Board or the Chief
Executive Officer or as may be prescribed by these Bylaws.
SECTION 4.10 VICE PRESIDENT. Each Vice President shall have such
powers and perform such duties with respect to the administration of the
business and affairs of the Corporation as may from time to time be assigned to
such Vice President by the Board or the Chief Executive Officer or as may be
prescribed by these Bylaws. In the absence or disability of the Chairman of the
Board, the Chief Executive Officer, the President and the Chief Operating
Officer, the Vice Presidents in order of their rank as fixed by the Board, or if
not ranked, the Vice President designated by the Board, shall perform all of the
duties of the Chairman of the Board, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the Chairman of the
Board.
SECTION 4.11 SECRETARY.
(A) The Secretary shall keep, or cause to be kept, at the
principal office of the Corporation, or such other place as the Board
may order, a book of minutes of all meetings of directors and
stockholders, with the time and place of holding, whether regular or
special, and if special, how authorized and the notice thereof given,
the names of those present at meetings of directors, the number of
shares present or represented at meetings of stockholders, and the
proceedings thereof.
(B) The Secretary shall keep, or cause to be kept, at the
principal office of the Corporation's transfer agent, a share
register, or a duplicate share register, showing the name of each
stockholder, the number of shares of each class held by such
stockholder, the number and date of certificates issued for such
shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
(B) The Secretary shall give, or cause to be given, notice of
all meetings of stockholders and of the Board required by these Bylaws
or by law to be given, and shall keep the seal of the Corporation in
safe custody and shall affix and attest the seal to all documents to
be executed on behalf of the Corporation under its
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seal, and shall have such other powers and perform such other duties as may
be prescribed by these Bylaws or assigned by the Board, the Chairman of the
Board or any officer of the Corporation to whom the Secretary may report.
If for any reason the Secretary shall fail to give notice of any special
meeting of the Board called by one or more of the persons identified in
Section 3.8 hereof, then any such person or persons may give notice of any
such special meeting.
ARTICLE V: CONTRACTS, CHECKS, DRAFTS,
BANK ACCOUNTS, ETC.
SECTION 5.1 EXECUTION OF CONTRACTS. The Board, except as in these
Bylaws otherwise provided, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances; and unless so authorized by the Board or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
SECTION 5.2 CHECKS, DRAFTS, ETC. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such officer, assistant, agent or attorney
shall give such bond, if any, as the Board may require.
SECTION 5.3 DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the Chairman of the
Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President and Chief Operating Officer, the Chief Financial Officer, any Vice
President and the Secretary (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
SECTION 5.4 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class or
series of shares of the stock of the Corporation owned by such owner. The
certificates representing shares of such stock shall be numbered in the order in
which they shall be issued and shall be signed in the name of the Corporation by
the Chairman of the Board, the President or any Vice President, and by the
Secretary, any Assistant
10
<PAGE>
Secretary or the Treasurer. Any or all of the signatures on the certificates
may be a facsimile. In case any officer, transfer agent or registrar who has
signed, or whose facsimile signature has been placed upon, any such certificate,
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may nevertheless be issued by the
Corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature shall have been placed thereupon, were
such officer, transfer agent or registrar at the date of issue. A record shall
be kept of the respective names of the persons, firms or corporations owning the
stock represented by such certificates, the number and class or series of shares
represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the Corporation for exchange or transfer shall
be cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.4 hereof.
SECTION 6.2 TRANSFERS OF STOCK. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 6.3 REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
SECTION 6.4 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in the judgment of
the Board, it is proper so to do.
SECTION 6.5 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any such other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders the Board shall not fix such a record date, then the record date
for determining stockholders for such purpose shall be the close of business on
the day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to
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<PAGE>
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of such meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 SCOPE OF INDEMNIFICATION. The Corporation shall
indemnify, in the manner and to the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may hereinafter be amended (the
"Delaware Law"), and by the Certificate of Incorporation, any person (or the
estate of any person) who is or was a party, or is threatened to be made a party
to, any threatened, pending or completed action, suit or proceeding, whether or
not by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director, officer or manager of another
corporation, partnership, limited liability company, joint venture, trust or
other enterprise. The Corporation may, to the fullest extent permitted by the
Delaware Law, purchase and maintain insurance on behalf of any such person
against any liability which may be asserted against such person. The
Corporation may create a trust fund, grant a security interest or use other
means (including without limitation a letter of credit) to ensure the payment of
such sums as may become necessary to effect the indemnification as provided
herein. The indemnification provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person, including any employee
or agent, to the fullest extent permitted by the Delaware Law, nor shall it be
deemed exclusive of any other rights to which any person seeking indemnification
from the Corporation may be entitled under any agreement, vote of stockholders
or disinterested directors, or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
SECTION 7.2 INDEMNIFICATION AGREEMENTS. The Corporation may enter
into indemnification agreements with any one or more directors, officers,
employees and agents upon resolution duly adopted by the Board. Such agreements
may indemnify such persons to the fullest extent permitted by the Delaware Law,
the Certificate of Incorporation and this Article VII.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 SEAL. The Board shall adopt a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation and
words showing that the Corporation was incorporated in the State of Delaware.
SECTION 8.2 WAIVER OF NOTICES. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
SECTION 8.3 AMENDMENTS. Except as otherwise provided herein or in
the Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of such proposed alteration, amendment, repeal, rescission or adoption is
given in the notice of such meeting.
SECTION 8.4 REPRESENTATION OF OTHER CORPORATIONS. The Chairman of
the Board, Vice Chairman of the Board, Chief Executive Officer, President, Chief
Operating Officer, Chief Financial Officer or the Secretary or any Vice
President of the Corporation is authorized to vote, represent and exercise on
behalf of the Corporation all rights incident to any and all shares
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<PAGE>
or ownership interests of any other corporation or corporations, partnership or
limited liability company standing in the name of the Corporation. The
authority herein granted to said officers to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
person authorized so to do by proxy or power of attorney duly executed by such
officers.
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<PAGE>
COMMON STOCK
NUMBER SHARES
[LOGO] EARTHSHELL
CORPORATION
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN DEFINITIONS
THE STATE OF DELAWARE AND RESTRICTIONS, IF ANY
CUSIP 269908 10 9
This Certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF
EARTHSHELL CORPORATION
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ JOHN DAOUD /s/ ESSAM KHASHOGGI
SECRETARY [SEAL] CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ..................Custodian ...........................
(Cust) (Minor)
under Uniform Gifts to Minors
Act ................................
(State)
UNIF TRF MIN ACT -- ................. Custodian (until age ................)
(Cust)
............................ under Uniform Transfers
(Minor)
to Minors Act..........................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-----------------------------------
X
------------------------------------
X
------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
- ----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.15
[LETTERHEAD]
February 5, 1998
Mr. John Daoud
Secretary/Director
EARTHSHELL CONTAINER CORPORATION
800 Miramonte Drive
Santa Barbara, CA 93109-1419
Dear John:
IMPERIAL BANK is pleased to advise you that the maturity date of the
$14,000,000 Revolving Line of Credit provided to Earthshell Container
Corporation will be extended to March 21, 1998, subject to the existing
credit terms and conditions agreement.
Please call me at (310) 417-5614 if you have any questions.
Sincerely,
/s/RICHARD H. MYERS, JR.
- ------------------------------
Richard H. Myers, Jr.
Senior Vice President
RHM:sm
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
as of October 1, 1997, by and between EarthShell Container Corporation, a
Delaware corporation with its principal office located in Santa Barbara,
California (the "Company"), and Simon K. Hodson, an individual ("Mr. Hodson").
AGREEMENT
1. SERVICES PROVIDED TO THE COMPANY. Mr. Hodson is hereby employed
by the Company as its Chief Executive Officer and, after October 15, 1997, as
its President, and Mr. Hodson hereby agrees to such employment.
(a) CHIEF EXECUTIVE OFFICER. In his capacity as Chief Executive
Officer and President, Mr. Hodson shall have such duties, responsibilities and
authority with respect to the business and affairs of the Company as are
consistent with the nature of such offices. During the term of this Agreement,
Employee shall devote substantially all of his regular working hours to the
business and welfare of the Company and its subsidiaries in the capacity of
Chief Executive Officer and President of the Company. Mr. Hodson shall provide
the Company with the benefit of his best judgment and efforts in performing his
duties hereunder. Notwithstanding the foregoing, the parties hereto acknowledge
that Mr. Hodson will serve as a Manager and as the President and Chief Operating
Officer of E. Khashoggi Industries, LLC, a Delaware limited liability company
("EKI"), and is expected to continue to serve in such capacity or in similar
capacities during the term of this Agreement. In addition, Mr. Hodson serves as
a director, manager and/or officer of certain of EKI's affiliated entities (such
affiliated entities other than the Company are referred to herein collectively
as the "EKI Affiliates"). It is expected the Mr. Hodson will continue to serve
in such capacity or similar capacities during the term of this Agreement. Mr.
Hodson may also spend a reasonable amount of time with respect to charitable and
civic activities (including serving on the board of directors of charitable
organizations) and, subject to the limitations set forth in Section 6 of this
Agreement, 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.
(b) BOARD OF DIRECTORS. It is currently contemplated by the
parties that, during the term of this Agreement, Mr. Hodson shall serve as a
director of the Company. Upon the expiration of this Agreement or its earlier
termination pursuant to Section 5, Mr. Hodson shall continue to serve his then
remaining term as a director of the Company.
2. TERM. Unless earlier terminated pursuant to Section 5 hereof,
Mr. Hodson shall be employed by the Company pursuant to this Agreement for a
term (the "Term") beginning on the date of this Agreement and continuing through
to and terminating at the close of business on the second anniversary of the
date hereof. At the Company's option, this Agreement may be renewed for an
additional one year term with such option to be exercised by written notice to
Mr. Hodson by no later than July 31, 2000.
<PAGE>
3. COMPENSATION TO MR. HODSON. During the term of this Agreement,
the Company shall pay to Mr. Hodson compensation consisting of an annual base
salary equal to $500,000 per annum, payable on such basis as is the normal
payment pattern of the Company, not to be less frequently than monthly. Mr.
Hodson 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 Board of Directors of the Company (the "Board") in its sole discretion,
and (ii) options or other rights to acquire the Company's common stock pursuant
to the Company's 1995 Stock Incentive Plan, 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.
4. OTHER BENEFITS. The Company shall provide to Mr. Hodson each of
the following benefits:
(a) BUSINESS EXPENSES. The Company shall pay or reimburse Mr.
Hodson for any reasonable out-of-pocket expenses incurred by Mr. Hodson 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 30 days after receipt of a statement
therefor from Mr. Hodson 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 Mr. Hodson, at the Company's expense,
coverage under the major medical, hospitalization, disability and other
insurance programs maintained by the Company for its officers generally, or if
none is made for its officers generally, its employees generally. In addition,
Mr. Hodson 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.
5. TERMINATION. Mr. Hodson's employment hereunder may be terminated
at any time by the Company in its sole discretion upon written notice to Mr.
Hodson. In such event, Mr. Hodson shall not be entitled to any severance pay or
any additional compensation and all payments and benefits due Mr. Hodson
hereunder shall cease upon termination of Mr. Hodson's employment pursuant to
this Section 5.
6. NONCOMPETITION COVENANT.
(a) During the term of this Agreement, Mr. Hodson shall not,
directly or indirectly, in any capacity (whether as an individual, promoter,
proprietor, investor, general partner, joint venturer, employee, agent,
consultant, director, officer, manager, stockholder or otherwise) work for, act
as a consultant or adviser to, own any interest in, or otherwise be connected in
any manner with the ownership, management, operation or control of (collectively
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<PAGE>
"Associated With"), any person or entity that is involved in the production,
sale, use or commercialization of Food Service Disposables (as defined in the
Amended and Restated License Agreement dated as of February 28, 1995 by and
between the Company and EKI's predecessor, and any and all amendments thereto
entered into prior to the termination of this Agreement) or that is otherwise in
direct competition with the business of the Company or its subsidiaries. Mr.
Hodson acknowledges that the Company's products are marketed internationally and
that its business plans include marketing throughout the entire world.
Accordingly the restrictions in this Section 6 shall extend to such businesses
in any part of the world. Notwithstanding the foregoing provisions, the Company
and Mr. Hodson hereby acknowledge that Mr. Hodson is a manager and officer, of
and has a beneficial ownership interest, in EKI and certain of the EKI
Affiliates. The parties hereto acknowledge that this Agreement is not intended
to prevent Mr. Hodson from rendering services to, or receiving compensation
from, EKI and the EKI Affiliates, either during the term of this Agreement
(consistent with Mr. Hodson's obligations pursuant to Section 1 above) or
thereafter.
(b) Nothing in this Section 6 shall restrict Mr. Hodson from
(i) continuing to own a beneficial interest in EKI or the EKI Affiliates, or
(ii) owning not more than 1% of the outstanding shares of any class of
securities in any entity.
(c) The covenants and agreements contained in this Section 6
shall be deemed to be a series of separate covenants and agreements, one for
each and every country, county, state, city and other jurisdiction in the world
with respect to which the Company's business has been or is hereafter carried
on. If any of the foregoing is determined by any court of competent
jurisdiction to be invalid or unenforceable by reason of such agreement
extending over too great a geographical area, or by reason of its being too
extensive in any other respect, such agreement shall be interpreted to extend
only over the maximum geographical area and to the maximum extent enforceable,
all as determined by such court in such action. Any determination that any
provision hereof is invalid or unenforceable, in whole or in part, shall have no
effect on the validity or enforceability of any remaining provision thereof.
7. OTHER ACTIVITIES. The parties acknowledge that the Company has
no interest in, or claim to, any compensation or profits received, or to be
received, by Mr. Hodson as a result of his performance of services for, or
involvement with, EKI or the EKI Affiliates, nor shall it have any claim to any
of their properties or assets, including, without limitation, any patents, trade
secrets or other intellectual property rights developed or created by Mr.
Hodson, either jointly or individually, on behalf of, or for the benefit of, EKI
and/or the EKI Affiliates during the term of this Agreement, except as otherwise
may be expressly set forth in any written agreement between EKI and/or the EKI
Affiliates, on the one hand, and the Company or its subsidiaries, on the other
hand.
8. CONFIDENTIAL AND PROPRIETARY INFORMATION. Mr. Hodson has
previously executed a non-disclosure agreement with respect to EKI, the Company
and their respective affiliated entities. Nothing herein shall be construed to
alter or modify Mr. Hodson's obligations or duties under such non-disclosure
agreement.
3
<PAGE>
9. 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 Mr. Hodson, to: Simon K. Hodson
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 Mr.
Hodson and his heirs and legal representatives. This Agreement is personal to
Mr. Hodson and shall not be assignable by Mr. Hodson.
(c) WAIVER OF BREACH. The waiver by the Company or Mr. Hodson
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. Any amendment to
this Agreement must be approved by the Conflicts Committee of the Company's
Board of Directors, and, if appropriate, by the Compensation Committee of the
Company's Board of Directors.
(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
4
<PAGE>
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) COUNTERPARTS. This Agreement may be executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
EARTHSHELL CONTAINER CORPORATION,
a Delaware corporation
By: /s/ Essam Khashoggi
-------------------------------
Title: Chairman of the Board
----------------------------
SIMON K. HODSON
/s/ Simon K. Hodson
----------------------------------
5
<PAGE>
AMENDED AND RESTATED
TECHNICAL SERVICES AND SUBLEASE AGREEMENT
This Amended and Restated Technical Services and Sublease Agreement
(the "Agreement") is made and entered into as of October 1, 1997 (the "Effective
Date"), by and between E. Khashoggi Industries, LLC, a Delaware limited
liability company ("EKI"), and EarthShell Container Corporation, a Delaware
corporation (the "Company"), with reference to the following facts:
RECITALS
A. EKI is the owner of certain technology utilizing biodegradable
materials, including starch based additives, for the packaging, portioning and
disposing of food service disposables. EKI is also the owner of technology
related to hydraulically bonded compositions and the methods of using and
manufacturing such compositions.
B. EKI is the successor by merger to the assets and liabilities of
E. Khashoggi Industries, a California general partnership ("EKI Predecessor"),
as well as all rights and obligations of EKI Predecessor under its contractual
agreements.
C. Pursuant to that certain Amended and Restated License Agreement
dated as of February 28, 1995 (the "License Agreement"), between EKI
Predecessor and the Company, EKI has licensed to the Company the exclusive right
to make, use, sell and otherwise commercialize Food Service Disposables which
incorporate, in whole or in part, the Technology and to utilize the Technology
to make, use, sell and otherwise commercialize ALI-ITE Paper for conversion into
Food Service Disposables (all capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to such terms in the License
Agreement).
D. In order to manufacture, use, sell, sublicense and otherwise
commercialize Food Service Disposables that employ or utilize the Technology,
the Company may require services of certain technical and scientific personnel
employed or otherwise retained by EKI.
E. EKI and the Company have previously entered into a Management,
Administrative Services and Professional Services Agreement, dated September 1,
1993 (the "Management Agreement"), pursuant to which EKI provided to the Company
technical services and assistance, including consultation, design formulation,
laboratory research and product development, and certain other services.
Pursuant to the Management Agreement, EKI also subleased to the Company office
space and performed certain related office services.
F. The Management Agreement was terminated and superseded in its
entirety by a Technical Services and Sublease Agreement that was entered into
between EKI and the Company, effective July 1, 1994 (the "Prior Technical
Services Agreement").
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G. The Prior Technical Services Agreement was originally scheduled
to terminate on June 30, 1997, but was subsequently extended by the parties
through September 30,1997.
H. The Company intends to change its name to "EarthShell
Corporation."
I. EKI and the Company desire to amend and restate the Prior
Technical Services Agreement on the terms, conditions and covenants contained
herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises, the terms and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. TECHNICAL SERVICES.
1.1 PROVISION OF TECHNICAL SERVICES.
(a) EKI agrees to provide to the Company during the term of this
Agreement such technical assistance relating to the Technology, and the
Company's and its sublicensees' use thereof, as the Company may request,
including consultation, design formulation, product development, and research
related to compositions capable of use in Food Service Disposables, methods of
using compositions as Food Service Disposables, and methods of manufacturing
Food Service Disposables (collectively, the "Technical Services"). The
Technical Services will be provided at such locations as the Company may from
time to time designate; provided, however, that EKI shall be entitled to travel,
meal and lodging expense reimbursement pursuant to Section 1.3 hereof with
respect to EKI technical and scientific personnel who are required to render
Technical Services at locations that require an overnight stay or that are
otherwise sufficiently distant from the personnel's home base to warrant expense
reimbursement under the Company's guidelines. The Technical Services shall be
provided by such EKI employees, advisors and consultants as the Company shall
request, provided that if the Company does not request the services of any
specific EKI employees, advisors or consultants, EKI shall use its good faith
judgment to efficiently assign its personnel to complete such Technical
Services.
(b) As long as this Agreement is in force, EKI shall provide the
Technical Services to the Company on a priority basis. EKI shall dedicate
its technical and scientific personnel as necessary to satisfy all requests
by the Company for Technical Services when and as reasonably requested, and
shall utilize such personnel for activities not related to Technical Services
requested by the Company only to the extent that it may do so without
compromising the timely delivery of all Technical Services reasonably
requested by the Company. Notwithstanding any provision of this agreement to
the contrary, if EKI's current number of technical and scientific personnel
(approximately 22 in number) are devoting substantially all of their regular
working hours to Company projects, EKI shall not be obligated to employ
additional technical and scientific personnel, nor shall it be required to
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have its personnel work overtime hours. EKI, however, shall use commercially
reasonable efforts to timely comply with all Company requests for the provision
of Technical Services through the deployment of its existing personnel or
through the retention of outside technical consultants.
(c) All requests for Technical Services shall be made in a request
form substantially in accordance with the form attached hereto as Exhibit A
(as such form may be modified from time to time), which form (the "Request
Form"), at a minimum, shall contain a brief description of the project and
its intended scope, a list of the deliverables required, the names of any
specific personnel requested to work on the project, and a proposed timeline
and budget estimating the fees and expenses to be incurred with respect to
the project. EKI shall indicate its acceptance of the project by
countersigning the Request Form (as the same may be modified by the Company
to take account of any changes requested by EKI and agreed to by the
Company). EKI will use commercially reasonable efforts to complete the
project within the estimated budget and shall notify the Company once it
reasonably appears that the budget will be exceeded by more than 10%. Upon
such notification, the Company may, at its option, redefine the scope of the
project (including the list of deliverables), terminate the project or adjust
the budget pursuant to a revised Request Form. All Request Forms (and any
modifications thereto) shall be approved by an officer of the Company who is
not affiliated with EKI. The Company shall not be obligated to pay for
Technical Services (or related expenses) that are not so approved by the
Company.
(d) Ownership of any intellectual or proprietary knowledge or
information developed in the course of furnishing the Technical Services
(including any Technical Services improperly classified as discussed in
Section 1.4 below) shall be determined pursuant to the terms of the License
Agreement and any applicable sublicense agreements thereunder.
1.2 SERVICES FEE.
(a) Following the close of each calendar month, EKI shall deliver to
the Company a written report (the "Technical Services Report") identifying the
EKI technical or scientific personnel who provided Technical Services requested
by the Company at any time during the preceding month, the number of hours spent
by each such person providing such services together with a brief description of
the services provided, the hourly billing rate of such personnel as set forth on
Exhibit B attached hereto (the "Billing Rate"), and the total amount due EKI
from the Company with respect to all Technical Services provided by EKI
personnel during such month. The Technical Services Report shall also contain,
or EKI shall otherwise timely provide to the Company, such additional
information as the Company may reasonably request to determine and evaluate the
Technical Services provided by EKI and the amount due EKI hereunder. As payment
for the Technical Services to be provided by EKI, within 30 days following the
date the Technical Services Report is delivered to the Company, the Company
shall pay to EKI a fee (the "Services Fee") computed by multiplying the
applicable Billing Rates set forth on Exhibit B hereto by the number of hours
spent by the EKI technical and scientific personnel providing Technical Services
requested by the Company during the preceding month. The hourly rates charged
by EKI to the Company and the job classifications of EKI's personnel shall be
reviewed by the parties on each anniversary of this
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Agreement and shall be equitably adjusted to take account of any increased
salaries and/or employee benefits paid by EKI to its technical personnel who
render Technical Services to the Company hereunder; provided, however, that no
increase in the hourly rates shall be permitted unless the proposed hourly rates
are in conformity with industry standards as conclusively determined by an
outside, independent technical consulting firm mutually selected by the parties.
(b) The Company shall not be obligated to make payment to EKI for
(i) hours of service provided by EKI personnel other than scientific or
technical personnel, (ii) services other than Technical Services requested or
approved by the Company, or (iii) any overhead or other expenses incurred by
EKI, except as provided in Section 1.3. To the extent EKI and the Company share
common officers and/or employees, all Technical Services provided by such
persons shall be performed in their capacity as officers or employees of the
Company and EKI shall not be entitled to any Services Fee with respect to such
services.
1.3 EXPENSE REIMBURSEMENT. In addition to the Services Fee to be paid by
the Company to EKI pursuant to Section 1.2, the Company, in accordance with the
guidelines set forth in Exhibit C hereto and the budget set forth in the
applicable Request Form, shall reimburse EKI for all direct, out-of-pocket
expenses incurred by EKI and paid to third parties specifically in connection
with the provision of Technical Services to the Company. Such out-of-pocket
expenses paid to third parties in connection with the provision of Technical
Services shall not include overhead expenses of EKI (such as general office
expenses of EKI), and any expenses not specifically allocable to a Company
project or any other similar expenses. EKI shall provide the Company with such
receipts, invoices, other evidence of out-of-pocket expenses incurred and
additional information as the Company may reasonably request in connection with
the expense reimbursement provided for hereunder. Upon the submission of such
documentation, the Company shall promptly reimburse EKI for the items to which
EKI is entitled to reimbursement hereunder; provided, however, that in no event
shall the Company be required to reimburse such expenses more frequently than
monthly.
1.4 THIRD-PARTY REVIEW. The Company, at its expense, shall have the
right, upon reasonable advance notice and during normal business hours, to
review and audit the records of EKI that pertain to the Technical Services
provided to the Company, and any fees or expenses related thereto that have been
invoiced to the Company. Such review or audit may be performed by Company
personnel or by outside professionals retained by the Company for such purposes
(provided such outside professionals are subject to appropriate confidentiality
obligations reasonably acceptable to EKI). In the event of any dispute between
the parties hereto regarding whether EKI is entitled to payment hereunder or the
amount thereof for any services rendered or expenses incurred, the Company shall
promptly remit to EKI the undisputed amount and the remaining disputed amount
shall be submitted for decision to a nationally recognized accounting firm
mutually agreeable to the parties (but which shall not then be engaged as the
independent auditors of either the Company or EKI), whose decision shall be
final and shall be binding upon the parties. In making such decision, the
accounting firm shall take into account any other information that it may deem
relevant or appropriate. In the event that such accounting firm is unable to
reach a decision with respect to any disputed matter within sixty days of the
date such matter is submitted, such matter shall be resolved by
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<PAGE>
binding arbitration pursuant to Section 7.8. In the event that any
previously rendered services or previously incurred expenses are determined
to have been improperly classified (whether pursuant to this Agreement, the
Technical Services Agreement or the Management Agreement), EKI shall promptly
reimburse the Company for the costs of such services or expenses, with
interest computed at the prime rate, as published in the Wall Street Journal
(the "Prime Rate"), as adjusted at the end of each fiscal quarter, from the
date the improperly classified payment was made until the date of repayment.
Such reimbursement shall be the sole remedy for such improper classification.
If it is determined that the amount in dispute (or any portion thereof) was
properly charged by EKI to the Company, the Company shall promptly reimburse
EKI for the amount determined to have been properly charged, with interest
computed at the Prime Rate, as adjusted at the end of each fiscal quarter,
from the day the invoice in question was delivered. The fees and expenses of
any accounting firm resolving a dispute under this Section 1.4 shall be borne
equally by the parties.
1.5 LATE PAYMENTS. Any amount payable to EKI hereunder which is not
disputed in good faith pursuant to Section 1.4 and which is not paid within
30 days following the date the invoice is submitted shall bear interest at
the Prime Rate, adjusted at the end of each fiscal quarter, commencing on the
day the invoice is submitted. Under no circumstance shall EKI be obligated
to perform any service for the Company or to incur any cost on the Company's
behalf, if the Company is in material default with respect to the payment of
any undisputed amounts hereunder. The Company shall not be considered in
default under this Agreement if, pursuant to Section 1.4, it disputes an
amount charged to it by EKI.
2. EQUIPMENT.
2.1 PURCHASE OF EQUIPMENT. During the term of this Agreement, the Company
shall bear the cost of, or shall reimburse EKI for the cost of, the purchase or
lease of any machinery or equipment (and related components) that is necessary
for and will be used primarily in connection with Technical Services performed
with respect to Company projects; provided, however, that the purchase or lease
of any such machinery or equipment (and related components) must be approved by
the Company. Any machinery or equipment (and related components) the cost of
which is borne by the Company shall be the sole and exclusive property of the
Company. The cost of any equipment or machinery (and related components) used
by EKI primarily for its own general use, or which is purchased or leased
without the approval of the Company, shall not be paid for or reimbursed by the
Company. Unless approved by the Company, EKI may not utilize the Company's
equipment or machinery in any significant manner for projects unrelated to the
Company.
2.2 RIGHT OF FIRST OFFER. Prior to consummating the sale of machinery or
equipment owned by a party (the "Owner"), whether existing as of the date of
this Agreement or subsequently acquired, the Owner shall first offer the other
party hereto (the "Non-Owner") the opportunity to purchase such machinery or
equipment for a price equal to the greater of (a) the then current book value of
such machinery or equipment as shown in the financial records of the Owner
(determined in accordance with generally accepted accounting principles),
(b) the principal amount of all indebtedness to which such machinery and
equipment is then subject, or (c) the price offered by any third party for such
machinery and
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<PAGE>
equipment to the extent such offer is bona fide (it being understood that the
Owner shall not be obligated to offer such machinery and equipment for sale to
third parties if the price likely to be obtained would not be materially higher
than the greater of the prices set forth in clauses (a) and (b)). The Owner's
offer shall be made in writing and shall be delivered in the manner provided in
Section 7.5. Upon receipt of such notice, the Non-Owner shall respond in
writing within five (5) business days thereafter if it desires to exercise such
right of first refusal. In the event that Non-Owner shall elect to purchase the
machinery or equipment, such purchase shall be completed within thirty (30) days
of Non-Owner's election to make such purchase. The consideration payable for
the machinery or equipment purchased by the Non-Owner hereunder shall be made in
cash or in such other form as the Owner shall in its sole discretion allow. The
Non-Owner shall pay any sales taxes or other transfer costs associated with such
purchase.
3. OFFICE SUBLEASE.
3.1 SUBLEASE OF OFFICE SPACE. EKI hereby subleases to the Company, and
the Company hereby subleases from EKI, the area the Company is presently
occupying at EKI's headquarters located at 800 Miramonte Drive, Santa Barbara,
California, comprising approximately 1,600 square feet (the "Subleased
Premises"). EKI shall also provide janitorial services with respect to the
Subleased Premises and shall provide the Company with reasonable use of EKI's
receptionist and EKI's conference rooms. EKI represents and warrants to the
Company that it has full right, authority and power to sublease the Subleased
Premises to the Company. The sublease created hereby shall not be a triple net
lease and EKI shall be responsible for the cost of all property taxes and
property and casualty insurance with respect to the Subleased Premises. The
Company shall be responsible for the maintenance of, and improvements to, the
Subleased Premises, provided any such maintenance or improvement projects are
approved in advance by the Company.
3.2 SUBLEASE PAYMENTS. As consideration for the sublease by EKI to the
Company of the Subleased Premises and the provision by EKI of the related
services described above, the Company shall pay to EKI, on a monthly basis, the
sum of $5,600 no later than the 10th day of each calendar month during the term
of the sublease.
3.3 TERM. The term of the sublease of the Subleased Premises expires on
March 31, 2001; PROVIDED, HOWEVER, that the Company may terminate such sublease
at any time by giving thirty days' prior written notice to EKI. In the event
that the Company remains in the Subleased Premises upon the expiration or
earlier termination of the term of the sublease and EKI thereafter accepts rent
from the Company, the Company's occupancy of the property shall be a
"month-to-month" tenancy on the terms and conditions set forth in Sections 3.1
and 3.2.
4. REGISTRATION RIGHTS. In connection with the execution of the Prior
Technical Services Agreement, EKI and the Company entered into that certain
Registration Rights Agreement granting certain registration rights to EKI with
respect to the shares of the Common Stock of the Company issued to EKI. Such
Registration Rights Agreement remains
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in full force and effect on the date hereof and shall not be modified in any
respect by this Agreement.
5. CONFIDENTIALITY. Each of the parties hereto shall, and shall use
commercially reasonable efforts to cause their respective employees and agents
to, keep confidential and not, without the prior written consent of the other
party hereto, disclose to any person (other than sublicensees of the
Technology), any of the confidential information or trade secrets communicated
in the course of the performance and receipt of the Technical Services, except
as may be required to be disclosed by applicable law. For purposes of this
Agreement, the term "confidential information or trade secrets" of a party
hereto shall include all information of a confidential or proprietary nature in
any form owned by such party during the term of this Agreement, including, but
not limited to, patents and patent applications; inventions and improvements,
whether patentable or not; development projects; designs, practices, processes,
methods, know-how and other facts relating to the business of such party; and
all other trade secrets and information of a confidential and proprietary
nature. "Confidential information" shall not include, however (i) any
information that is or shall become generally known in the trade through no
fault of the recipient party and (ii) any information acquired from a third
party who in turn lawfully acquired such information with the right to divulge
it.
6. TERM. This Agreement shall continue in effect until December 31, 2002 (the
"Termination Date"), except that (i) the sublease of the Subleased Premises may
terminate earlier in accordance with Section 3.3. and (ii) the obligations of
the parties set forth in Sections 4, 5 and 7 hereof shall survive the
termination of this Agreement.
7. MISCELLANEOUS PROVISIONS.
7.1 No Agency. This Agreement shall not be construed to constitute any
party as an agent or legal representative of any other party. The relationship
created hereunder shall be one of vendor and vendee and no party shall be
considered a partner or co-venturer of the other party solely by reason of their
relationship under this Agreement.
7.2 SEVERABILITY. If any provision of this Agreement is determined by a
competent authority to be illegal or invalid, the provision will be
automatically severed from this Agreement. Any such holding will not affect the
legality or validity of the remaining provisions of this Agreement.
7.3 WAIVER. If any party fails to give notice or enforce any right under
this Agreement, such failure shall not constitute a waiver of the same, unless
reduced to writing and signed by the waiving party. If a party waives its
rights in writing, such waiver shall not constitute a waiver of any other right
or of a subsequent violation of the same right the violation of which had been
previously waived.
7.4 ASSIGNMENT. The parties may not assign, pledge, or otherwise transfer
this Agreement or any right or obligation hereunder without the prior written
consent of the other party; PROVIDED, HOWEVER, that either party shall be
permitted to assign, without the consent of the other party, all, but not less
than all, of its rights, duties and obligations under this
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Agreement in connection with the sale of all or substantially all of its entire
business, whether by merger, consolidation, sale of stock, sale of all or
substantially all assets or otherwise. This Agreement shall bind the successors
and assigns of the parties.
7.5 NOTICES. All notices and other communications provided for or
permitted hereunder shall be given in writing and shall be made by hand
delivery, first-class mail (registered or certified, return receipt requested),
telecopier, or overnight courier guarantying next-day delivery, addressed as
follows:
E. Khashoggi Industries, LLC
800 Miramonte Drive
Santa Barbara, California 93109
Attn: Chief Financial Officer
Facsimile No.: (805) 897-2298
EarthShell Corporation
800 Miramonte Drive
Santa Barbara, California 93109
Attn: Chief Financial Officer
Facsimile No.: (805) 899-3517
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, postage prepaid, if mailed;
when receipt is acknowledged, if telecopied; and the next business day after
timely delivery to the courier, if sent by overnight courier guarantying next-
day delivery.
7.6 AMENDMENT. This Agreement may be amended only by the consent of each
of the parties expressed in writing, signed by their duly authorized
representatives. Any such amendment must be approved by the Conflicts Committee
of the Company's Board of Directors.
7.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties regarding the subject matter hereof, and supersedes all
prior discussions or agreements related to the same, including, without
limitation, the Prior Technical Services Agreement (except as provided in
Section 4 hereof).
7.8 Dispute Resolution Clause.
(a) Except as provided in Section 1.4, any controversy, claim or
dispute arising out of or relating to this Agreement or the breach, termination,
enforcement, interpretation or validity thereof, including the determination of
the scope or applicability of this agreement to arbitrate ("Dispute"), shall be
determined by arbitration in Santa Barbara, California, in accordance with the
laws of the State of California for agreements made in and to be performed in
California. The arbitration shall be administered by the American
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Arbitration Association ("AAA") pursuant to its Commercial Rules and
Supplementary Procedures for Large, Complex Disputes.
(b) Within fifteen days after the commencement of the arbitration, an
arbitrator shall be selected by the parties (or if they fail to agree, by the
AAA) from the AAA's Intellectual Property Panel of Arbitrators. The arbitrator
shall be neutral and independent and shall comply with the AAA Code of Ethics
for Arbitrators in Commercial Disputes (Canons I - VI).
(c) Judgment on the award made by the arbitrator may be entered in
any court having jurisdiction.
(d) Either party may, without inconsistency with this Agreement, seek
from a court any interim or provisional relief that is necessary to protect the
rights or property of that party, pending the appointment of the arbitrator.
The exclusive forum for such application shall be the Los Angeles Superior Court
or the United States District Court for the Central District of California.
(e) Upon the request of any party, a non-binding mediation shall be
conducted prior to the arbitration pursuant to the Mediation Rules of the AAA.
(f) The arbitrator shall have no authority to award punitive or other
damages not measured by the prevailing party's actual damages and may not, in
any event, make any ruling, finding, or award that does not conform to the terms
and conditions of this Agreement.
(g) The award of the arbitrator shall be in writing and shall specify
the factual and legal basis for the award. The arbitrator shall, in the award,
allocate all of the costs of the arbitration (and the mediation, if applicable),
including the fees of the arbitrator and the reasonable attorneys' fees of the
prevailing party, against the party who did not prevail (applying the principles
set forth in Section 1.4).
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their duly authorized representatives as of the date set forth herein.
E. KHASHOGGI INDUSTRIES, LLC
a Delaware limited liability company
By: /s/ John Daoud
---------------------------------------------
John Daoud,
Manager and Chief Financial Officer
EARTHSHELL CONTAINER CORPORATION
By: /s/ D. Scott Houston
---------------------------------------------
D. Scott Houston,
Chief Financial Officer
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AMENDED AND RESTATED
AGREEMENT FOR ALLOCATION OF PATENT COSTS
This Amended and Restated Agreement for Allocation of Patent Costs
(this "Agreement") is entered into as of October 1, 1997 (the "Effective
Date")by and between E. Khashoggi Industries, LLC, a Delaware limited liability
company ("EKI"), and EarthShell Container Corporation, a Delaware corporation
(the "Company").
RECITALS
A. EKI is the owner of certain technology utilizing biodegradable
materials, including starch based additives, for the packaging, portioning and
disposing of food service disposables. EKI is also the owner of technology
related to hydraulically bonded compositions and the methods of using and
manufacturing such compositions.
B. EKI is the successor by merger to the assets and liabilities of
E. Khashoggi Industries, a California general partnership ("EKI Predecessor"),
as well as all rights and obligations of EKI Predecessor under its contractual
agreements. EKI has not yet begun to commercialize its technology (other than
technology licensed to the Company as described below), but expects to do so
following the second anniversary of this Agreement.
C. Pursuant to that certain Amended and Restated License Agreement
dated as of February 28, 1995 (the "License Agreement"), between EKI
Predecessor and the Company, EKI has licensed to the Company the exclusive right
to make, use, sell and otherwise commercialize Food Service Disposables which
incorporate, in whole or in part, the Technology and to utilize the Technology
to make, use, sell and otherwise commercialize ALI-ITE Paper for conversion into
Food Service Disposables (all capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to such terms in the License
Agreement).
D. Pursuant to Section 6(a) of the License Agreement, the Company
has previously agreed to pay, or reimburse EKI for, all costs and expenses
associated with filing, prosecuting, and maintaining patent and patent
applications (both domestic and foreign) directed to (i) compositions (whether
cement-based or non-cement based) capable of use in Food Service Disposables,
(ii) methods of using compositions (whether cement-based or non-cement-based) as
Food Service Disposables, or (iii) methods of manufacturing Food Service
Disposables whether cement-based or non-cement based (collectively, the "Company
Related Patents"), and EKI has agreed to pay all costs and expenses associated
with filing, prosecuting and maintaining patent and patent applications (both
domestic and foreign) not within the scope of the Company Related Patents.
E. The Company and EKI Predecessor have previously entered into that
certain Agreement for Allocation of Patent Costs, dated as of July 31, 1993 (the
"Prior Patent
<PAGE>
Allocation Agreement"). The Company is obligated to pay or reimburse EKI for
all costs and expenses associated with filing, prosecuting, and maintaining
patents and patent applications in connection with technology that directly
relates to food and beverage containers, or the process of manufacturing such
containers, within the field of use licensed to the Company, or which has
significant teachings to the manufacture of food and beverage containers, even
if outside such field of use.
F. The Company intends to change its name to "EarthShell
Corporation."
G. EKI and the Company desire to amend and restate the Prior Patent
Allocation Agreement on the terms and conditions stated herein and to cause this
Agreement to supersede the provisions of Section 6(a) of the License Agreement.
AGREEMENT
In consideration of the mutual promises of the parties set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, EKI and the Company hereby agree
as follows:
1. From and after the Effective Date and through the second
anniversary of this Agreement, the Company shall pay, or reimburse EKI if EKI
has made payment in cash, stock or other form of consideration (with all
non-cash consideration being valued at its fair market value at the time of
delivery), all costs, fees and expenses (collectively, "Costs") incurred and
associated with filing, prosecuting, acquiring or maintaining patents or patent
applications (both domestic and foreign) in connection with Technology that
directly relates to the Food Service Disposables licensed to the Company under
the License Agreement (including compositions capable of use in Food Service
Disposables, methods of using compositions as Food Service Disposables and
methods of manufacturing Food Service Disposables), even though there may be
some benefit from such patents or patent applications to EKI. Following the
second anniversary of this Agreement, the Company shall pay or reimburse EKI for
all Costs incurred and associated with filing, prosecuting, acquiring or
maintaining patents or patent applications (both domestic and foreign) in
connection with Technology that directly relates to and primarily benefits the
Food Service Disposables licensed to the Company under the License Agreement
(including compositions capable of use in Food Service Disposables, methods of
using compositions as Food Service Disposables and methods of manufacturing Food
Service Disposables), even though there may be some benefit from such patents or
patent applications to EKI. The phrase "primarily benefits" means that the
Company, as compared to EKI, is more likely to realize a preponderance of the
economic benefits from the filing, prosecution, acquisition or maintenance of
the patent or patent application in question, based on all relevant and material
criteria, including, without limitation, the current and future business plans
and commercialization activities of the Company and EKI, as initially
established by EKI and the Company and as revised biennially. It is
acknowledged by the parties that the term "Costs" includes the reasonable costs,
fees and expenses of the parties' internal legal counsel, if any, that are
directly associated with, or allocable to, filing, acquiring, prosecuting or
maintaining patents or patent applications.
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2. From and after the Effective Date, EKI shall pay, or reimburse
the Company if the Company has made payment in cash, stock or other form of
consideration (with any non-cash consideration being valued at its fair market
value at the time of delivery), all Costs incurred and associated with filing,
prosecuting, acquiring and maintaining all other patents or patent applications
(both domestic and foreign) not described in Section 1, including those related
to Food Service Disposables, even though there may be some incidental benefits
from such patents or patent applications to the Company.
3. Attached hereto as Exhibit A is a list of those patents and
patent applications as of the Effective Date which, for purposes of this
Agreement, are stipulated to directly relate to Food Service Disposables (and
which are therefore subject to Section 1). Attached hereto as Exhibit B is a
list of those patents and patent applications as of the Effective Date which,
for purposes of this Agreement, are stipulated to not have such a relationship
and which are therefore subject to Section 2. Exhibits A and B shall be revised
biennially by the parties to list the patents and patent applications that are
subject to Sections 1 and 2, respectively, for the ensuing two year period.
4. The parties acknowledge that the allocation of Costs required by
Sections 1 and 2 above may not always be susceptible of precise determination.
The parties will look to their joint or respective outside patent counsel for
the allocation of such Costs pursuant to the terms of this Agreement. In the
event of any disagreement between the parties with respect to the allocation of
such Costs, the disagreement shall be resolved by arbitration in accordance with
Section 15. With regard to the Company, this Agreement shall be administered
and enforced, and any disagreement hereunder resolved, by the members of the
Conflicts Committee of the Company's Board of Directors (who may retain
independent patent counsel to advise them in such matters).
5. Notwithstanding any provision of this Agreement to the contrary,
no party shall have the right to incur any Costs that are reimbursable by the
other party once the first party is notified in writing by the other party that
it does not desire to incur such Costs.
6. Any continuation-in-part, division, revision or replacement
patent or patent application stemming from a patent or patent application listed
on Exhibit A or Exhibit B (as the same may be revised on a biennial basis) shall
be given the same status as the patent or patent application from which it
stems. All Costs for filing, prosecuting, acquiring or maintaining foreign
patents or patent applications shall likewise be allocated in accordance with
this Agreement.
7. Any Costs incurred by EKI or the Company in connection with
filing, prosecuting, acquiring or maintaining patents or patent applications
prior to the Effective Date shall be allocated in accordance with the terms and
provisions of the Prior Patent Allocation Agreement.
8. If any provision of this Agreement is determined by a competent
authority to be illegal or invalid, the provision shall be automatically severed
from this Agreement.
3
<PAGE>
Any such holding shall not affect the legality or validity of the remaining
provisions of this Agreement.
9. If any party fails to give notice or enforce any right under this
Agreement, such failure shall not constitute a waiver of the same, unless
reduced to writing and signed by the waiving party. If a party waives its
rights in writing, such waiver shall not constitute a waiver of any other right
or of a subsequent violation of the same right the violation of which had been
previously waived.
10. All notices and other communications provided for or permitted
hereunder shall be given in writing and shall be made by hand-delivery,
first-class mail (registered or certified, return receipt requested),
telecopier, or nationally recognized overnight courier, addressed as follows:
E. Khashoggi Industries, LLC
800 Miramonte Drive
Santa Barbara, California 93109
Attn: Chief Financial Officer
Facsimile No.: (805) 897-2298
EarthShell Corporation
800 Miramonte Drive
Santa Barbara, California 93109
Attn: Chief Financial Officer
Facsimile No.: (805) 899-3517
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, postage prepaid, if mailed;
when receipt is acknowledged, if telecopied; and the next business day after
timely delivery to the courier, if sent by nationally recognized overnight
courier.
11. This Agreement may be amended only by the consent of each of the
parties expressed in writing, signed by their duly authorized representatives.
12. This Agreement constitutes the entire agreement between the
parties regarding the subject matter hereof, and, except as set forth in
Sections 7 and 13, supersedes all prior discussions or agreements related to the
same, including, without limitation, the Prior Patent Allocation Agreement and
Section 6(a) of the License Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
reference to the conflicts of law principles thereof.
13. In the event that any previously incurred Costs are determined to
have been improperly classified (whether pursuant to this Agreement, the Prior
Patent Allocation Agreement or Section 6(a) of the License Agreement), the
relevant party shall promptly reimburse the other party hereto for such Costs,
with interest computed at the prime rate, as published in the Wall Street
Journal (the "Prime Rate") as adjusted at the end of each fiscal quarter, from
the date
4
<PAGE>
the improperly classified payment was made (or demand for payment was made)
until the date of repayment. Such reimbursement shall be the sole remedy for
such improper classification.
14. Any amount reimbursable to a party hereunder is due upon
submission of an invoice with appropriate supporting documentation, which
invoice shall be submitted within ten days after the end of each calendar month
(although the failure to timely submit such invoice shall not bar the party from
receiving reimbursement for any costs reimbursable hereunder). Any invoiced
amounts not paid within 30 days following the date the invoice is submitted
shall bear interest at the Prime Rate, adjusted at the end of each fiscal
quarter, from the date the invoice is submitted. Under no circumstance shall
EKI or the Company be obligated to incur any Costs on behalf of the other party
if such other party is in material default with respect to the payment of any
amounts due hereunder.
15. Arbitration Clause.
a. Any controversy, claim or dispute arising out of or relating
to this Agreement or the breach, termination, enforcement, interpretation or
validity thereof, including the determination of the scope or applicability of
this agreement to arbitrate ("Dispute"), shall be determined by arbitration in
Santa Barbara, California, in accordance with the laws of the State of
California for agreements made in and to be performed in California. The
arbitration shall be administered by the American Arbitration Association
("AAA") pursuant to its Commercial Rules and Supplementary Procedures for Large,
Complex Disputes.
b. Within fifteen days after the commencement of the
arbitration, an arbitrator shall be selected by the parties (or if they fail to
agree, by the AAA) from the AAA's Intellectual Property Panel of Arbitrators.
The arbitrator shall be neutral and independent and shall comply with the AAA
Code of Ethics for Arbitrators in Commercial Disputes (Canons I - VI).
c. The award rendered by the arbitrator shall be final and
shall not be subject to vacation or modification. The arbitrator shall render
any award or otherwise conclude the arbitration no later than 120 days after the
date the arbitrator is selected. Judgment on the award made by the arbitrator
may be entered in any court having jurisdiction over the parties.
d. Either party may, without inconsistency with this Agreement,
seek from a court any interim or provisional relief that is necessary to protect
the rights or property of that party, pending the appointment of the arbitrator.
The exclusive forum for such application shall be the Los Angeles Superior Court
or the United States District Court for the Central District of California.
e. Upon the request of any party, a non-binding mediation shall
be conducted prior to the arbitration pursuant to the Mediation Rules of the
AAA.
f. The arbitrator shall have no authority to make any ruling,
finding, or award that does not conform to the terms and conditions of this
Agreement. By way of
5
<PAGE>
example, the arbitrator shall have no authority to award punitive, special,
consequential or exemplary damages or any other damages that conflict with
Section 13.
g. The award of the arbitrator shall be in writing and shall
specify the factual and legal basis for the award. The arbitrator shall, in the
award, allocate all of the costs of the arbitration (and the mediation, if
applicable), including the fees of the arbitrator and the reasonable attorneys'
fees of the prevailing party, against the party who did not prevail.
16. No party may assign, pledge, or otherwise transfer this Agreement
or any right or obligation hereunder without the prior written consent of the
other party; provided, however, that either party shall be permitted to assign,
without the consent of the other party, all, but not less than all, of its
rights, duties and obligations under this Agreement in connection with the sale
or disposition of its entire or substantially its entire business, whether by
merger, consolidation, sale of stock, sale of all or substantially all of its
assets or otherwise. This Agreement shall bind the successors and assigns of
the parties.
IN WITNESS WHEREOF, EKI and the Company have executed this Agreement
as of the day first set forth above.
E. KHASHOGGI INDUSTRIES, LLC
By: /s/ John Daoud
------------------------------------
John Daoud,
Manager and Chief Financial Officer
EARTHSHELL CONTAINER
CORPORATION, a Delaware corporation
By: /s/ Scott Houston
------------------------------------
Scott Houston,
Chief Financial Officer
6
<PAGE>
EXHIBIT A
PATENTS AND APPLICATIONS "DIRECTLY RELATED" TO ECC TECHNOLOGY
I. ISSUED U.S. PATENTS.
Patent Number Docket Number Short Title
------------- ------------- -----------
4,921,250 11527.223 Ayres Methods
5,108,677 11527.223.1 Ayres Containers
5,356,579 11527.19.1 Powder Compaction Methods--Removable Agg
5,358,676 11527.10.2 Powder Compaction Methods
5,385,764 11527.51.1 Hydraulically Settable Food or Bev Containers
5,453,310 11527.55 Cementitious Packaging Containers
5,506,046 11527.149 Inorganically Filled Articles from Sheets
5,508,072 11527.137 Inorganically Filled Sheets
5,514,430 11527.51.2 Coated Hydr Settable Food or Bev Containers
5,543,186 11527.96 Sealable Hydraulically Settable Containers
5,545,450 11527.148 Inorganically Filled Articles
5,549,859 11527.63 Methods of Extruding Hydr Settable Materials
5,569,514 11527.223.2 Ayres Methods (II)
5,580,409 11527.106 Method of Making Hydr Settable Articles-Sheets
5,580,624 11527.56.1 Noncementitious Food or Beverage Containers
5,582,670 11527.146 Method of Making Inorganically Filled Sheets
5,614,307 11527.98.1 Coated Hydraulically Settable Sheets
5,618,341 11527.201 Fiber Dispersion Methods
5,626,954 11527.98 Hydraulically Settable Sheets
5,631,052 11527.55.2 Coated Cementitious Packaging Containers
5,631,053 11527.110.1 Hinged Inorganically Filled Articles
5,635,292 11527.19.2 Powder Compaction Articles--Removable Agg
5,637,412 11527.10.4 Powder Compaction Articles
5,641,584 11527.50.2 Foamed Cementitious Insulation
5,654,048 11527.55.3 Cementitious Packaging Containers (II)
5,658,603 11527.167.2 Systems for Molding Inorganically Filled Art
5,658,624 11527.63.1 Extruded Hydraulically Settable Articles
5,660,900 11527.176 Starch-Bound Inorganically Filled Articles
5,660,903 11527.137.2 Inorganically Filled Sheets (II)
5,660,904 11527.146.2 Inorganically Filled Sheets (III)
5,662,731 11527.209 Fiber-Filled Starch-Based Compositions
5,665,439 11527.107 Hydraulically Settable Articles from Sheets
5,665,442 11527.137.1 Laminated Inorganically Filled Sheets
5,676,905 11527.78 Method of Molding Hydr Settable Articles
5,679,145 11527.216 Fiber-Filled Starch-Based Compositions (II)
5,679,381 11527.106.1 System for Making Hydr Settable Sheet Articles
5,691,014 11527.148.1 Coated Inorganically Filled Articles
1
<PAGE>
II. ALLOWED U.S. APPLICATIONS.
Docket Number Short Title
------------- -----------
11527.51.3 Hydraulically Settable Food and Beverage Containers (II)
11527.56.2 Noncementitious Food and Beverage Containers--Methods
11527.56.3 Coated Noncementitious Food or Beverage Containers
11527.77 Wet Sheet Molding Methods for Hydraulically Settable Materials
11527.86.1 Method of Making Hydraulically Settable Sheets
11527.96.2 Coated Sealable Hydraulically Settable Containers
11527.110 Inorganically Filled Hinges
11527.110.2 Method of Making Inorganically Filled Hinges
11527.136 Laminated Inorganically Filled Sheets
11527.148.2 Inorganically Filled Articles (II)
11527.149.1 Laminated Inorganically Filled Sheet Articles
11527.149.2 Inorganically Filled Articles from Sheets (II)
11527.154.1 Inorganically Filled Articles from Sheets (III)
11527.167.1 Inorganically Filled Articles (III)
11527.210 Method of Making Fiber-Reinforced Starch-Bound Articles
11527.239 Sealable Inorganically Filled Containers
11527.242 High Starch Sheets
11527.247 Glycerin Treatment of Starch-Based Articles
11527.248 Special Hinge Structure in Starch-Bound Articles
11527.251 Mold Apparatus for Making Hinge Structure
III. PENDING U.S. APPLICATIONS
Docket Number Short Title
------------- -----------
11527.78.2 Method of Molding Hydraulically Settable Articles (II)
11527.146.1 Systems for Making Inorganically Filled Sheets
11527.146.3 Methods for Making Inorganically Filled Sheets (II)
11527.154 Method of Making Inorganically Filled Articles From Sheets
11527.147 Method of Molding Inorganically Filled Articles
11527.176.1 Starch-Based Compositions
11527.196 Method for Making Starch-Bound Inorganically Filled Articles
11527.243 Method of Making High Starch Sheets
11527.249 Method for Manufacturing Hinged Starch-Bound Articles
2
<PAGE>
IV. FOREIGN PATENTS AND APPLICATIONS.
Group Docket No. Short Group Title
---------------- -----------------
11527.63x Extrusion of Hydraulically Settable Materials
11527.141x Hydraulically Settable Food and Beverage Containers
11527.155x Inorganically Filled Sheets and Articles (I)
11527.162x Inorganically Filled and Hydraulically Settable Articles
11527.165x Inorganically Filled Sheets and Articles (II)
11527.221.1x Dispersion of Cellulose Fibers-Gasland
11527.228x Inorganically Filled Starch-Bound Articles and Methods
11527.234x Fiber Reinforced Foamed Starch Articles and Methods
11527.239x Sealable Inorganically Filled Containers
11527.242x High Starch Sheets and Compositions
11527.243x Method of Making High Starch Sheets
11527.249x Hinged Starch-Bound Articles and Methods
3
<PAGE>
EXHIBIT B
PATENTS AND APPLICATIONS NOT "DIRECTLY RELATED" IN ECC TECHNOLOGY
1. ISSUED U.S. PATENTS.
<TABLE>
<CAPTION>
Patent Number Docket Number Short Title
------------- ------------- -----------
<S> <C> <C>
4,225,247 11527.159 Mixing and Agitating Device
4,225,357 11527.156 Pervious Concrete Product
4,302,127 11527.157 Applicator and Distributor Assembly
4,398,842 11527.158 Sandwich Pervious Concrete Product
4,552,463 11527.23 Apparatus for Colloidal Mixture
4,889,428 11527.147 Rotary Mill
4,944,595 11527.1 Cement Building Material (II)
4,946,504 11527.11 Cement Building Material (III)
5,061,319 11527.34 Cement Building Material
5,100,586 11527.25 Hazardous Waste Containers
5,169,566 11527.26 Cementitious Containment Barriers
5,232,496 11527.1.1 Improved Building Material
5,505,987 11527.29.2 Thin-Bonded Overlay
5,527,387 11527.41.2 Design Optimized Concrete
5,545,297 11527.94 Filament Winding Methods
5,631,097 11527.113.1 Laminate Insulation with Cementitious Sheet
5,695,811 11527.105 Thin-Bonded Overlay (II)
</TABLE>
II. ALLOWED U.S. APPLICATIONS.
Docket Number Short Title
------------- -----------
11527.94.1 Filament Wound Hydraulically Settable Articles
11527.200 Aggregates and Fibers Treated with Ettringite
III. PENDING U.S. APPLICATIONS.
[None]
IV. FOREIGN PATENTS AND APPLICATIONS.
Group Docket No. Short Group Title
---------------- -----------------
11527.1x Apparatus for Cement Building Material
11527.11x Cement Building Material
11527.23x Apparatus for Colloidal Mixture
11527.34x Process for Cement Building Material
11527.178x Design Optimized Concrete
11527.235x Filament Winding Methods
1
<PAGE>
EXHIBIT 10.22
[LOGO]
NOTE
$ 14,000,000.00 Inglewood, California, DECEMBER 31, 1997
On February 20, 1998, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking
corporation, or order, at its LOS ANGELES AIRPORT REGIONAL office, the
principal sum of $14,000,000.00 MAXIMUM or such sums up to the maximum if so
stated, as the bank may now or hereafter advance to or for the benefit of the
undersigned in accordance with the terms hereof, together with interest from
date of disbursement or N/A, whichever is later, on the unpaid principal
balance / / at the rate of ________% per year /X/ at the rate of 1.000% per
year in excess of the rate of interest which Bank has announced as its prime
lending rate (the "Prime Rate"), which shall vary concurrently with any
change in such Prime Rate, or $250.00, whichever is greater. Interest shall
be computed at the above rate on the basis of the actual number of days
during which the principal balance is outstanding, divided by 360, which
shall, for interest computation purposes, be considered one year.
Interest shall be payable /X/ monthly / / quarterly / / included with
principal / / in addition to principal / / ________________ beginning
JANUARY 31, 1998, and if not so paid shall become a part of the principal.
All payments shall be applied first to any late charges owing, then to
interest and the remainder, if any, to principal. / / (if checked),
Principal shall be payable in installments of $_______________ or more, each
installment on the ________ day of each________________, beginning
________________________. Advances not to exceed any unpaid balance owing at
any one time equal to the maximum amount specified above, may be made at the
option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent ten or more days, Obligor
agrees to pay Bank a late charge in the amount of 5% of the payment so due and
unpaid, in addition to the payment; but nothing in this paragraph is to be
construed as any obligation on the part of the holder of this note to accept
payment of any payment past due or less than the total unpaid principal balance
after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorneys fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
EARTHSHELL CONTAINER CORPORATION
- ---------------------------------------- ----------------------------------
BY: /s/ SCOTT HOUSTON
- ---------------------------------------- ----------------------------------
- ---------------------------------------- ----------------------------------
<PAGE>
DEMAND PROMISSORY NOTE
$29,543,504 September 30, 1997
FOR VALUE RECEIVED AND FOR THE PURPOSE OF CONSOLIDATING THE INDEBTEDNESS
LISTED ON THE ATTACHED EXHIBIT B, the undersigned promises to pay to E.
Khashoggi Industries or order, the principal amount of Twenty-Nine Million
Five Hundred Forty-Three Thousand Five Hundred Four Dollars ($29,543,504),
together with interest from date hereof at the initial rate of Eight and
One-Half percent (8.50%) per annum which represents the Prime Rate (as
defined below) on September 30, 1997, on the unpaid balance, payable in lawful
money of the United States of America at the office of E. Khashoggi
Industries without defalcation or discount. The interest rate shall be
adjusted to the Prime Rate in effect on the first day of each calendar
quarter (January 1, April 1, July 1 and October 1) commencing October 1,
1997. The term "Prime Rate" means the highest "Prime Rate" as published in
the Wall Street Journal's "Money Rates" table, which is described as the base
rate on the corporate loans at large US money center banks. Interest shall be
compounded quarterly and paid at the last day of each calendar quarter
commencing on September 30, 1997. The unpaid principal balance, and any
accrued but unpaid interest, shall be payable upon demand and in all events
shall be due and payable on September 30, 2000. Any interest not paid when
due shall be added to the principal balance. Unless otherwise provided
herein, all payments hereunder shall be applied first to accrued interest and
the balance to the reduction of principal. Any portion of principal or
interest not paid when due shall continue to bear interest as stipulated above
until paid.
In case of default in the payment of principal or interest hereunder,
proceedings may at once be instituted for the recovery of the same, and the
undersigned agrees to pay all costs of such proceedings and any other costs
of collection, including reasonable attorney's fees.
The undersigned may pay this Note in part or in full without penalty.
The undersigned severally waive presentment, protest and demand; and waive
notice of protest, demand and of dishonor and non-payment of this Note, and
expressly agrees that this Note, or any payment thereunder, may be extended
from time to time without in any way effecting the liability of the
undersigned.
Upon due execution and delivery of this Note, E. Khashoggi Industries will
deliver to the undersigned any promissory notes or other written obligations
evidencing the indebtedness listed in the attached Exhibit B, marked
"canceled".
EARTHSHELL CONTAINER CORPORATION:
/s/ Simon K. Hodson
- ---------------------------------
Simon K. Hodson
Chief Executive Officer
ATTEST:
/s/ Scott Houston
- ---------------------------------
Scott Houston
Chief Financial Officer
<PAGE>
EXHIBIT B
EARTHSHELL CONTAINER CORPORATION
Obligation Due to EKI and Converted to Note Payable as of 9/30/97
Note date 6/30/97 (Previous consolidation) $27,214,890
Due on intercompany billing: 8/97 576,335 576,335
Cash advance: 7/11/97 85,000
Cash advance: 7/30/97 50,000
Cash advance: 8/7/97 200,000
Cash advance: 8/13/97 60,000
Cash advance: 8/26/97 150,000
Cash advance: 8/27/97 50,000
Cash advance: 8/28/97 400,000
Cash advance: 9/16/97 75,000
Cash advance: 9/26/97 170,000 1,240,000
Interest due: 4/97 166,849
Interest due: 5/97 174,705
Interest due: 6/97 170,725 512,279
-----------
TOTAL OBLIGATIONS DUE TO EKI AS OF 9/30/97 $29,543,504
-----------
-----------
DOES NOT INCLUDE JULY 1997 INTERCOMPANY BILLING OF $576,214 WHICH WILL BE
PAID ON MONDAY, OCTOBER 27, 1997.
<PAGE>
[LOGO]
August 22, 1997
Mr. Simon K. Hodson
EarthShell Container Corporation
800 Miramonte Drive
Santa Barbara, CA 93109-1419
Finally we have reached a point where most of the problems and issues
surrounding your development -- and our introduction -- of EarthShell
packaging are behind us. To summarize where we are in simple terms, and to
avoid as much legalese as possible, I'd like to confirm the following: As
soon as price can be agreed upon, I will recommend to the McDonald's Senior
Management that we authorize the purchase of EarthShell sandwich containers
(the "Containers") for a single menu item for all McDonald's restaurants in
the United States for at least a three-year period.
The responsibility to accept and pay for product thereafter, or to continue
to accept and pay for product, however, shall be expressly subject to the
following terms and conditions:(1)
TERMS AND CONDITIONS
1. The Containers will meet and maintain all product specifications
established by McDonald's which specifications may be amended from time
to time by McDonald's in its reasonable discretion. (Initial
specifications are attached to this letter as Exhibit A which are subject
to Paragraph 9 hereof.) Where a change in specifications requires or
justifies an adjustment in the price of the containers, either upwards or
downward, all parties will use their best efforts to negotiate or
facilitate such an adjustment directly through their agents, licensees,
converters, or affiliates.
2. McDonald's shall receive such assurances and documentation as is
reasonably required in order to ensure that the use of EarthShell
Containers shall not violate or infringe the patent or other intellectual
or proprietary rights of others.
3. EarthShell and/or its licensed converters supplying McDonald's with
EarthShell Containers ("licensed converters") shall demonstrate their
ability to manufacture and have ready for use an adequate ongoing supply
of the Containers in order to meet the quantity and quality requirements
of the intended purchase order.
- -----------------------------
(1) Even though we are very encouraged by the product we have tested, these
terms and conditions are necessitated by the fact that the product has not
yet actually been manufactured on the same equipment that would be needed to
meet our quantity requirements.
<PAGE>
4. Any environmental claims made from time to time by EarthShell, its
subsidiaries, affiliates and licensed converters shall be appropriate,
properly supported, and in compliance with all applicable guidelines as
respects the Containers.
5. The price of EarthShell Containers sold to the McDonald's system shall
not exceed the price charges to any third party by EarthShell or any
of its licensed converters for a comparable EarthShell Container taking
into account product specifications, quantities ordered, delivery terms,
etc.
6. The Containers are favorably received and continue to be favorably
received by McDonald's franchisees and McDonald's restaurant customers
as determined in McDonald's reasonable discretion.
7. EarthShell, its officers, directors, employees and affiliates shall not
engage in any act, or the Containers shall not have any environmental or
other characteristics, (whether actual or perceived) which, in McDonald's
reasonable discretion, could adversely affect the McDonald's brand or
McDonald's System.
8. Neither EarthShell nor its licensed converters shall be in default of any
contractual obligations to Perseco or any other McDonald's supplier in
connection with the Containers which are the subject of this letter.
9. In the event that any term or condition contained in this letter is not
met, EarthShell or its licensed converter shall have a reasonable time
to cure the problem or otherwise restore the product to compliance with
the terms and conditions, subject to the following:
A. If the terms and conditions are not met within 24 months of the
date of this letter, neither McDonald's nor Perseco shall have further
obligations to purchase or authorize purchase of the Containers, and
B. Once Containers are in use in McDonald's restaurants, a failure in
any terms or conditions may require that existing inventories be
discarded and replaced with alternative packaging provided by third
parties. (In other words, the restaurants cannot be expected to use
defective or otherwise non-compliant Containers.)
10. EarthShell and its licensed converters acknowledge and agree that
McDonald's continuously investigates ways to improve its operations, that
McDonald's is generally engaged in a wide variety of research and
investment opportunities in a broad array of areas, and that McDonald's
may be working with, investigating or reviewing other or similar products,
concepts and/or technologies with other entities. EarthShell and its
licensed converters expressly acknowledge and agree that such activities
on the part of McDonald's do not breach the terms and conditions set out
in this letter and that McDonald's has no obligation to disclose its
involvement in such activities to EarthShell. Furthermore, EarthShell and
its licensed converters acknowledge and agree that McDonald's will at all
times, be free to investigate and utilize alternate sources of sandwich
containers.
<PAGE>
11. EarthShell and its licensed converters will continuously improve upon
the environmental impacts of the Containers provided to Perseco with a
long-term goal of reducing the key environmental loadings by 40% from
the April 18, 1997 LCI submitted by Franklin Associates for the QPC
sandwich container.
12. EarthShell's licensed converters agree that if they believe that the
production and sale of Containers in accordance with any McDonald's
specifications will result in such Containers not being in compliance
with all applicable laws, rules, regulations, and local codes, or that
the Containers will infringe any patent or other proprietary right of a
third party, then EarthShell's licensed converters will immediately
notify McDonald's and provide to McDonald's all relevant information
concerning such belief. EarthShell and its licensed converters
acknowledge and agree that McDonald's is looking to EarthShell and its
licensed converters to advise it of the aspects of the McDonald's
specifications that should be changed and of EarthShell and/or its
licensed converters recommended changes so that the Containers will be
in compliance with such codes, regulations and laws and not infringe any
patent or other proprietary right of a third party. McDonald's, in its
sole discretion, shall determine whether or not to accept the
specification changes recommended by EarthShell and/or its licensed
converters.
13. EarthShell and its licensed converters acknowledge that McDonald's does
not directly operate any McDonald's restaurants and will not purchase
any Containers from EarthShell and its licensed converters. EarthShell
and its licensed converters acknowledge and agree that orders for
Containers will come only from Perseco or the approved independent
distribution centers and that Containers will be used only by McDonald's
restaurants owned by independent franchisees or McDonald's subsidiary
corporations, referred to as McOpCo's, and other approved parties
ordering directly from EarthShell's licensed converters. EarthShell and
its licensed converters acknowledge and agree that McDonald's is not
making any promises, commitments or guarantees of sales.
14. EarthShell and its licensed converters acknowledge and agree that the
only contractual obligations involved in this contemplated business
relationship for the purchase of Containers arise from orders placed by
McDonald's independent distribution centers (through Perseco) and
approved by McDonald's for sale to McDonald's restaurants. These parties
decide whether to order from EarthShell's licensed converters and their
obligations are limited to payment for items delivered in conformity
with their orders. McDonald's is not responsible for and does not
guarantee payment of any invoices or accounts (whether past due,
delinquent or otherwise) from anyone ordering from EarthShell's licensed
converters and those parties ordering from EarthShell's licensed
converters are solely responsible for payment.
15. EarthShell and its licensed converters agree to indemnify McDonald's
its subsidiaries, suppliers and franchisees from any and all claims,
damages, expenses and lawsuits caused by the Containers which are not
attributable to McDonald's, its affiliates, subsidiaries, suppliers or
franchisees, including, without limitation, infringement of any patent
or any other proprietary right or trade secret misappropriation or
unfair competition claims. EarthShell and its licensed converters
<PAGE>
agree to maintain comprehensive general liability insurance in an amount
and with a carrier having a financial rating approved by McDonald's to list
McDonald's as an additional named insured, as its interests may appear,
and to provide McDonald's upon request with proof of such insurance.
Liability under this paragraph however, shall not be limited by the
amount of insurance carried. The parties will use their best efforts to
minimize and negotiate such claims to the extent possible.
16. EarthShell and its licensed converters' authority to use any McDonald's
trademark is limited to the usage designated by McDonald's in writing
and is subject to termination by McDonald's with or without cause at any
time. In addition, EarthShell and its licensed converters are prohibited
from adding the "Mc" or "Mac" prefixes to any items unless EarthShell
and its licensed converters secure McDonald's prior written approval.
17. Except as required by law, EarthShell and its licensed converters are
not authorized to make any public announcements that it or they are an
approved McDonald's supplier or that the Containers are approved by
McDonald's unless EarthShell and its licensed converters first receive
express written permission from McDonald's to make that disclosure.
18. The EarthShell logo and/or other identifying marks shall not be
displayed on the Containers except in a manner to which McDonald's
agrees, which agreement shall not be unreasonably withheld.
19. This letter sets forth the understanding of the parties regarding
McDonald's approval of the purchase of Containers and to the extent
inconsistent therewith supersedes all prior written and oral agreements
and understandings regarding the same.
20. This letter is not intended to be an enforceable agreement and is subject
to the negotiation of definitive documentation in accordance with the
terms and conditions set forth above.
If the above conforms with your understanding, please let me know so that I
can make my final recommendation to Senior Management.
Very truly yours,
/s/ Shelby Yastrow
- ---------------------------
Shelby Yastrow
<PAGE>
EXHIBIT A
PACKAGING CRITERIA FOR SUCCESS
I. STORE OPERATIONS:
A. Package product breakage and operational failure rate must meet
allowable target limits:
1. Breakage is defined as:
a) Damage to the outer case of the container that raises concern
about the sanitary and quality nature of the package held
within.
b) Damage to the actual package that renders the package
non-functional, such as closure or hinge damage.
c) Aesthetic damage to the actual package that renders the
package non-usable as determined solely by the McDonald's
restaurant.
2. Allowable and target rates:
a) Not to exceed 1% in the McDonald's System;
b) Target of 0% to be approached with incremental improvements
in subsequent years of use in the McDonald's System.
3. Breakage/failure measurement to include a sum of, but not
exclusive to the following:
a) Transportation and related distribution handling
b) Crew operations and handling
B. Package must be functional in all potential
McDonald's preparation methods:
C. Package must be the appropriate size to contain the specified
sandwich while maintaining sandwich integrity and appearance
acceptable to McDonald's. The package size must consider the
changing operational and product environments at McDonald's.
D. Package must be fast and easy to close.
E. Package must stay closed, when in the bin for example.
F. Package should not be confusing to the crew to use - easy to train
the crew.
G. Package should perform well in all styles of transfer bins; slide,
shelf, stack.
H. Package should stack easily in carry-out bags.
I. Package must be functional in storage and handling.
1. Case size must be appropriate for storage
2. Case weight must be appropriate for crew handling (under 40 lbs
maximum)
3. May need inner sleeves to facilitate crew transportation and
storage
1 of 4
<PAGE>
II. CUSTOMER SATISFACTION:
Marketability of the package to be used in the McDonald's restaurants
needs to perform at least equivalently to the F-flute container (or
current incumbent package) for parameters below:
A. McDonald's Marketing perspective - meets standards and requirements
of appropriate McDonald's Marketing Management. Including such
parameters as:
1. Base colors
2. Ink colors
3. Print areas
4. Overall appearance of the container
5. Promotional vehicle to carry coupons or game pieces
6. Graphics changes/printability
7. Label application for games
8. The graphics need to facilitate, and not limit, the crew's
ability to distinctively identify the package for different
menu items, including:
a) In the grill area when preparing the food
b) In the bin when selecting product to present to the
customer
B. The package must meet the requirements of McDonald's consumers as
measured by and in accordance with McDonald's Market Research group,
in areas such as:
1. Improvement in food taste ratings, including
a) temperature
b) moistness
c) sensory evaluation
2. Overall ease of use
a) In-store
b) Drive-thru
3. Food product appearances
4. Package attractiveness
5. Ease of differentiating one sandwich package from another
6. Perceived environmental impact
7. Intent to buy more McDonald's products
C. The package must be meet the standards and requirements of
McDonald's Test Kitchen, in areas such as:
1. Food taste
2. Food appearance
3. Food temperature
2 of 4
<PAGE>
III. ENVIRONMENTAL IMPACT:
The environmental impact of the any alternative package needs to be, at
a minimum, comparable to the environmental impact of the incumbent
package. The overall goal of McDonald's and Perseco is to continuously
improve the environmental impact of the packaging used in the McDonald's
System. Environmental impacts are measured by, but not limited to, life
cycle inventories and assessments, expert environmental and scientific
input and review, public opinion, media coverage, and McDonald's and
Perseco's own assessment.
IV. PRICE AND AVAILABILITY:
The delivered price of the alternative package must give McDonald's a
competitive value gap against their competition, with the value gap
determined solely by McDonald's. The delivered price to include FOB
(exworks), freight delivered to the restaurant level and breakage
allowances.
A. Delivered cost:
1. FOB
2. Freight from supplier to DC
3. Freight from DC to restaurant
4. Breakage allowance
B. The competitive value gap must apply against other competitive new
packaging introductions that may occur prior to or during the
introduction of the subject alternative package, and thereafter.
C. The competitive value gap must be sustained throughout any product
changes inherent in the McDonald's system, such as, but not limited
to:
1. New food preparation procedures
2. New menu item formulations, such as bun sizes
3. New packaging performance expectations
D. The alternative package must meet all applicable FDA guidelines for
food safety. The package must be safe to use for its intended purpose
with the consumer in mind.
E. As the alternative package is introduced to the market, it is
McDonald's and Perseco's expectation that the McDonald's System has
assured supply. Assured supply means that all orders by the
McDonald's distribution centers are filled on time and in full,
unless previously agreed upon contingency plans are agreed upon.
F. As the alternative package manufacturing base needs expansion,
McDonald's will make the final decision on which converter and
converter location(s) will get additional production volumes. The
converter selection is not limited by the initial converter or
technology licenser.
3 of 4
<PAGE>
V. OTHER BUSINESS PARAMETERS:
A. The alternative package manufacturer and/or licenser of technology
shall provide McDonald's with First Right to Refusal:
1. The option to purchase the First commercial production available
for any Quick Service Restaurant (QSR) package developed, by any
converter.
2. Sustaining volumes for McDonald's demand for any QSR package prior
to sale of said package to other companies/organizations.
B. If for any reason the converter fails to meet any of the criteria for
success items in this document, McDonald's and Perseco reserves the
right to make null and void any and all agreements to purchase
subject package, and all liabilities will be the responsibility of
the converter(s).
C. If during the course of commercialization or on-going business the
McDonald's food preparation systems or menu item recipes change,
McDonald's or Perseco will not be held responsible for any tooling or
other production equipment or facilities thereby made obsolete.
4 of 4
<PAGE>
[LOGO]
August 22, 1997
Shelby Yastrow, Esq.
General Counsel & Executive Vice President
McDonald's Corporation
One Kroc Drive
Oak Brook, IL 60521
Dear Shelby:
Thank you for your letter of August 22, 1997 specifying the terms and
conditions upon which you will recommend to McDonald's Senior Management that
they approve the purchase of an EarthShell sandwich container for use in all
of McDonald's domestic restaurants. This letter confirms our acceptance of
those terms and conditions.
If her schedule permits, I would like to arrange for Claire Babrowski to
visit our facilities next week in Santa Barbara and to review our products
and recent technological improvements. Please have her call me at her
earliest convenience to discuss the scheduling of her visit.
Shelby, this is the most significant event in the Company's history and I am
very grateful for your past patience, encouragement and support. This
milestone could not have been achieved without your significant involvement,
and the support of McDonald's Senior Management. You have my commitment, as
well as that of the entire EarthShell team, to ensure that EarthShell
packaging contributes to McDonald's well deserved reputation and success.
Sincerely,
/s/ Simon K. Hodson
Simon K. Hodson
Chief Executive Officer
SKH.jbd
<PAGE>
EXECUTION COPY
SUBLICENSE AGREEMENT
THIS SUBLICENSE AGREEMENT ("Agreement"), dated as of October 16, 1997,
is by and between EARTHSHELL CONTAINER CORPORATION, a Delaware corporation
("ECC"), and SWEETHEART CUP COMPANY INC., a Delaware corporation
("Sweetheart").
RECITALS
A. Pursuant to that certain Amended and Restated License Agreement, dated
February 28, 1995 (the "EKI License Agreement"), between E. Khashoggi
Industries, a California general partnership ("EKI"), and ECC, ECC has the
exclusive right to utilize, and to sublicense to others the right to utilize,
specified technology to manufacture and sell certain food service disposables.
B. ECC and Sweetheart have previously entered into a sublicense agreement
effective as of October 7, 1994 (the "Existing Sublicense") under which
Sweetheart sublicenses the technology licensed by EKI under the EKI License
Agreement in order to manufacture and distribute certain disposable food and
beverage products within the territory specified therein.
C. Concurrently herewith, ECC and Sweetheart are entering into the
Operating Agreement dated as of the date hereof (the "Operating Agreement") by
which they are redefining their business relationship and entering into new
arrangements for the commercialization of the technology licensed by EKI under
the EKI License Agreement. The Operating Agreement contemplates the following:
(i) ECC and Sweetheart will terminate the Existing Sublicense and
will enter into a new sublicense agreement under which ECC will sublicense
to Sweetheart the right to utilize such technology to manufacture and sell
in the Territory (as defined below) certain hinged sandwich container
products for McDonald's Corporation in consideration of which ECC will
receive a twenty percent (20%) royalty on the net revenue derived by
Sweetheart from the sale of such products; and
(ii) ECC will provide to Sweetheart (A) fully integrated lines of
equipment required to manufacture such products and (B) technical
information necessary to commercially manufacture such products, including
material composition, raw materials specifications, process equipment
specifications, processing conditions, output standards and quality
assurance methods.
<PAGE>
D. ECC is willing to grant, and Sweetheart desires to accept, a
sublicense of such technology, as contemplated by the Operating Agreement, upon
the terms and conditions set forth herein.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants and agreements set forth herein, together with other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. DEFINITIONS.
Capitalized terms used herein shall have the meanings set forth
below:
(a) The term "AFFILIATE" shall have the meaning set forth in the
Operating Agreement.
(b) The term "AGREEMENT" shall have the meaning set forth in the
preamble.
(c) The term "BANKRUPTCY" shall have the meaning set forth in the
Operating Agreement.
(d) The term "CONFIDENTIALITY AGREEMENT" shall mean the
Confidentiality Agreement dated as of the date hereof between ECC and
Sweetheart.
(e) The term "ECC" shall have the meaning set forth in the
preamble.
(f) The term "ECC Infringement Action" shall have the meaning set
forth in paragraph 8(c).
(g) The term "EKI License Agreement" shall have the meaning set
forth in the recitals.
(h) The term "EQUIPMENT" shall have the meaning set forth in the
Operating Agreement.
(i) The term "EXISTING SUBLICENSE" shall have the meaning set forth
in the recitals.
(j) The term "GROSS SALES" shall have the meaning set forth in the
Operating Agreement.
(k) The term "IMPROVEMENT" shall mean any improvement, enhancement,
refinement, modification or other new invention or discovery, whether patentable
or unpatentable, deriving from or otherwise relating to, in whole or in part,
any of the Technology or the Products, including without limitation any of the
foregoing
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<PAGE>
relating to the operation or maintenance of the Equipment or the process by
which Products are manufactured.
(l) The term "INITIATING PARTY" shall have the meaning set forth in
paragraph 8(b).
(m) The term "JOINT IMPROVEMENTS" shall have the meaning set forth
in paragraph 6(c).
(n) The term "LICENSED PATENTS" shall mean any Patent now or
hereafter owned or acquired by ECC or in which ECC now holds or hereafter
acquires rights that are useful or necessary in the production, distribution,
use or sale of Products.
(o) The term "LICENSED TECHNOLOGY" shall mean the Licensed Patents
and the Trade Secrets.
(p) The term "LOSSES" shall mean any and all losses, liabilities,
damages, costs and expenses, including reasonable costs of investigation and
reasonable attorneys, accountants and expert witness fees.
(q) The term "NET SALES" shall mean, with respect to the Products,
the aggregate amount through the end of the relevant fiscal period of Gross
Sales, reduced by (i) actual cash, trade or quantity discounts, including
"off-invoice discounts," allowed by Sweetheart, (ii) credits allowed by
Sweetheart, (iii) sales, use, value added import, export, excise or similar
taxes to the extent paid by Sweetheart, and (iv) freight and transportation
costs paid by Sweetheart (and not reimbursable by ECC pursuant to Section 6.1 of
the Operating Agreement) in connection with the delivery and shipment of the
Products whether or not included as a separate item in the invoice (but
exclusive of discounts, returns, taxes or freight and transportation charges
that are deducted in computing Gross Sales).
(r) The term "NON-INITIATING PARTY" shall have the meaning set
forth in paragraph 8(b).
(s) The term "PATENT PROTECTION ABANDONMENT" shall have the meaning
set forth in paragraph 7(a).
(t) The term "PATENTS" shall mean unexpired patents, utility
models, industrial designs, certificates of invention or similar grants of
intellectual property rights that are filed, registered, issued or granted in
the United States of America or Canada, including without limitation any
divisionals, reissues, continuations, continuations-in-part, renewals,
reexaminations, and extensions of any of the foregoing, and any applications
therefor (and Patents which may issue on such applications).
(u) The term "PERSON" shall mean an individual, partnership,
corporation, limited liability company, trust, governmental or political
subdivision and any other entity that has legal capacity to own property in its
own name and to sue or be sued.
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<PAGE>
(v) The term "PRIME RATE" shall mean the prime rate of interest for
corporate loans, as published by the Wall Street Journal on the date in question
or, if such date is not a business day, the next business day.
(w) The term "PRODUCTS" shall have the meaning assigned to such
term in the Operating Agreement.
(x) The term "REPRESENTATIVE" shall have the meaning set forth in
paragraph 5(a).
(y) The term "ROYALTY" shall have the meaning set forth in
paragraph 3(a).
(z) The term "ROYALTY REPORT" shall have the meaning set forth in
paragraph 4(a).
(aa) The term "START DATE" shall have the meaning assigned to such
term in the Operating Agreement.
(bb) The term "SUBLICENSE" shall have the meaning set forth in
paragraph 2(a).
(cc) The term "SWEETHEART" shall have the meaning set forth in the
preamble.
(dd) The term "SWEETHEART IMPROVEMENTS" shall have the meaning set
forth in paragraph 6(b).
(ee) The term "SWEETHEART INFRINGEMENT ACTION" shall have the
meaning set forth in paragraph 8(d).
(ff) The term "SWEETHEART'S TRADITIONAL FIELD OF USE" shall mean
foodservice disposable products and packaging products for frozen desert, dairy
products and beverages.
(gg) The term "TECHNOLOGY" shall mean the Licensed Technology and
the Sweetheart Improvements, if any.
(hh) The term "TERRITORY" shall mean all fifty states of the United
States of America, Canada and any territories or possessions of the United
States or Canada.
(ii) The term "TRADEMARKS" shall have the meaning set forth in
paragraph 2(c).
(jj) The term "TRADE SECRET ELECTION" shall have the meaning set
forth in paragraph 7(a).
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<PAGE>
(kk) The term "TRADE SECRETS" shall mean (i) the know-how and
proprietary information owned by or licensed to ECC to the extent useful or
necessary in the production, distribution, use or sale of Products, including
without limitation the trade secrets that are described on Exhibit "A" hereto
and (ii) any Improvement (other than Sweetheart Improvements) or other
proprietary information now or hereafter owned by or licensed to ECC that is not
patentable and that is useful or necessary in the production, distribution, use
or sale of Products.
2. THE SUBLICENSE.
(a) Subject to the terms and conditions of this Agreement, ECC
hereby grants to Sweetheart a non-exclusive, royalty-bearing sublicense under
the Licensed Technology (the "Sublicense") to make, use, sell, offer to sell and
otherwise commercialize the Products solely within the Territory.
(b) Sweetheart shall not have the right to sublicense or transfer
the Licensed Technology, or any interest in or rights under the Sublicense,
without the prior written consent of ECC; provided that the rights and
obligations of Sweetheart in, to and under this Agreement may be assigned to the
extent provided by paragraph 32. Any purported sublicense or transfer without
such consent shall be void and shall constitute a breach of a material
obligation of Sweetheart within the meaning of Section 11.4(a)(ii) of the
Operating Agreement.
(c) Subject to paragraph 10(a) hereof, Sweetheart is authorized and
required to utilize, in connection with the marketing, distribution and sale of
the Products in the Territory, the trademarks and service marks (collectively
the "Trademarks") owned by or licensed to ECC that are designated by ECC to
Sweetheart prior to commercial production of the Products by Sweetheart or from
time to time thereafter.
(d) Sweetheart shall not market, distribute, sell or attempt to
dispose of any Product to any Person, outside the Territory, or to any Person
within the Territory if Sweetheart knows or has reason to believe that such
Person intends to use the Product in question outside the Territory. The
marketing, distribution, sale or other disposition of a Product outside the
Territory by Sweetheart shall constitute a breach of a material obligation of
Sweetheart within the meaning of Section 11.4(a)(ii) of the Operating Agreement.
(e) Sweetheart agrees to maintain the confidentiality of the Trade
Secrets in accordance with the terms of the Confidentiality Agreement.
3. ROYALTIES.
(a) In consideration for the grant of the Sublicense, Sweetheart
shall pay to ECC a royalty (the "Royalty") of twenty percent (20%) of the Net
Sales of Products by Sweetheart after the Start Date (it being agreed and
acknowledged that Royalties shall be payable in respect of all Net Sales during
the term of this Agreement
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<PAGE>
other than Net Sales attributable to Products invoiced and shipped by
Sweetheart prior to the Start Date in accordance with the delivery instructions
provided by McDonald's Corporation).
(b) Any failure to make payment of any Royalty, when due hereunder,
is a breach of a material obligation of Sweetheart and may result in the
termination of this Agreement pursuant to Section 11.4 of the Operating
Agreement.
(c) Notwithstanding the provisions of paragraph 3(a) hereof,
Sweetheart shall have no obligation to pay Royalties in respect of the sale of
any Product made after the date on which the last-to-issue patent included in
the Licensed Patents expires.
4. PAYMENT OF THE ROYALTY.
(a) Within thirty (30) days of the last day of each month,
Sweetheart shall pay to ECC the Royalty payable in respect of all Products sold
by Sweetheart during such month. Each Royalty payment shall be accompanied by a
written report (the "Royalty Report") prepared by Sweetheart and certified as
accurate by the principal financial officer of Sweetheart. Each Royalty Report
shall set forth, for the month covered by the Royalty Report, (i) the number of
each of the Products sold by Sweetheart, (ii) the gross invoice price for each
of such Products, and (iii) any reductions to the gross invoice price for
purposes of calculating Net Sales.
(b) All Royalty payments called for by this Agreement shall be paid
by Sweetheart in United States dollars.
(c) A second failure by Sweetheart within any two-year period to
make timely payment of the full Royalty amount actually due under this Agreement
shall constitute a breach of a material obligation of Sweetheart and may result
in the termination of this Agreement pursuant to Section 11.4 of the Operating
Agreement.
5. RIGHT TO AUDIT.
(a) Sweetheart shall keep and maintain complete and accurate
records concerning the sale of the Products. ECC or its designated
representative (the "Representative") shall have the right to review those
records and operations of Sweetheart that deal with the shipment and sale of
Products in connection with any review conducted by ECC pursuant to Section 9.2
of the Operating Agreement.
(b) If Sweetheart is ultimately determined to have failed to pay to
ECC the full amount of a Royalty payment actually due hereunder, Sweetheart
shall promptly pay the full amount of such discrepancy to ECC, with interest
thereon, at the Prime Rate in effect on the date on which the payment in
question should have been made, from such date until the payment is actually
made.
6. IMPROVEMENTS TO TECHNOLOGY
6
<PAGE>
(a) ECC shall own all Improvements developed by or for ECC (and not
any of its licensees). Subject to ECC's right to do so, all such Improvements
shall be included in the Licensed Technology licensed hereunder to Sweetheart
without additional royalty or other obligation being imposed on Sweetheart.
(b) Sweetheart will own all Improvements developed by or for
Sweetheart ("Sweetheart Improvements"). Subject to Sweetheart's right to do so,
Sweetheart hereby grants to ECC an irrevocable non-exclusive license to utilize
all Sweetheart Improvements inside and outside the Territory, solely in
connection with the manufacture, use, sale and other commercialization of
products that utilize or incorporate any of the Licensed Technology, with ECC
having the right to sublicense Sweetheart Improvements to third parties. Each
ECC sublicensee of Sweetheart Improvements that is not an Affiliate of ECC shall
be required, as a condition to such sublicense, to pay royalty payments to
Sweetheart based on net revenues earned from the sale of products that utilize
or incorporate such Sweetheart Improvements and which are reasonably calculated
in relation to the incremental economic value of such Sweetheart Improvements to
ECC's sublicensee; provided, however, that (i) the annual royalty rate shall not
exceed ten percent (10%) of such incremental economic value; and (ii) the annual
royalty rate shall equal one percent (1%) of such net revenues if the parties
are unable to agree upon the amount of such royalty rate based on such
incremental economic value.
(c) Improvements developed jointly by ECC and Sweetheart ("Joint
Improvements") shall be owned by ECC, provided that all Joint Improvements
shall be included in the Licensed Technology licensed hereunder to Sweetheart
without additional royalty or other obligation being imposed on Sweetheart.
In addition, ECC hereby grants to Sweetheart an irrevocable non-exclusive
license to utilize Joint Improvements in connection with the manufacture,
use, sale and other commercialization of products inside or outside the
Territory within Sweetheart's Traditional Field of Use. ECC shall have the
right to license Joint Improvements to third parties in which case the ECC
licensee shall pay to ECC and Sweetheart a royalty based on net revenues
earned from the sale of products that utilize or incorporate Joint
Improvements and which is reasonably calculated in relation to each party's
contribution to the incremental economic value of Joint Improvements,
provided, however, that (i) the annual royalty rate to be paid by each ECC
licensee shall not exceed ten percent (10%) of such incremental economic
value and (ii) the annual royalty rate shall equal one percent (1%) of such
net revenues if the parties are unable to agree upon the amount of such
royalty rate based on such incremental economic value.
(d) Any Improvements developed by or for any third party (including
an ECC sublicensee other than Sweetheart) and licensed to ECC shall, if
requested by Sweetheart and subject to ECC's right to do so, be sublicensed to
Sweetheart hereunder at the royalty rate charged to ECC by such third party.
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<PAGE>
(e) Each party that develops or acquires an Improvement during the
term hereof will disclose such Improvement in writing to the other party
promptly after the development or acquisition of such Improvement by such
party, subject to the rights of, or obligations to, any third parties with
respect to such Improvement.
7. PATENT MATTERS.
(a) The party that owns an Improvement, as determined pursuant to
the provisions of paragraph 6, shall have the right, in its sole discretion, to
(i) affirmatively seek patent protection for any such Improvement at its sole
cost and expense or (ii) maintain any Improvement as a trade secret. If a party
that owns an Improvement that is or may be patentable determines to maintain
such Improvement as a trade secret (a "Trade Secret Election"), it shall use
reasonable commercial efforts to give the other party written notice of such
Trade Secret Election within a reasonable time after the creation, development
or acquisition of such Improvement by such party. In the case of any
Improvement as to which the owning party has not made a Trade Secret Election,
such party shall be obligated, at its sole expense, to diligently pursue on a
commercially reasonable basis the application, prosecution and maintenance of a
Patent within the Territory with respect to such Improvement; provided that such
party may elect to forego patent protection by giving written notice to the
other party of such election (a "Patent Protection Abandonment") promptly
thereafter, following which the other party shall have the right (but not the
obligation) to seek such patent protection for such Improvement in its own name
and at its own expense. If, following a Patent Protection Abandonment by the
party owning a patentable Improvement, the other party files or continues the
prosecution of a patent application and ultimately obtains a Patent in its name
with respect to an Improvement owned by such party, such party shall have an
irrevocable, royalty-free unrestricted license under such Patent.
(b) Each party shall provide each other party with such assistance
as may be reasonably requested, from time to time, in connection with efforts to
seek patent protection for any Improvement in accordance with paragraph 7(a),
including the execution of any documents necessary to obtain and maintain such
patent protection; provided, however, that the party responsible for seeking
patent protection shall reimburse such party for any out-of pocket fees and
expenses reasonably incurred by such party in providing such assistance. ECC
and Sweetheart shall conduct, no less frequently than semiannually, periodic
technology review meetings at which ECC shall provide Sweetheart with copies of
any new patents that have issued on any patent applications included in the
Licensed Patents since the time of the prior technology review meeting (if any)
and the parties will review (i) the status of the prosecution of then pending
patent applications included in the Licensed Patents, (ii) any Improvements that
have been made by either party since the time of the prior technology review
meeting (if applicable) and (iii) other matters relating to the development of
Improvements and the protection and status of the Technology.
(c) ECC shall pay or cause to be paid all maintenance fees and
annuities as they become due in respect of any Licensed Patents, the practice of
which is necessary in connection with the manufacturing and sale of Products.
If ECC elects not to
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<PAGE>
pay or cause to be paid any such fees or annuities, it shall use reasonable
efforts to give written notice of such election to Sweetheart before the due
date therefor, and Sweetheart shall have the right (but not the obligation) to
pay such fees or annuities. ECC shall take all steps reasonably within its
control to further the diligent prosecution of any pending patent applications
included in the Licensed Patents.
(d) ECC shall provide Sweetheart within 30 days after the date
hereof a listing of all existing patents and pending patent applications
included in the Licensed Patents on the date hereof.
(e) ECC agrees to maintain the confidentiality of Sweetheart
Improvements as to which Sweetheart makes a Trade Secret Election in accordance
with the provisions of the Confidentiality Agreement.
8. INFRINGEMENT MATTERS.
(a) Each of ECC and Sweetheart will promptly, and in any event
within thirty (30) days of discovery, notify the other in writing of any
apparent infringement of the Technology or the Trademarks in the Territory which
comes to its attention while the Sublicense remains in effect and that involves
food service disposables. ECC shall have the initial right, at its sole cost
and expense, to bring suit to enjoin such infringement to the extent it involves
the Licensed Technology or the Trademarks and to recover damages therefor for
its sole account. If, solely because of costs considerations, neither EKI nor
ECC brings any such action with sixty (60) days after written notice of
infringement is given by or to Sweetheart, Sweetheart, at its sole cost and
expense, shall have the right to bring suit to enjoin such infringement and
recover damages therefor for its sole account, to the extent such infringement
involves food service disposables. Sweetheart shall have the initial right, at
its sole cost and expense, to bring suit to enjoin any apparent infringement to
the extent it involves the Sweetheart Improvements and to recover damages
therefor for its sole account. If, solely because of costs considerations,
Sweetheart fails to bring any such action with sixty (60) days after written
notice of infringement is given by or to ECC, ECC, at its sole cost and
expense, shall have the right to bring suit to enjoin such infringement and
recover damages therefor for its sole account, to the extent such infringement
involves food service disposables.
(b) In any action brought pursuant to paragraph 8(a) hereof, the
party initiating the suit (the "Initiating Party") shall select and control
counsel for the prosecution of such suit. The other party hereto (the
"Non-Initiating Party") shall (i) have the right to receive, from time to time,
full and complete information from the Initiating Party concerning the status of
such suit, (ii) have the right, at its own expense, to be represented therein by
counsel in advisory or consultative capacity, and (iii) cooperate fully with the
Initiating Party and provide whatever assistance is reasonably requested by the
Initiating Party in connection with such suit, including the preparation and
signing of documents. If Sweetheart is the Initiating Party, Sweetheart shall
not have the right to settle any infringement suit described in paragraph 8(a)
hereof, without the prior written consent of ECC, which consent shall not be
unreasonably withheld. The costs and
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expenses, including attorneys' fees, of the Initiating Party in any action
alleging infringement will be borne by the Initiating Party. In no event,
however, will the Non-Initiating Party be obligated to reimburse the costs and
expenses, including attorneys' fees, of the Initiating Party in an amount in
excess of the damages awarded to the Non-Initiating Party in such action.
(c) The parties shall promptly notify each other in writing of
(i)any claim by any Person that the use of the Licensed Technology or the
Trademarks by Sweetheart in connection with the manufacture, use or sale of any
Product infringes or violates the patent, trademarks, trade secret or other
intellectual property rights of such Person and (ii) the commencement of any
lawsuit against either party, or any of their respective customers, asserting
any such claim (an "ECC Infringement Action"). ECC shall assume and control the
defense of any ECC Infringement Action, at its sole cost and expense,
irrespective of whether ECC is named as a defendant therein. Sweetheart will
assist ECC in the defense of any ECC Infringement Action by providing such
information, fact witnesses and other cooperation as ECC may request from time
to time; provided that ECC shall reimburse Sweetheart for any out-of-pocket
expenses incurred by Sweetheart in connection therewith. Sweetheart shall have
the right to be represented in connection with an ECC Infringement Action by its
own legal counsel, at its own expense, provided that such legal counsel will act
only in an advisory capacity. If ECC does not assume the defense of any ECC
Infringement Action, Sweetheart shall have the right, but not the obligation, to
assume the defense of such lawsuit, utilizing legal counsel of its choice. If
Sweetheart so assumes the defense of an ECC Infringement Action, Sweetheart
shall have no right to settle such ECC Infringement Action unless Sweetheart
shall have received the prior written consent of ECC (which shall not be
unreasonably withheld or delayed).
(d) The parties shall notify each other of (i) any claim by any
Person that the use of any Sweetheart Improvements by either party in connection
with the manufacture, use or sale of any product infringes or violates the
patent, trade secret or other intellectual property rights of such Person and
(ii) the commencement of any lawsuit against either party, or any of their
respective customers, asserting any such claim (a "Sweetheart Infringement
Action"). Sweetheart shall assume and control the defense of any Sweetheart
Infringement Action that does not also constitute an ECC Infringement Action, at
its sole cost and expense, irrespective of whether Sweetheart is named as a
defendant therein. ECC will assist Sweetheart in the defense of such Sweetheart
Infringement Action by providing such information, fact witnesses and other
cooperation as Sweetheart may request from time to time; provided that
Sweetheart shall reimburse ECC for any out-of-pocket expenses incurred by ECC in
connection therewith. ECC shall have the right to be represented in connection
with such Sweetheart Infringement Action by its own legal counsel, at its own
expense, provided that such legal counsel will act only in an advisory capacity.
If Sweetheart does not assume the defense of any such Sweetheart Infringement
Action, ECC shall have the right, but not the obligation, to assume the defense
of such lawsuit, utilizing legal counsel of its choice. If ECC so assumes the
defense of such Sweetheart Infringement Action, ECC shall have no right to
settle such Sweetheart Infringement Action unless ECC shall have received the
prior written consent of Sweetheart (which shall not be unreasonably withheld
or delayed).
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(e) If the court, in any ECC Infringement Action, enters a final
and non-appealable order finding that the Licensed Technology infringes or
violates the intellectual property of another person and requiring Sweetheart
(i) to obtain a license under any third party's patent not licensed hereunder in
order to continue with Sweetheart's activities as contemplated by this
Agreement, and to pay a royalty or fee under such license, and the infringement
of such patent cannot reasonably be avoided by Sweetheart, or (ii) to pay
damages on account of such infringement or violation, ECC shall pay the amount
of any such fee or royalty payable and any such damages to the extent that the
infringement or violation found by such court resulted from Sweetheart's use of
Licensed Technology (other than Joint Improvements) within the scope of the
Sublicense granted hereunder.
(f) If the court, in any Sweetheart Infringement Action, enters a
final and non-appealable order finding that the Sweetheart Improvements infringe
or violate the intellectual property of another person and requiring ECC (i) to
obtain a license under any third party's patent not licensed hereunder in order
to exploit the Sweetheart Improvements in the manner contemplated by this
Agreement, and to pay a royalty or royalty under such license, and the
infringement of such patent cannot reasonably be avoided by ECC, or (ii) to pay
damages on account of such infringement or violation, Sweetheart shall pay the
amount of any such fee or royalty and any such damages to the extent the
infringement or violation found by such court resulted from ECC's use of the
Sweetheart Improvements within the scope of the license granted by Sweetheart
hereunder.
9. DISCLAIMER OF WARRANTY; NO CONSEQUENTIAL DAMAGES.
(a) EXCEPT AS EXPRESSLY SET FORTH HEREIN OR THE OPERATING
AGREEMENT, NEITHER ECC NOR EKI MAKE OR GIVE, AND THEY HEREBY EXPRESSLY DISCLAIM,
ANY AND ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING
BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A
PARTICULAR PURPOSE, IN REGARD TO ANY PRODUCTS WHICH MAY BE MANUFACTURED, USED OR
SOLD BY SWEETHEART AND WHICH ARE BASED UPON OR UTILIZE ANY OF THE LICENSED
TECHNOLOGY.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, PUNITIVE OR CONSEQUENTIAL LOSSES, EXPENSES OR DAMAGE WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE OR PROFITS, INCREASED COSTS OF
PRODUCTION, DAMAGES OR LOSSES AS A RESULT OF SUCH OTHER PARTY'S INABILITY TO
OPERATE, INABILITY TO FULFILL CONTRACTS WITH THIRD PARTIES, OR SIMILAR MATTERS
OR EVENTS ARISING FROM THE USE OR INABILITY TO SELL THE PRODUCTS OR ANY FAILURE
TO FULFILL A PURCHASE ORDER IN A TIMELY FASHION, NOR SHALL EITHER PARTY BE
LIABLE FOR ANY LOSS, EXPENSE OR DAMAGE SUFFERED OR
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INCURRED BY THE OTHER PARTY AS A RESULT OF CLAIMS, DEMANDS, SUITS OR OTHER
PROCEEDINGS BY ANY OTHER PARTY OR PERSONS, WHETHER PRIVATE, PUBLIC OR
GOVERNMENTAL IN NATURE. The limitations, exclusions and disclaimers in this
Agreement shall apply irrespective of the nature of the cause of the action or
demand, including but not limited to breach of contract, negligence, tort or any
other legal theory and shall survive any breach or breaches and/or failure of
the essential purpose of this Agreement, or any remedy contained in this
Agreement.
(c) Without limiting the generality of the foregoing provisions of
this paragraph 9, except as and to the extent otherwise specifically provided
herein, nothing in this Agreement shall be construed as:
(i) a warranty or representation by ECC as to the
validity or scope of any Licensed Patent; or
(ii) a requirement that ECC or EKI shall file any patent
application, secure any patent or maintain any patent in force; or
(iii) an obligation to bring or prosecute actions or suits
against third parties for infringement; or
(iv) conferring a right to use in advertising, publicity or
otherwise any trademark or trade name of ECC; or
(v) granting by implication, estoppel, or otherwise any
license or rights under patent or other intellectual property rights of ECC
or EKI other than the patents and other intellectual property rights
included in the Technology, to the extent sublicensed as provided in
paragraph 2.
10. ADDITIONAL DUTIES OF SWEETHEART.
In addition to, and not in limitation of, the other duties and
obligations of Sweetheart, as set forth in this Agreement, Sweetheart shall have
the following obligations hereunder:
(a) Sweetheart shall prominently display and utilize such
Trademarks (whether owned by or licensed to ECC) as may be designated by ECC
from time to time in connection with the advertisement, marketing,
distribution and sale of the Products; provided that Sweetheart shall not be
required to use the Trademarks under circumstances where such use would
conflict with the packaging or labeling requirements or trademark rights of
McDonald's Corporation and any consent of McDonald's Corporation. The right
to use such Trademarks is included within the Sublicense herein granted.
Except as otherwise agreed by ECC, Sweetheart shall use its reasonable
efforts to cause each Product manufactured by Sweetheart to bear at least one
of the Trademarks designated by ECC. The specific placement, size, and
detail of any Trademark on each Product must be approved by ECC (which
approval shall not be unreasonably withheld or delayed), but shall not be
required to be placed on a Product in such a size,
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placement, detail or configuration so as to impair the marketability of the
Product. Sweetheart shall not in any manner represent that it has any ownership
interest any Trademarks licensed hereunder. Sweetheart acknowledges that use of
the Trademarks shall not create in its own favor any right, title, or interest
in or to the Trademarks, and that all uses thereof by Sweetheart shall inure to
the benefit of ECC or EKI. Sweetheart shall cooperate with ECC or EKI in the
execution of any appropriate and necessary documents in connection with the
registration of any Trademarks. Upon termination of this Agreement, Sweetheart
shall cease and desist from use of the Trademarks in any way, including any word
or phrase that is similar to or likely to be confused with any of the
Trademarks. However, in the event of termination of this Agreement, Sweetheart
shall have the right to sell existing stock and inventory of manufactured
Products for a period of sixty (60) days and thereafter shall deliver to ECC or
its duly authorized representative all materials upon which the Trademarks
appear.
(b) Sweetheart acknowledges the goodwill associated with the
Trademarks and the right of ECC to exercise quality control over the use of
the Trademarks pursuant to paragraph 30. Sweetheart shall not challenge or
question the validity or ownership of the Trademarks or, subject to the
provisions of applicable law, any Licensed Patents. Sweetheart acknowledges
that the Licensed Technology in existence on the date hereof is novel and
unique in the foodservice disposable products industry.
(c) Sweetheart shall continue to make all required payments under
this Agreement to ECC during any challenge of the validity of any of the
Licensed Patents (or claims thereof) included in the Technology. In the event
Sweetheart fails to continue to make such payments based upon or in connection
with such a challenge, ECC may at its option terminate this Agreement upon
written notice to Sweetheart.
11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF ECC AND SWEETHEART.
(a) ECC hereby represents and warrants to Sweetheart that:
(i) ECC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(ii) ECC has all requisite power and authority to enter into
this Agreement and to perform its obligations hereunder including but not
limited to the right to sublicense the Licensed Technology and license the
Trademarks. This Agreement has been duly and validly authorized, executed and
delivered by ECC and is a legal, valid and binding obligation of ECC,
enforceable against it in accordance with its terms.
(iii) To the best knowledge of ECC, (i) no Person has made
any claims or threatened, in writing or otherwise, that the use of Licensed
Technology or the manufacture or sale of Products violates, would violate,
infringes or would infringe any existing patent, trade name, trademark,
copyright, trade secret or other intellectual property right of such Person, in
each case that arises under the laws of the United States or Canada and (ii) the
use of the Licensed Technology or Trademarks by Sweetheart as
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contemplated herein will not result in the infringe the intellectual property
rights of any third party.
(iv) ECC is either the owner of all right, title and
interest in the Licensed Technology or hold rights under a valid and enforceable
license to use the Licensed Technology.
(v) ECC has used reasonable efforts to maintain (and will
continue to use reasonable efforts to maintain) the confidentiality of all Trade
Secrets and will not disclose any Trade Secrets to any third parties who are not
under appropriate confidentiality obligations (subject to such termination or
expiration provisions as may be applicable thereto).
(vi) The execution, delivery and performance of this
Agreement by ECC do not and will not violate or constitute a default under any
other agreement or any order, judgment, decree or like restriction, statute or
regulation by which it or any of its assets and properties may be bound.
(vii) The execution, delivery and performance of this
Agreement by ECC will not require any consent, approval or authorization of any
Person.
(b) Sweetheart hereby represents and warrants to ECC that:
(i) Sweetheart is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(ii) Sweetheart has all requisite power and authority to
enter into this Agreement and to perform its obligations hereunder. This
Agreement has been duly and validly authorized, executed and delivered by
Sweetheart and is a legal, valid and binding obligation of Sweetheart,
enforceable against it in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement by Sweetheart do not and will not violate or constitute a default
under any other agreement or any order, judgment, decree or like restriction,
statute or regulation by which it or any of its assets and properties may be
bound.
(iv) The execution, delivery and performance of this
Agreement by Sweetheart do not and will not require any consent, approval or
authorization of any Person.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the parties, as set forth herein, shall be true and accurate as of
the date of this Agreement, and shall survive the execution of this Agreement.
13. TECHNICAL ASSISTANCE. ECC shall provide to Sweetheart technical
documentation relating to the Technology for the implementation of the Licensed
Technology in accordance with the terms of the Operating Agreement.
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14. Indemnification. In addition to the indemnification obligations
provided elsewhere in this Agreement (or in the Operating Agreement):
(a) Each of ECC and Sweetheart shall indemnify and hold the other
party harmless from and against, and each hereby assumes liability for, the
payment of any Losses of whatsoever kind and nature that may be imposed upon,
suffered or incurred by the other party as a consequence of or in connection
with any misrepresentation or breach of any warranty, covenant or agreement of
such party contained in this Agreement.
(b) Neither party shall have any liability to the other party
pursuant to this paragraph 14 by reason of any breach of any representation or
warranty by such party, if, prior to the date of this Agreement, the party
seeking indemnification in respect of such breach had actual knowledge that a
representation or warranty made by the other party in this Agreement was, or was
likely to be, incorrect or untrue, but nevertheless proceeded to execute and
deliver this Agreement.
(c) Any claims for indemnification under this paragraph 14 shall be
subject to the procedures set forth in Section 10.3 of the Operating Agreement.
15. MOST FAVORED NATIONS. ECC shall not grant any sublicense under the
Licensed Technology to any third party that has, or proposes to enter into, a
contract to sell Products to The Perseco Company or McDonald's Corporation that,
when considered in the context of the overall financial arrangement (including
consideration of such items as royalty rate, equipment lease payments or profit
participations, share in operating profits or losses, and equipment warranties
and guarantees), is more favorable to such third party than is the business
arrangement between ECC and Sweetheart provided for in this Agreement and the
Operating Agreement. If any such sublicense is determined to be more favorable
to such third party than the Sublicense granted to Sweetheart herein, ECC shall
promptly notify Sweetheart to that effect and ECC, at Sweetheart' election,
shall modify the terms and conditions hereof in any reasonable manner so that
the disparity is eliminated to Sweetheart's reasonable satisfaction.
16. TERM AND TERMINATION.
(a) The term of this Agreement shall commence upon the date
hereof. Unless sooner terminated as hereinafter provided, this Agreement
shall continue in full force and effect until the termination of the Operating
Agreement; provided that if the Operating Agreement terminates pursuant to
the provisions of Section 11.4(c) of the Operating Agreement, the term of
this Agreement shall continue in full force and effect until the expiration
of the last-to-issue patent included in the Licensed Patents.
(b) This Agreement may be terminated, at any time, by the mutual
written consent of the parties hereto.
(c) This Agreement shall immediately terminate in the event that a
Bankruptcy shall occur with respect to Sweetheart.
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17. EFFECT OF EXPIRATION OR TERMINATION.
(a) From and after the effective date of the expiration of the term
of this Agreement or the termination of this Agreement pursuant to paragraph 16
hereof, Sweetheart shall have no right, whatsoever, to utilize the Licensed
Technology or Trademarks, except for the Improvements created, developed or
acquired prior to the effective date of termination or expiration of this
Agreement that are irrevocably licensed to Sweetheart in Sweetheart's
Traditional Field of Use, and Sweetheart shall promptly return to ECC all
written materials or other tangible media containing any Trade Secrets which are
then in the possession of Sweetheart. Termination of this Agreement shall not
affect the license granted by Sweetheart to ECC with respect to Sweetheart
Improvements created, developed or acquired by Sweetheart prior to the
termination or expiration of this Agreement or any license in favor of ECC under
any Patent that is obtained in the name of Sweetheart following a Patent
Protection Abandonment by ECC with respect to the Improvement covered by such
Patent, each of which is irrevocable and shall continue in effect indefinitely.
Paragraphs 6, 8 and 14 shall survive termination of this Agreement.
(b) The obligation of Sweetheart to pay to ECC the Royalty for all
Products actually sold by Sweetheart prior to the effective date of the
expiration or termination of this Agreement shall survive the expiration or
termination of this Agreement.
18. MARKING AND UNITED STATES EXPORT CONTROL.
(a) Sweetheart shall mark all of the Products and related documents
with all applicable United States patent numbers, as required by the patent
laws, or as instructed by ECC.
(b) Sweetheart shall comply with all applicable laws, rules and
regulations of the United States, including but not limited to the Export
Regulations of the United States Department of Commerce, in connection with the
direct or indirect export of any of the Technology or Products, to the extent
any such export hereafter is permitted by the terms of this Agreement, as it may
be amended from time to time. Sweetheart acknowledges that ECC has not made and
does not make any representation that any license is or is not required in
connection with such export or, if required, that such license will be issued by
the United States Department of Commerce or other applicable governmental
agency.
19. SPECIAL TAX PROVISIONS. Sweetheart or its agents shall be solely
responsible for the payment and discharge of any taxes, duties, or withholdings
relating to any transaction of Sweetheart or its agents in connection with the
manufacture, use, sale or commercialization of the Technology or the Products;
provided that, subject to any applicable provisions of the Operating Agreement,
ECC shall be responsible for paying any taxes, duties or withholding relating to
the payment to ECC of any Royalty payment under this Agreement and Sweetheart
shall be permitted to make any withholding with respect to such payments and
fees that is required by applicable law or regulation.
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20. RELATIONSHIP OF THE PARTIES. This Agreement shall not create any
partnership, joint venture or similar relationship between Sweetheart and ECC
(or ECC's Affiliates) and no representation to the contrary shall be made by
either party. Neither Sweetheart nor ECC shall have any authority to act for or
on behalf of or to bind the other in any fashion, and no representation to the
contrary shall be made by either such party.
21. NOTICES. Any notice which is required or permitted to be given to a
party pursuant to this Agreement shall be deemed to have been given only if such
notice is reduced to writing and delivered personally, or by United States mail
with postage prepaid and return receipt requested, or by telecopier (FAX)
transmission, confirmed by letter, or by reputable overnight courier (pursuant
to instructions requiring next-day delivery) to the person in question as set
forth below:
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ECC: EarthShell Container Corporation
800 Miramonte Drive
Santa Barbara, California 93109-1419
Attention: Simon K. Hodson
Chief Executive Officer
Telephone: (805) 897-2294
Fax: (805) 897-2298
with a copy to: Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: J. Nicholson Thomas
Telephone: (213) 229-7628
Fax: (213) 229-7520
Sweetheart: Sweetheart Cup Company Inc.
10100 Reisterstown Road
Owings Mills, MD 21117
Attention: Vice President of Research
& Engineering
Telephone: (410) 998-1270
Fax: (410) 998-1471
With a copy to: Sweetheart Cup Company Inc.
10100 Reisterstown Road
Owings Mills, MD 21117
Attention: Vice-President and General
Counsel
Telephone: (410) 998-1815
Fax: (410) 998-1313
Any party may change its address by giving notice of such change in
the manner set forth herein. If delivered personally, a notice shall be deemed
delivered when actually received at the address specified herein. Any notice
given by mail shall be deemed delivered three (3) days following the date upon
which it is deposited in the mail, with postage prepaid and return receipt
requested. Any notice given by FAX shall be deemed delivered on the date it is
actually transmitted to the person m question at the FAX number specified above.
Any notice given by overnight courier shall be deemed delivered on the next
business day following the date it is placed in the possession of such courier.
22. ENTIRE AGREEMENT. This Agreement supersedes any prior understandings
or agreements, whether written or oral, and any contemporaneous oral agreements,
between
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the parties hereto in regard to the subject matter hereof and, together with the
Operating Agreement and the Confidentiality Agreement dated [as of the date
hereof] between ECC and Sweetheart, contain the entire agreement between the
parties in regard to the subject matter hereof. This Agreement may not be
changed or modified orally, but only by an agreement, in writing, signed by all
the parties hereto. Nothing contained in this Agreement shall be deemed or
construed to supersede, modify or amend the EKI License Agreement.
23. SAVINGS CLAUSE. Should any part or provision of this Agreement be
rendered or declared invalid by reason of any law or by decree of a court of
competent jurisdiction, the invalidation of such part or provision of this
Agreement shall not invalidate the remaining parts or provisions hereof, and the
remaining parts and provisions of this Agreement shall remain in full force and
effect.
24. WAIVER. Neither the failure or delay on the part of either party to
exercise any right, power or privilege hereunder shall operate as a wavier
thereof, nor shall any single or partial exercise of any such right or privilege
preclude any other or further exercise thereof or of any other right or
privilege.
25. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
choice of law rules thereof.
26. DISPUTE RESOLUTION. Any dispute or controversy which shall arise
under or in connection with any aspect of this Agreement, including but not
limited to any aspect of the Sublicense, the performance or nonperformance of
any obligation set forth herein, or the interpretation hereof shall be resolved
through the dispute resolution procedures set forth in Section 12.1 of the
Operating Agreement.
27. BANKRUPTCY OF ECC. The Sublicense granted herein, to the extent it is
applicable to the Licensed Technology, shall be deemed a license of intellectual
property for purposes of the United States Code, Title 11, Section 365(n). In
the event of ECC's bankruptcy and a subsequent rejection or disclaimer of this
Agreement by a bankruptcy trustee or by ECC as a debtor-in-possession, whether
under the law of the United States, or in the event of a similar action under
applicable law, Sweetheart may elect to retain its license rights under this
Agreement, subject to and in accordance with the provisions of the United States
Code, Title 11, Section 365 (n) or other applicable law.
28. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
29. TERMINOLOGY. As used in this Agreement, the singular shall include
the plural and the plural shall include the singular. Titles of paragraphs in
this Agreement are for convenience only, and neither limit nor amplify the
provisions of the Agreement, and all references in this Agreement to a paragraph
shall refer to the corresponding paragraph
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of this Agreement unless specific reference is made to the paragraph or sections
of another document or instrument.
30. QUALITY CONTROL. Within a reasonable time after the date hereof, ECC
shall provide to Sweetheart with ECC's standard quality control manual or
procedures, which ECC agrees shall be commercially reasonable. In order to
preserve the goodwill associated with Trademarks, Sweetheart agrees to maintain
quality standards for the Products in conformity with such standard quality
control manual or procedures.
31. TERMINATION OF EXISTING SUBLICENSE. The Existing Sublicense is hereby
terminated; provided that those provisions of the Existing Sublicense that, by
their express terms, are to survive any termination of the Existing Sublicense
shall continue to survive to the extent provided in the Existing Sublicense.
32. ASSIGNMENT. The rights and obligations in, to and under this
Agreement shall be binding upon and inure to the benefit of the parties, their
legal representatives, successors and assigns. Neither party may assign this
Agreement or any rights hereunder without the prior written consent of the other
party except to the extent and in the manner specified in the Operating
Agreement with respect to an assignment of the rights and obligations of a party
thereunder.
33. REVIEW OF PATENT APPLICATIONS. ECC and Sweetheart agree and
acknowledge that ECC has allowed Sweetheart to review any pending patent
applications included in the Licensed Patents on a confidential basis prior to
the execution of this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Sublicense Agreement
to be executed and delivered by their duly authorized representatives upon the
date first herein written.
ECC: Sweetheart:
EarthShell Container Corporation Sweetheart Cup Company Inc.
By: /s/ Simon K. Hodson By: /s/ Daniel Carson
------------------------------- ------------------------------
Its: Its:
------------------------------- ------------------------------
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EXHIBIT A
TRADE SECRETS
The term "Trade Secrets" as used in the Agreement shall include any
technical or business information, any invention, equipment or apparatus, method
or process, technology, know-how, trade secret, drawing, data, evaluation,
specifications, quality and inspection standards, sales literature, report,
business plan, memorandum, market study, customer lists, training materials,
computer program or software (including both source and object code), or any
other document or thing which is in whole or in part confidential, proprietary,
or secret and which is owned or controlled by, licensed or assigned to ECC or
for which ECC has the right to grant licenses thereon during the term of this
Agreement and which relates in whole or in part to any of the following:
1. The compositions, including the variable and preferred parameters for each
component, used in the Products or the Technology based on hydraulically
reacting materials.
2. The processing steps, including the variable and preferred parameters for
each step, used in the Technology.
3. The equipment and apparatus used in the manufacture of the Products.
4. Quality control, testing and research and development data, reports, and
information, including patent applications in preparation as they relate to
the Technology.
5. Customers and suppliers of the components and equipment of the Technology,
including any agreements.
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EXECUTION COPY
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==============================================================================
OPERATING AGREEMENT
FOR THE PRODUCTION OF HINGED
SANDWICH CONTAINERS FOR
MCDONALD'S CORPORATION
BETWEEN
SWEETHEART CUP COMPANY INC.
AND
EARTHSHELL CONTAINER CORPORATION
DATED AS OF OCTOBER 16, 1997
==============================================================================
<PAGE>
EXECUTION COPY
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TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINITIONS...................................... 2
1.1. Definitions...................................... 2
ARTICLE II. PURPOSE OF THE AGREEMENT; OUTSIDE ACTIVITIES;
REPRESENTATIONS AND WARRANTIES...................... 10
2.1. The Contract........................................ 10
2.2. Economic Model...................................... 10
2.3. Cooperation with Respect to the Contract............ 10
2.4. Outside Business Activities......................... 10
2.5. Determination of Costs.............................. 11
2.6. Representations and Warranties of ECC.............. 11
2.7. Representations and Warranties of SCC.............. 11
2.8. Quality Control.................................... 12
ARTICLE III. FACILITY........................................... 12
3.1. Description of Facility............................ 12
3.2. Maintenance........................................ 13
3.3. Covenant Against Liens............................. 13
3.4. Consideration for Use of Facility.................. 14
3.5. Casualty Loss...................................... 14
ARTICLE IV. EQUIPMENT.......................................... 15
4.1. Equipment Installation............................. 15
4.2. ECC Performance Guarantee.......................... 15
4.3. Return of Equipment................................ 16
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4.4. Use of Equipment; Repairs; Insurance............... 17
4.5. Casualty Loss...................................... 17
4.6. Ownership of Equipment............................. 19
4.8. Inspection and Reports............................. 19
4.9. Manufacturers' Warranties.......................... 20
4.10. Quiet Enjoyment.................................... 20
4.11. ECC's Performance of Sweetheart's Obligations...... 20
ARTICLE V. PERSONNEL.......................................... 21
5.1. Personnel.......................................... 21
5.2. No Violations of Labor Laws........................ 21
ARTICLE VI. FUNDING OBLIGATIONS................................ 21
6.1. ECC's Funding Obligations.......................... 21
6.2. Sweetheart's Funding Obligations................... 21
ARTICLE VII. DISTRIBUTIONS...................................... 22
7.1. Distribution Priority: During the Pre Start
Date Period...................................... 22
7.2. Distribution Priority: After the Pre Start Date
Period........................................... 23
7.3. ECC Performance Guarantee Offset................... 24
ARTICLE VIII. MANAGEMENT......................................... 24
8.1. Operations......................................... 24
8.2. Representatives ................................... 24
8.3. Fundamental Business Strategies.................... 25
8.4 Budget Approval.................................... 26
ARTICLE IX. RECORDS, AUDITS AND REPORTS........................ 27
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9.1. Records, Audits and Reports........................ 27
9.2. Right to Review.................................... 27
9.3. Financial Statements............................... 28
ARTICLE X. INDEMNIFICATION AND INSURANCE...................... 28
10.1. Indemnification by Sweetheart...................... 28
10.2. Indemnification by ECC............................. 29
10.3. Indemnification Procedures......................... 29
10.4. Insurance.......................................... 31
ARTICLE XI. TERMINATION; PURCHASE RIGHTS....................... 31
11.1. Mutual Termination................................. 31
11.2. Prior to Start Date................................ 31
11.3. After the Start Date During the Initial Term....... 31
11.4. After the Start Date and the Initial Term.......... 31
11.5. Sweetheart's Purchase Right........................ 32
11.6. ECC's Right of First Offer and Purchase Right...... 33
11.7 Effect of Termination.............................. 34
ARTICLE XII. GENERAL PROVISIONS................................. 34
12.1. Dispute Resolution................................. 34
12.2. Further Assurances................................. 35
12.3. Amendments......................................... 35
12.5. Entire Agreement................................... 37
12.6. Severability....................................... 37
12.7. Counterparts....................................... 38
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12.8. Governing Law...................................... 38
12.9. Assignment......................................... 38
12.10. Successors......................................... 38
12.11. Third Party Beneficiaries.......................... 38
12.12. Specific Performance............................... 38
12.13. Damages............................................ 39
12.14. Waivers............................................ 39
12.15. Cumulative Rights and Remedies..................... 39
12.16. Expenses........................................... 39
12.17. Table of Contents; Headings........................ 39
12.18. Construction....................................... 39
12.19. Conflict........................................... 40
12.20. Force Majeure...................................... 40
12.21. No Creation of Legal Entity........................ 40
12.22. Waiver of Rights of Partition and Dissolution...... 40
12.23. Survival of Rights, Duties and Obligations......... 41
12.24. Publicity.......................................... 41
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OPERATING AGREEMENT
THIS OPERATING AGREEMENT FOR THE PRODUCTION OF HINGED SANDWICH
CONTAINERS FOR MCDONALD'S CORPORATION has been entered into this 16th day of
October, 1997, by EARTHSHELL CONTAINER CORPORATION, a Delaware corporation,
and SWEETHEART CUP COMPANY INC., a Delaware corporation.
R E C I T A L S
A. ECC has developed and demonstrated, on a limited production basis, a
new packaging material with significant market potential in product applications
for foodservice disposables.
B. Sweetheart is a prominent manufacturer and supplier of foodservice
disposables with significant manufacturing, distribution, marketing and product
development capabilities.
C. Sweetheart is procuring a purchase order (the "Contract") from The
Perseco Company ("Perseco") to manufacture and supply, on an annual basis,
approximately 600 million units of hinged sandwich containers for use by
McDonald's Corporation (the "Products").
D. ECC and Sweetheart have previously entered into a sublicense agreement
dated October 7, 1994 (the "Existing License"). Concurrently with entering into
this Agreement, ECC and Sweetheart shall enter into a Sublicense Agreement (the
"Sublicense Agreement") whereby ECC shall license to Sweetheart certain
technology as defined therein (the "Licensed Technology") to manufacture the
Products. The Existing License shall terminate upon the execution of the
Sublicense Agreement.
E. Concurrently with entering into this Agreement, ECC and Sweetheart
shall enter into a Confidentiality Agreement (the "Confidentiality Agreement")
whereby ECC and Sweetheart shall keep confidential certain proprietary and
confidential information as provided therein.
F. ECC and Sweetheart intend this Agreement, in conjunction with the
Sublicense Agreement and Confidentiality Agreement, to define their business
relationship and joint intentions to commercialize the Licensed Technology by
manufacturing and distributing the Products pursuant to the terms hereof and
thereof.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing recitals and for the
mutual agreements set forth herein, together with other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties, intending to be legally bound, agree as follows:
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ARTICLE I.
DEFINITIONS
1.1. DEFINITIONS. Capitalized terms used in this Agreement shall
have the following meanings (unless otherwise expressly provided herein):
"ACCOUNTANTS" means a nationally recognized firm of certified public
accountants appointed by Sweetheart in its reasonable discretion.
"ACTUAL OVERHEAD" means, with respect to the Products, the aggregate amount
accrued by Sweetheart from the Operations Date through the end of the relevant
fiscal period for the items of Manufacturing Overhead identified in the attached
Exhibit F as "Actual Overhead" (with any components of Fixed Overhead being
determined in accordance with the Applicable Budget), plus (ii) a 10% per annum
return (calculated in the same manner as interest) on Sweetheart's actual
average raw materials inventory.
"AFFILIATE," with respect to any Person, means any other Person directly or
indirectly controlling, controlled by or under common control, with, such
Person. For purposes of this Agreement, "CONTROL" (including with correlative
meanings, the terms "CONTROLLING", "CONTROLLED BY" or "UNDER COMMON CONTROL
WITH") as used with respect to any Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
"AGREEMENT" means this Operating Agreement, as originally executed and as
amended from time to time.
"ALLOCATION OF GENERAL OVERHEAD" means, with respect to the Products, the
aggregate amount accrued by Sweetheart from the Operations Date through the end
of the relevant fiscal period for the overhead items listed in the attached
Exhibit F (exclusive of items identified as Actual Overhead), with any
components of Fixed Overhead being determined in accordance with the Applicable
Budget.
"ANCILLARY AGREEMENTS" means the Sublicense Agreement, the
Confidentiality Agreement and any other agreements, instruments or documents
executed and delivered by the Parties in order to consummate the transactions
contemplated under this Agreement. "APPLICABLE BUDGET" means any operating or
capital budget approved by the Representatives and covering the fiscal period
in question.
"BANKRUPTCY," means, with respect to any Person, (i) such Person (a)
becomes bankrupt or insolvent or generally fails to pay, or admits in writing
its inability to pay, its debts as they come due, (b) makes an assignment for
the benefit of, or any composition or arrangement with, its creditors, (c)
applies for, consents to, or acquiesces in, the appointment of a trustee,
receiver, liquidator or other custodian for itself, its business or all or a
substantial part of its property, or, in the absence of such application,
consent or acquiescence, a trustee, receiver, liquidator or other custodian is
appointed for itself, its business or all or a substantial part of its property
and is not discharged within 60 days, (ii) any bankruptcy,
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reorganization, debt arrangement, or other case or proceeding under any
bankruptcy, insolvency or similar law of any applicable jurisdiction, or any
dissolution, winding up or liquidation case or proceeding shall be commenced
in respect of such Person and, if such case or proceeding is not commenced by
such Person, is consented to or acquiesced in by such Person or remain
undismissed for 60 days, or (iii) such Person takes any action to authorize,
or in furtherance of, any of the events described in clauses (i) or (ii)
above.
"CASUALTY LOSS," as used with respect to the Facility or to any item of
Equipment, has the meaning ascribed to such term in Section 3.5(b) or 4.5(b), as
applicable.
"CONFIDENTIALITY AGREEMENT" has the meaning ascribed thereto in Recital E.
"CONTRACT" has the meaning ascribed thereto in Recital C, and shall include
any supplemental terms and conditions imposed by Perseco or McDonald's
Corporation.
"DCCD" means, with respect to the Products, the Net Sales less Standard
Cost of Sales, Actual Overhead and Production Variances for any fiscal period
during the Pre Start Date Period.
"DISPLACED FINISHED GOODS CASH COSTS" means, with respect to the Products,
the aggregate direct, out of pocket expenses accrued by Sweetheart through the
end of the relevant fiscal period for the costs of storing finished goods
inventory currently located at the Facility, not to exceed $110,000 per annum
for a period not exceeding 18 months from the Operations Date.
"DISTRIBUTABLE CASH" means, with respect to any Fiscal Quarter, Net Sales
accrued by Sweetheart during the Fiscal Quarter with respect to the Products,
plus payments by ECC and Sweetheart of their respective funding obligations
pursuant to Sections 4.2, 6.1 and 6.2 for such Fiscal Quarter, plus any
insurance or warranty recoveries or indemnification payments received for such
Fiscal Quarter in respect of costs or expenses that had reduced Distributable
Cash for the current or any prior Fiscal Quarter, plus any sums released from
reserves during such Fiscal Quarter by the Representatives in connection with
the Products, less the sum of the following to the extent paid or set aside
during such Fiscal Quarter in connection with the Products:
(a) the royalty payable to ECC under the Sublicense Agreement;
(b) all third party, out of pocket operating costs accrued by
Sweetheart and directly associated with, and properly chargeable to, the
manufacture and distribution of the Products, including product, casualty and
general liability insurance premiums, any loss not covered by insurance or
indemnity, external legal and auditing charges, the costs of liquidation,
property taxes on the Equipment, freight and transportation costs for delivery
of the Products that are paid by ECC, all as set forth in the Applicable Budget
or as otherwise agreed to by the Representatives (but exclusive of any costs or
expenses payable to Sweetheart pursuant to Sections 7.1 and 7.2, as applicable,
interest charges and any depreciation, amortization or other non-cash charges);
and
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(c) such reserves as are set forth in the Applicable Budget or
as the Representatives otherwise deem necessary in their sole discretion for the
proper operation and development of the Principal Activity and for the payment
of any current or contingent liabilities relating to the production of Products
pursuant to this Agreement.
"ECONOMIC MODEL" has the meaning set forth in Section 2.2. A redacted
version of the Economic Model is attached hereto as Exhibit A.
"ECC" means EarthShell Container Corporation (or, upon its name change,
EarthShell Corporation), and any permitted successors or assigns of its rights
and obligations under this Agreement.
"ECC DEFICIT ACCOUNT" means, with respect to the Products, the aggregate
amount of (i) the Equipment Profit Participation accrued during the Post Start
Date Period that is not paid pursuant to Section 7.2(f) (which shall be credited
at the end of the applicable Fiscal Quarter), plus (ii) the Excess Investment in
Equipment Amortization (which shall be credited at the end of each Fiscal
Quarter), plus (iii) a 10% per annum return on the average monthly balance in
the ECC Deficit Account, plus (iv) any other amounts accrued by ECC during the
Post Start Date Period that are mutually agreed to by the Representatives, less
(v) amounts paid to ECC pursuant to Section 7.2(h) (credited when paid).
"ECC PERFORMANCE GUARANTEE" has the meaning ascribed thereto in
Section 4.2(a) hereof.
"ECC PRELIMINARY DISTRIBUTION" means $72,375 for each Fiscal Quarter during
the period commencing on the Start Date and ending on the Warranty Termination
Date (prorated for any partial quarter).
"EFFECTIVE DATE" means the date of this Agreement.
"EQUIPMENT" means the items of equipment provided by ECC to Sweetheart
pursuant to this Agreement as generally described in Exhibit C (which may be
amended from time to time pursuant to the terms of this Agreement).
"EQUIPMENT PROFIT PARTICIPATION" means $283,765 for each Fiscal Quarter
commencing on or after the Operations Date (prorated for any partial quarter).
"EXCESS INFRASTRUCTURE ENHANCEMENT COSTS" means the amount by which the
total accrued Infrastructure Enhancement Costs through the end of the applicable
fiscal period exceeds the Specified Infrastructure Enhancement Costs.
"EXCESS INFRASTRUCTURE ENHANCEMENT COSTS AMORTIZATION" means the amount
which, if paid in equal installments at the end of each Fiscal Quarter during
the Term, would provide Sweetheart a 10% internal rate of return on the
aggregate Excess Infrastructure Enhancement Costs accrued prior to the
commencement of the Term. Amounts accrued (or repaid) during the Term shall be
amortized (or credited) in the same manner over the remainder of the Term
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and such amortization amounts shall increase (or decrease) the Excess
Infrastructure Enhancement Costs Amortization.
"EXCESS INVESTMENT IN EQUIPMENT" means the amount by which the total
Invested Equipment Capital accrued by ECC through the end of the applicable
fiscal period exceeds the Specified Investment in Equipment.
"EXCESS INVESTMENT IN EQUIPMENT AMORTIZATION" means the amount which if
paid in equal installments at the end of each Fiscal Quarter during the Term
would provide ECC with a 10% internal rate of return on the aggregate Excess
Investment in Equipment accrued prior to the commencement of the Term. Amounts
accrued (or repaid) during the Term will be amortized (or credited) in the same
manner over the remainder of Term and such amounts will increase (or decrease)
the Excess Investment in Equipment Amortization.
"FACILITY" has the meaning ascribed thereto in Section 3.1 (a) hereof and
is depicted in Exhibit B.
"FDA" means the United States Food and Drug Administration.
"FACILITY PARTICIPATION" means $39,888 for each Fiscal Quarter commencing
on or after the Operations Date (prorated for any partial quarter).
"FISCAL QUARTER" means a calendar quarter.
"FISCAL YEAR" means Sweetheart's fiscal year beginning on October 1 and
ending on September 30 the following year.
"FIXED OVERHEAD" means those items of Manufacturing Overhead that are
identified as "fixed" in the attached Exhibit F.
"FORCE MAJEURE EVENT" means any adverse acts of God, fire, earthquake,
explosion, flood, war, riot, condemnation, sabotage, embargo, compliance with
any order or regulation of any governmental entity acting under or with color of
right, intervention or delays created by any regulatory authority, or any other
similar event beyond the reasonable control of the Parties.
"GAAP" means United States generally accepted accounting principles applied
on a consistent basis.
"GROSS SALES" means, with respect to the Products sold to Perseco, the
gross invoice price charged by Sweetheart to Perseco for any relevant fiscal
period.
"INDEMNIFIED PARTY" has the meaning ascribed thereto in Section 10.3(a)
hereof.
"INDEMNIFYING PARTY" has the meaning ascribed thereto in Section 10.3(a)
hereof.
"INDEMNIFICATION CLAIM NOTICE" has the meaning ascribed thereto in Section
10.3(a) hereof.
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"INDENTURE" means that certain Indenture, dated August 30, 1993, between
United States Trust Company of New York, as Trustee, Cup Acquisition
Corporation, as Issuer, and SHI Holding Company, LLC, as Guarantor, for
$190,000,000 9-5/8% Senior Secured Notes due 2000, and that certain Indenture,
dated August 30, 1993, between U.S. Trust Company of Texas, as Trustee and
Sweetheart Cup Company Inc. for $110,000,000 10 1/2% Senior Subordinated Notes
due 2003.
"INFRASTRUCTURE ENHANCEMENT COSTS" means, with respect to Sweetheart, all
third party, out of pocket costs plus all direct, internal costs (but only to
extent set forth in the Applicable Budget or as otherwise agreed to by the
Representatives), in each case only to the extent properly capitalizable under
GAAP, accrued by Sweetheart through the end of the relevant fiscal period
commencing after the Effective Date to improve or otherwise modify the Facility
or related infrastructure to accommodate the Equipment pursuant to Section 3.1
(exclusive of any costs stemming from a Casualty Loss that are reimbursable
through insurance or other third party recoveries), computed, for purposes of
Section 7.1(g), by reducing such costs by the cumulative distributions made by
Sweetheart pursuant to Section 7.1(j).
"INITIAL CONTRACT TERM" has the meaning ascribed thereto in Section 11.3
hereof.
"INITIAL LINES" means the initial Lines of Equipment to be installed at the
Facility by ECC that are necessary or required to produce 600 million units of
Product per annum as required under the Contract.
"INVESTED EQUIPMENT CAPITAL" means, with respect to ECC, all third party,
out of pocket expenses plus all direct, internal costs (but only to the extent
set forth in the Applicable Budget or as otherwise agreed to by the
Representatives), in each case only to the extent properly capitalizable under
GAAP, accrued by ECC through the end of the relevant fiscal period to purchase,
deliver, install, test, improve or modify the Initial Lines including (i) the
costs accrued by ECC under the column "ECC Responsibility" in the exhibit
attached to the Economic Model, and (ii) any capital expenditures accrued by ECC
under the ECC Performance Guarantee, but excluding (w) any costs accrued as a
result of the purchase price for the Equipment exceeding, in the aggregate, the
amount set forth in the Economic Model (subject, however, to any appropriate
modifications for any difference in purchase price between the Equipment
described in the Economic Model and the Equipment actually purchased by ECC,
with such modifications to be proportional to the increased throughput
efficiency of the Equipment purchased), (x) any fees payable to Simons
Engineering (or similar company) for performing the detailed design and
engineering of the basic ECC commercial manufacturing line of equipment, and (y)
any costs stemming from a Casualty Loss that are reimbursable through insurance
or other third party recoveries and (z) the initial tooling costs for the
Initial Lines. For purposes of Section 7.1(g), Invested Equipment Capital shall
be computed by reducing such costs by the cumulative distributions made to ECC
pursuant to Section 7.1(j)).
"LICENSED TECHNOLOGY" has the meaning ascribed thereto in Recital D.
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"LIEN" means any lien, mortgage, encumbrance, pledge, charge, lease
restriction, easement, servitude, right of others or security interest of any
kind, including any thereof arising under conditional sales or other title
retention agreements.
"LINES OF EQUIPMENT" has the meaning ascribed thereto in Section 4.1(a).
"LOSS" has the meaning ascribed thereto in Section 10.1.
"MANUFACTURING OVERHEAD" means, with respect to the Products, the amounts
accrued by Sweetheart from the Operations Date through the end of the relevant
fiscal period for the overhead items described in Exhibit F, with any components
of Fixed Overhead being determined in accordance with the Applicable Budget.
"MODEL EFFICIENCY LEVEL" has the meaning ascribed thereto in
Section 4.1(b).
"NET SALES" means, with respect to the Products, the aggregate amount
through the end of the relevant fiscal period of Gross Sales, reduced by
(i) actual cash, trade or quantity discounts, including "off-invoice discounts,"
allowed by Sweetheart, (ii) credits allowed by Sweetheart, (iii) sales, use,
value added import, export, excise or similar taxes to the extent paid by
Sweetheart, and (iv) freight and transportation costs paid by Sweetheart (and
not reimbursable by ECC pursuant to Section 6.1) in connection with the delivery
and shipment of the Products whether or not included as a separate item in the
invoice (but exclusive of discounts, returns, taxes or freight and
transportation charges that are deducted in computing Gross Sales).
"OPERATIONS DATE" means the first day of the Fiscal Quarter in which the
Initial Lines are installed and operational to the reasonable satisfaction of
Sweetheart.
"OSHA" means the United States Occupational Safety and Health
Administration.
"PARTIES" means ECC and Sweetheart.
"PERMITTED LIENS" means (i) Liens for taxes either not yet due or being
contested in good faith and by appropriate proceedings, and (ii) materialmen's,
mechanics', workers', repairmen's, employees' or other like Liens arising in the
ordinary course of business for amounts either not yet due or being contested in
good faith and by appropriate proceedings, so long as such proceedings shall not
involve any substantial danger of the sale, forfeiture or loss of any part of
the relevant asset, title thereto or any interest therein and shall not
interfere with the use or disposition thereof.
"PERSECO" has the meaning ascribed thereto in Recital C.
"PERSON" means any individual or any corporation, partnership, limited
liability company, trust or similar entity.
"PERSONNEL" has the meaning ascribed thereto in Section 5.1 (a) hereof.
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"POST START DATE PERIOD" means any fiscal period commencing after the end
of the Start Date Period and ending on or before the date the Agreement is
terminated pursuant to Article XI.
"PRE START DATE PERIOD" means the period beginning on the Operations Date
and ending on the last day of the Fiscal Quarter in which the Start Date occurs.
"PRINCIPAL ACTIVITY" has the meaning ascribed thereto in Section 2.4(a).
"PROCEEDING" has the meaning ascribed thereto in Section 10.3(a) hereof.
"PRODUCTS" has the meaning ascribed thereto in Recital C.
"PRODUCTION VARIANCES" means, with respect to the Products and for any
fiscal period during the Pre Start Date Period, the aggregate, direct costs
accrued by Sweetheart through the end of the fiscal period for actual material
and labor production costs in excess of the amounts used to calculate the
Standard Cost of Sales through the end of the fiscal period. For this purpose,
actual material costs shall mean the cost of raw materials actually used in the
production process and actual labor production costs shall be calculated at the
Standard Labor Rates in accordance with the Applicable Budget.
"PURCHASE RIGHT" has the meaning ascribed thereto in Section 11.2(b)
hereof.
"REPRESENTATIVE" has the meaning ascribed thereto in Section 8.2(a) hereof.
"RETURN CONDITION" has the meaning ascribed thereto in Section 4.3(a)
hereof.
"SG&A ALLOCATION PERCENTAGE" means 2% of Net Sales.
"SPECIFIED INFRASTRUCTURE ENHANCEMENT COSTS" means $1,400,000.
"SPECIFIED INFRASTRUCTURE ENHANCEMENT DISTRIBUTION" means $55,503 for each
Fiscal Quarter commencing on or after the Operations Date (prorated for any
partial quarter).
"SPECIFIED INVESTMENT IN EQUIPMENT" means $7,157,600.
"STANDARD COST OF SALES" means, with respect to the Products, the aggregate
amount accrued by Sweetheart through the end of the relevant fiscal period for
all direct operating costs associated with the manufacture of the Products,
consisting of standard raw material costs, standard labor costs computed at the
applicable Standard Labor Rates and assuming standard labor efficiency (based on
the Economic Model), and, after the Start Date only, Variable Overhead, all as
determined in accordance with the Applicable Budget.
"STANDARD LABOR RATES" means, for any fiscal period, the labor rates
that are applied to the Personnel for purposes of determining the Standard
Costs of Sales for such fiscal period.
"START DATE" means the date by which (i) ECC has reduced the DCCD to zero
(which may be accomplished by paying the DCCD to zero), and (ii) (x) the Initial
Lines have achieved the Model Efficiency Level, or (y) the Initial Lines are
producing sufficient Product
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to satisfy the Contract at the quality and service levels required by Perseco
under the Contract and ECC agrees to assume the economic consequence of not
having achieved the Model Efficiency Level, or (z) Sweetheart agrees in
writing that the Start Date has commenced.
"SUBLICENSE AGREEMENT" has the meaning ascribed thereto in Recital D and
shall include all supplements, amendments and other modifications thereto from
time to time.
"SWEETHEART" means Sweetheart Cup Company Inc. and any of its permitted
successors or assigns of its rights and obligations under this Agreement.
"SWEETHEART DEFICIT ACCOUNT" means, with respect to the Products, the
aggregate amount of (i) the Facility Participation that is accrued during the
Post Pre Start Date Period and which is not paid pursuant to Section 7.2(f)
(credited at the end of the applicable Fiscal Quarter), plus (ii) the Specified
Infrastructure Enhancement Distribution not paid pursuant to Section 7.2(f)
(credited at the end of the applicable Fiscal Quarter), plus (iii) the Excess
Infrastructure Enhancement Costs Amortization (credited at the end of each
month), plus (iv) Displaced Finished Goods Cash Costs accrued after the Post Pre
Start Date Period (credited at the end of each Fiscal Quarter for which the
related unreimbursed costs were accrued), (v) plus unreimbursed direct labor
rate variances (i.e., the amount by which total direct labor costs attributable
to the Principal Activity for any Fiscal Quarter during the Post Start Date
Period exceed the costs calculated using the applicable Standard Labor Rates for
such Fiscal Quarter), plus (vi) a 10% per annum return on the average balance in
the Sweetheart Deficit Account (other than amounts credited to the account
pursuant to clause (iv)), plus (vii) such other amounts accrued by Sweetheart
during the Post Start Date Period as the Parties may mutually agree, less (viii)
amounts paid to Sweetheart under Section 7.2(h).
"SWEETHEART PRELIMINARY DISTRIBUTION" means $289,500 for each Fiscal
Quarter during the period commencing on the Start Date and ending on the
Warranty Termination Date (prorated for any partial quarter).
"TERM" means the ten year period commencing on the Operations Date.
"UNFAVORABLE PRODUCTION VARIANCES" means, with respect to the Products, the
aggregate costs accrued by Sweetheart for any relevant fiscal period during the
Post Start Date Period and ending on the Warranty Termination Date in connection
with unfavorable variances in (i) raw material usage or costs, (ii) labor
efficiency (determined by applying the Standard Labor Rates set forth in the
Applicable Budget), and (iii) Variable Overhead efficiency.
"VARIABLE OVERHEAD" means those items of Manufacturing Overhead that are
identified as being "variable" in the attached Exhibit F.
"WARRANTY TERMINATION DATE" means the date the ECC Performance Guarantee is
terminated.
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ARTICLE II.
PURPOSE OF THE AGREEMENT; OUTSIDE ACTIVITIES; REPRESENTATIONS AND WARRANTIES
2.1. THE CONTRACT. Pursuant to the Contract, Perseco shall be obligated
to purchase, and Sweetheart shall be obligated to sell annually,
approximately 600 million units of Product for a minimum two year period.
ECC shall approve any material terms or conditions of the Contract, or any
modifications thereto, that may result in an additional financial or
performance obligation by ECC beyond those set forth in the Economic Model,
including such terms as product specifications, quality requirements and
timing of delivery.
2.2. ECONOMIC MODEL. The Parties have attached hereto as Exhibit A, a
redacted version of the economic model, dated October __, 1997 (the "Economic
Model"), that illustrates, on a hypothetical basis, the expected revenue and
cost components for the annual production and sale of approximately 600
million units of Big Mac sandwich containers. The Economic Model assumes
that each Line of Equipment will be tooled for and dedicated to produce that
container. The price set forth in Economic Model is subject to adjustment to
reflect changes in Product specifications or processing conditions from those
set forth in the original Contract.
2.3. COOPERATION WITH RESPECT TO THE CONTRACT. Each Party and its
Representatives shall cooperate with the other Party and its Representatives,
and take all commercially reasonable steps, to administer, implement and
enforce the terms and provisions of this Agreement and the Ancillary
Agreements in a manner that will reasonably ensure the timely fulfillment and
performance of all of Sweetheart's or ECC's duties and obligations under the
Contract. In this connection, Sweetheart and ECC agree not to take any
action or omit to take any action that could reasonably lead to a breach of
the Contract, and, in the event of any such breach, the Parties shall take
all steps reasonably necessary to timely cure such breach to avoid a
termination of the Contract. Sweetheart and ECC specifically agree not to
make any environmental or marketing claims that will violate the terms of the
Contract.
2.4. OUTSIDE BUSINESS ACTIVITIES.
(a) Neither this Agreement, nor any activity undertaken pursuant
hereto and in compliance herewith, shall prevent or restrict the other business
activities of any Party, nor shall the other Party have any right, by virtue of
this Agreement, to participate in, or to receive the benefits of, any such
activities. The Representatives and Parties shall not be required to devote all
of their business time or attention to the business of manufacturing and
distributing the Products pursuant to the Contract (the "Principal Activity"),
but shall devote such time as may be necessary for the discharge of their
obligations and duties under this Agreement. The Representatives and Parties
may invest in or possess an interest in other business, regardless of whether
such business activities are competitive with the Principal Activity.
(b) Prior to November 21, 1997, ECC shall not enter into a
sublicense agreement with a new sublicensee (other than Prairie Packaging, Inc.
or Affiliates of existing
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sublicensees) to utilize the Licensed Technology to manufacture and
distribute the Products within North America.
2.5 DETERMINATION OF COSTS. Any costs accrued internally by a Party or
pursuant to an agreement with an Affiliate of a Party and which are subject
to reimbursement pursuant to Sections 7.1 and 7.2 shall not exceed those
costs that would have been charged by a third party on an arm's length basis
for comparable goods and services of comparable quality; provided, however,
that any costs that are consistent with the Applicable Budget, or that are
otherwise approved by the Representatives, shall be conclusively presumed to
have satisfied this standard.
2.6. REPRESENTATIONS AND WARRANTIES OF ECC. ECC represents and
warrants to Sweetheart as follows:
(a) ORGANIZATION, STANDING AND POWER. ECC is a corporation duly
organized and validly existing under the laws of the State of Delaware, and in
good standing in such jurisdiction. ECC has the requisite corporate power and
authority to carry on its business as now being conducted.
(b) AUTHORITY; ENFORCEABILITY. ECC has the requisite corporate
power and authority to enter into this Agreement and each Ancillary Agreement to
which it is to be a party and shall at all times have the requisite corporate
power and authority to perform its obligations hereunder and thereunder. The
execution and delivery by ECC of this Agreement and each Ancillary Agreement to
which it is to be a party and the consummation by ECC of the transactions
contemplated hereby and thereby to be consummated by ECC have been duly
authorized by all necessary corporate action on the part of ECC. This Agreement
has been duly executed and delivered by ECC, and this Agreement constitutes, and
each Ancillary Agreement to which ECC is to be a party, if and when executed by
ECC, shall constitute, a legal, valid and binding obligation of ECC, enforceable
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, moratorium or other laws affecting creditors' rights
generally, or equitable principles, whether applied in a proceeding in equity or
law.
(c) NO VIOLATION. The execution and delivery by ECC of this
Agreement and the Ancillary Agreements to which it is to be a party does not or
shall not, and the consummation by ECC of the transactions contemplated hereby
and thereby to be consummated by ECC and the compliance with the terms hereof
and thereof shall not, (i) violate any law, judgment, order, decree, statute,
ordinance, rule or regulation applicable to ECC, (ii) violate or conflict with
any provision of the certificate of incorporation or by-laws of ECC,
(iii) violate or conflict with any provision of any mortgage, indenture, lease,
agreement or other instrument to which ECC is a party or by which it or any of
its property or assets is bound, or (iv) require any consent, approval, order or
authorization of, or the registration, declaration or filing with, any
governmental entity or any other Person.
2.7. REPRESENTATIONS AND WARRANTIES OF SCC. Sweetheart represents
and warrants to ECC as follows:
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(a) ORGANIZATION, STANDING AND POWER. Sweetheart is a
corporation duly organized and validly existing under the laws of the State of
Delaware, and in good standing in such jurisdiction. Sweetheart has the
requisite corporate power and authority to carry on its business as now being
conducted.
(b) AUTHORITY; ENFORCEABILITY. Sweetheart has the requisite
corporate power and authority to enter into this Agreement and the Ancillary
Agreements to which is to be a party and shall at all times have the requisite
corporate power and authority to perform its obligations hereunder and
thereunder. The execution and delivery by Sweetheart of this Agreement and each
Ancillary Agreement to which it is to be a party and the consummation by it of
the transactions contemplated hereby and thereby to be consummated by it have
been duly authorized by all necessary corporate action on its part. This
Agreement has been duly executed and delivered by Sweetheart, and this Agreement
constitutes, and each Ancillary Agreement to which Sweetheart is to be a party,
if and when executed by it, shall constitute a legal, valid and binding
obligation of Sweetheart, enforceable in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium or other laws
affecting creditors' rights generally, or equitable principles, whether applied
in a proceeding in equity or law.
(c) NO VIOLATION. The execution and delivery by Sweetheart of
this Agreement and the Ancillary Agreements to which Sweetheart is to be a party
does not or shall not, and the consummation by Sweetheart of the transactions
contemplated hereby and thereby and the compliance with the terms hereof and
thereof shall not, (i) violate any law, judgment, order, decree, statute,
ordinance, rule or regulation applicable to Sweetheart, (ii) violate or conflict
with any provision of its certificate of incorporation or by-laws, (iii) violate
or conflict with any provision of any mortgage, indenture, lease, agreement or
other instrument to which Sweetheart is a party or by which it or any of its
property or assets is bound, or (iv) require any consent, approval, order or
authorization of, or the registration, declaration or filing with, any
governmental entity or any other Person.
2.8. QUALITY CONTROL. Should any Products manufactured, sold or
otherwise commercialized by Sweetheart contain any material defect in their
appearance or function or shall otherwise be of substandard quality as
determined pursuant to quality control procedures to be mutually agreed upon
by the Parties, Sweetheart, at ECC's request shall cease any further
manufacture, sale or other commercialization of such Products containing such
material defect or having such substandard quality. Unless Sweetheart shall
correct such defect or quality problem within a reasonable time following its
discovery by or disclosure to Sweetheart, Sweetheart shall be in breach of a
material obligation under this Agreement.
ARTICLE III.
FACILITY
3.1. DESCRIPTION OF FACILITY.
(a) On or before the date the first Line of Equipment is to be
installed by ECC, and at all times during the term of this Agreement, Sweetheart
shall dedicate and make
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available for use in the Principal Activity, at no additional cost (except as
set forth in Section 3.4), a portion of its facility in Owings Mills,
Maryland, as depicted in Exhibit B, suitable for the production, sale and
distribution of the Products in a manner consistent with the Economic Model.
In consultation with ECC, Sweetheart shall provide appropriate capacity and
utility hook-ups to safely house and operate the Initial Lines by the
delivery dates agreed to by the Parties. The facility shall include suitable
space for the storage of raw materials, work-in-progress and finished goods,
administrative offices, transportation facilities and other functions
necessary to manufacture and distribute the Products. If additional Lines of
Equipment are added, Sweetheart shall provide similar facility space for such
consideration as the Parties may mutually agree. The physical location and
specifications of any plant facility utilized for the Principal Activity
(referred to herein collectively as the "Facility") shall be subject to ECC's
reasonable approval. The Facility shall meet all legal and administrative
code standards applicable to the conduct of the Principal Activity thereat.
(b) In connection with the manufacture of the Products,
Sweetheart shall assure the availability of adequate utilities, sewage
facilities, waste disposal, security, fire protection, parking, telephones and
common areas (including all trash facilities, toilets, stairs, corridors, public
lobbies and telephone, electrical and mechanical rooms and spaces).
(c) ECC personnel or consultants will be permitted access to the
Facility and shall be provided office space during the Pre Start Date Period as
is reasonably necessary in order for them to fulfill ECC's obligations or
protect its rights under this Agreement or the Ancillary Agreements.
(d) All alterations of and improvements to the Facility,
including those necessary to cause the Facility to comply with the requirements
of this Section 3.1, shall be the property of Sweetheart.
3.2. MAINTENANCE. Sweetheart, at its sole cost and expense, shall
make all repairs and replacements necessary to maintain and operate the
Facility in material compliance with all applicable legal and administrative
code standards, and to satisfy all applicable customary and reasonable
industry practices with respect thereto, for the periods during which the
Facility is utilized for the Principal Activity, subject to the obligations
of ECC under Section 4.2.
3.3. COVENANT AGAINST LIENS. If, because of any act or omission of
ECC, any Lien (other than Permitted Liens) shall be filed against Sweetheart
or any portion of Sweetheart's properties, including the Facility, ECC shall,
at its own cost and expense, cause the same to be discharged of record or
bonded within 30 days of learning of the filing thereof, and ECC shall
indemnify and hold Sweetheart harmless against and from all costs,
liabilities, suits, penalties, claims and demands, including reasonable
counsel fees, resulting therefrom. Any funds expended by Sweetheart pursuant
to this Section 3.3 and which are not reimbursed by ECC upon written demand
shall bear interest at the rate of 10% per annum from the date of demand
until the sum is paid. All Permitted Liens must be satisfied no later than
120 days following the termination of this Agreement.
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3.4. CONSIDERATION FOR USE OF FACILITY. In consideration for furnishing
the Facility and improving it to accommodate the Initial Lines, Sweetheart
shall receive the Facility Participation, the Specified Infrastructure
Enhancement Distribution and the Excess Infrastructure Enhancement Costs
Amortization.
3.5. CASUALTY LOSS.
(a) All risk of loss with respect to the Facility shall be on
Sweetheart during the term of this Agreement (except to the extent attributable
to the negligent or intentional acts or omissions of ECC, its employees or
agents, which risk of loss shall be borne by ECC pursuant to its indemnification
obligations under Article X).
(b) For purposes of this Agreement, a "Casualty Loss" with
respect to the Facility shall mean any of the following events: (i) the actual
or constructive total or partial loss of the Facility from a Force Majeure Event
or other event resulting in material loss, destruction or damage to the
Facility, (ii) the rendering of the Facility as unfit for its intended use for
any reason whatsoever (including by reason of a Force Majeure Event), or
(iii) the condemnation, confiscation or seizure of, or requisition of title to
or use of, the Facility by any governmental authority.
(c) Upon the occurrence of a Casualty Loss resulting in a "total
loss" of the Facility (i.e., it is not commercially reasonable to repair or
reconstruct the Facility in order to continue the Principal Activity),
Sweetheart shall promptly give notice thereof to ECC and shall use commercially
reasonable efforts to replace the Facility as soon as practicable with other
suitable facilities in order to continue the Products operations with a minimum
of interruption. The Parties shall make appropriate adjustments to the Facility
Participation, the Specified Infrastructure Enhancement Distribution and the
Excess Infrastructure Enhancement Costs Amortization to reflect the changed
circumstances.
(d) Upon the occurrence of a Casualty Loss to the Facility that
does not constitute a total loss, Sweetheart shall promptly notify ECC in
writing of such loss and shall use commercially reasonable efforts to repair and
restore such Facility as soon as practicable to the condition it was in
immediately prior to the occurrence of such loss (assuming the Facility was
maintained in accordance with the terms of this Agreement), and shall also take
commercially reasonable steps to minimize the interruption to the Principal
Activity. In such event, there shall be no adjustment to the items specified in
the last sentence of Section 3.5(c) (except as provided in Section 3.5(f)).
(e) So long as Sweetheart is in material compliance with its
obligations hereunder with respect to the Facility, Sweetheart shall retain all
insurance proceeds, condemnation awards or other third party recoveries from the
Casualty Loss to the Facility and such amounts shall be disbursed to Sweetheart
to pay the expenses required to repair, restore or replace the Facility.
(f) The Facility Participation, Specified Infrastructure
Enhancement Distribution and Excess Infrastructure Enhancement Costs
Amortization shall cease to accrue during any period in which the Facility is
unavailable to operate the Principal Activity.
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ARTICLE IV.
EQUIPMENT
4.1. EQUIPMENT INSTALLATION.
(a) ECC shall, at its sole cost and expense (except as set forth
in Section 4.1(d) below), acquire, deliver, install and test the Initial Lines
at the Facility and provide them, and any mutually agreed upon additions or
improvements thereto, to Sweetheart during the term of the this Agreement. ECC
shall acquire, deliver and install, on a timely basis, additional lines of
Equipment (together with the Initial Lines, the "Lines of Equipment"), as
required, if Perseco amends the Contract to purchase more than 600 million units
annually of the Product. The consideration payable to ECC for making such
additional Lines of Equipment available to Sweetheart shall be mutually
determined by the Parties. The items of Equipment expected to comprise the
Initial Lines are described generally in the Economic Model and the Exhibit C
attached hereto and shall be installed at such times as will reasonably allow
Sweetheart to satisfy its delivery commitments under the Contract.
(b) Following installation, the Initial Lines must operate for
at least 14 consecutive days, 24 hours per day, and produce, on an annualized
basis, 600 million units of Product meeting the product and quality
specifications set forth in the Contract, and satisfying, on an overall basis,
the staffing and raw materials usage and throughput requirements set forth in
the Economic Model (the "Model Efficiency Level").
(c) ECC shall supply all technical information necessary to
manufacture the Products in accordance with the Economic Model, including
material composition, raw materials specifications, Equipment specifications and
directions, processing conditions, output standards and quality assurance
methods.
(d) In consideration for making the Initial Lines available to
Sweetheart for purposes of the Principal Activity, ECC shall receive the
Equipment Profit Participation and the Excess Investment in Equipment
Amortization.
(e) After the Start Date, ECC may, in its discretion, substitute
more efficient or technically superior equipment for any item of Equipment (or
component thereof) which is described in the Economic Model, provided: (i) ECC
gives reasonable advanced written notice to Sweetheart; (ii) the equipment to be
substituted has been established to Sweetheart's reasonable satisfaction to have
commercial viability and will integrate into the established lines at the
Facility without adverse operational cost; (iii) the Parties have agreed to a
plan of substitution of such equipment; (iv) any such substitution will not
cause a material interruption to the Principal Activity; and (v) the substituted
equipment will meet or exceed the requirements of the Model Efficiency Level
within a commercially reasonable time following installation and start up.
4.2. ECC PERFORMANCE GUARANTEE.
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(a) Commencing on the Start Date and until terminated on the
Warranty Termination Date pursuant to Section 4.2(b), ECC shall pay to
Sweetheart within 30 days after the end of each Fiscal Quarter during the Post
Start Date Period any incremental costs accrued by Sweetheart that are
considered Unfavorable Production Variances and that are attributable to the
failure of the Equipment, operated in accordance with the Licensed Technology
and other technical support supplied pursuant to Section 4.1(c) hereof, on an
aggregate basis, to (i) manufacture Products that are in conformity with the
Contract, and (ii) perform, on an overall basis, in accordance with the Model
Efficiency Level as to staffing, raw materials usage and throughput, all as set
forth in the Economic Model, but only to the extent that such incremental costs
are not the result of (i) Sweetheart's operation or maintenance of the
Equipment, (ii) a Force Majeure Event, or (iii) a Casualty Loss (the "ECC
Performance Guarantee").
(b) The Warranty Termination Date shall occur on the earlier of
(i) the date on which the Initial Lines operate at the Model Efficiency Level
for a continuous period of 24 months, and (ii) the date on which Sweetheart
elects, in its sole discretion, to terminate the ECC Performance Guarantee.
(c) Prior to the Start Date, ECC, in its sole discretion and at
its cost and expense, may replace any item of Equipment which is inefficient,
not operating properly, or otherwise fails to meet, or continue to operate at,
the Model Efficiency Level; provided that such replacement does not adversely
affect performance under the Contract, and provided further that Sweetheart
shall approve any such replacement that may result in an additional financial or
performance obligation by Sweetheart beyond those set forth in the Economic
Model or the Applicable Budget.
4.3. RETURN OF EQUIPMENT.
(a) Unless Sweetheart exercises its Purchase Right with respect
to the Equipment (as set forth in Section 11.5 hereof), Sweetheart shall, at its
own risk and expense, return the Equipment free of any Liens (other than
Permitted Liens or Liens created by ECC) within 120 days following the
termination of this Agreement, at the Facility or at such other mutually agreed
upon location (provided, however, that Sweetheart shall remain obligated to
discharge the Permitted Liens on a timely basis). The Equipment shall be in the
same operating order, condition and appearance as when received by Sweetheart,
ordinary wear and tear excepted ("Return Condition"), and Sweetheart shall pay
for any repairs necessary to restore the Equipment to the Return Condition.
Sweetheart shall dismantle, load and otherwise prepare the Equipment for
shipment to any destination directed by ECC (which expense shall be an item of
Distributable Cash). EEC shall pay for the costs of shipping the Equipment to
its intended designation.
(b) In the event that the Equipment is not returned within 30
days after the termination of this Agreement in the Return Condition and in the
manner specified in Section 4.3(a), Sweetheart shall pay as rent to ECC an
amount equal to the greater of the fair market daily rental as reasonably
determined by ECC commencing on the 31st day following termination of this
Agreement, until and including the day on which such Equipment is
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returned in the condition and manner specified in Section 4.3(a). Payment of
additional rent hereunder does not relieve Sweetheart of its obligation to
return the Equipment immediately at such time as set forth herein.
(c) In the event there exists at the termination of this
Agreement a good faith dispute between ECC and Sweetheart regarding whether the
Equipment is in the Return Condition, Sweetheart shall return such Equipment to
ECC, and ECC may effect any repairs to such Equipment ECC deems necessary to
restore such Equipment to its Return Condition. In the event it shall be
determined that Sweetheart has failed to comply with this Section 4.3,
Sweetheart shall pay ECC all reasonable costs of repairing or replacing such
Equipment to its Return Condition, in addition to interim rent equal to the
daily rent equivalent for each day until such repair and replacement is
completed (or should have been completed if diligently pursued).
4.4. USE OF EQUIPMENT; REPAIRS; INSURANCE.
(a) Sweetheart shall (i) use, operate, maintain and store the
Equipment in material compliance with all applicable legal and administrative
code standards, (ii) satisfy all applicable customary and reasonable industry
practices with respect thereto, and (iii) use the Equipment for the exclusive
benefit of the Principal Activity and in conformity with the manufacturer's
operating manual and the technical information furnished by ECC.
(b) Sweetheart shall make all repairs and replacements required
to be made to maintain the Equipment in all material respects in good condition,
appearance and operating order, reasonable wear and tear excepted, and shall pay
all costs accrued in connection with the use and operation of the Equipment
during the term of this Agreement, subject to the obligations of ECC under
Section 4.2. In performing maintenance and repairs, Sweetheart shall comply
with all of the manufacturer's specifications and recommendations and all
technical information furnished by ECC.
(c) Commencing with the date each Line of Equipment is installed
Sweetheart shall obtain or provide, and maintain at all times, on the Equipment,
(i) physical damage insurance equal to the replacement cost of each item of
Equipment, and (ii) public liability and property damage insurance, in each case
with such insurer as shall be reasonably satisfactory to ECC; provided, however,
any insurer rated by AM Best (or a comparable agency) at a rating of A.10 or
better (or a comparable rating) shall at all times be deemed a reasonably
satisfactory insurer. Each such insurance policy will require that the insurer
give ECC at least 30 days prior written notice of any alteration in or
cancellation of the terms of such policy. Sweetheart shall furnish to ECC a
certificate or other evidence reasonably satisfactory to ECC that such insurance
coverage is in effect and that ECC is a loss payee with respect to the
Equipment. Sweetheart's obligations to keep the Equipment insured as provided
herein shall continue until the Equipment is returned to ECC pursuant to Section
4.3. ECC agrees to reimburse Sweetheart for the incremental insurance premium
costs accrued by Sweetheart for coverage of the Equipment during the Pre Start
Date Period.
4.5. CASUALTY LOSS.
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(a) All risk of loss for each item of Equipment shall be on ECC
until the Start Date (unless such loss is caused by the negligent or intentional
acts or omissions of Sweetheart, its employees or agents, in which event the
loss shall be subject to the indemnification provisions set forth in Article X).
Sweetheart will maintain insurance coverage on the Equipment from the date the
Equipment is installed in accordance with Section 4.4(b).
(b) Commencing from the Start Date, the Equipment is installed
and operational, and continuing until its return by Sweetheart pursuant to
Section 4.3, Sweetheart assumes the entire risk of any Casualty Loss (as defined
below) with respect to any item of Equipment, and no such Casualty Loss shall
relieve Sweetheart of any of its obligations hereunder, provided, however, that
ECC shall be responsible for any Casualty Loss caused by the intentional or
negligent acts or omissions of ECC, its employees or agents (which Casualty Loss
shall be subject to the indemnification provisions set forth in Article X).
(c) For purposes of this Agreement, a "Casualty Loss" with
respect to an item of Equipment shall mean any of the following events: (i) the
actual or constructive partial or total loss of such item of Equipment by reason
of a Force Majeure Event or other event resulting in material loss, theft,
destruction or damage of or to the item, (ii) the rendering of the item as unfit
for its intended use for any reason (including by reason of a Force Majeure
Event, but excluding any loss attributable to design, engineering or
craftsmanship defects), or (iii) the condemnation, confiscation or seizure of,
or requisition of title to or use of, such item of Equipment by a governmental
authority.
(d) Except as provided in Section 4.5(a) and (b), upon the
occurrence of a Casualty Loss that results in a total loss of an item of
Equipment (i.e., it is not commercially reasonable to repair or restore the
item), Sweetheart shall promptly give notice thereof to ECC and shall pay or
cause to be paid to ECC, on the earlier of the date insurance proceeds are
received (if the Casualty Loss is an insured loss) or the date or dates payments
are required to be paid to the manufacturer of any replacement equipment
purchased by ECC (assuming normal payment terms), the sum necessary to replace
such item of Equipment (including any taxes, fees and other charges which may be
due). At such time as ECC has received said sums, ECC shall use commercially
reasonable efforts to replace the item of Equipment as promptly as possible.
Appropriate adjustments shall be made to the calculation of the Equipment Profit
Participation and the Excess Investment in Equipment Amortization to reflect the
replacement of the item of Equipment (it being understood that (i) the Equipment
Profit Participation with respect to the item of Equipment will be suspended
following ECC's receipt of the replacement proceeds pursuant to this
Section 4.5(d), and shall recommence upon the installation of the replacement
Equipment, and (ii) the Excess Investment in Equipment Amoritization shall only
be increased by costs that exceed the insurance proceeds or other sums paid to
ECC pursuant to this Section 3.5(d)). Any replacement equipment acquired prior
to the Warranty Termination Date shall be subject to ECC's Performance Guarantee
under Section 4.2.
(e) In the event of a Casualty Loss that does not result in a
total loss of an item of Equipment, Sweetheart shall notify ECC and, at its sole
cost and expense, shall
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promptly repair and restore such item of Equipment to the condition it was in
immediately prior to the occurrence of such damage (assuming such item of
Equipment was maintained in accordance with the terms of this Agreement) and
no adjustments shall be made to the Equipment Profit Participation or the
Excess Investment in Equipment Amortization. So long as Sweetheart is in
compliance with its obligations hereunder with respect to the Equipment, all
payments from insurance proceeds or otherwise with respect to any damage that
is not a total loss shall be disbursed to Sweetheart to pay its out-of-pocket
expenses required to repair or restore such item of Equipment.
4.6. OWNERSHIP OF EQUIPMENT.
(a) Sweetheart acknowledges and agrees that (i) it does not have
and will not acquire legal title to the Equipment (except upon the valid
exercise of its Purchase Right), and (ii) it shall at all times protect and
defend, at its own cost and expense, the title of ECC from and against all
claims, Liens and legal processes of creditors of Sweetheart. The Equipment and
any improvements thereto made by ECC shall remain the personal property of ECC.
Sweetheart shall keep the Equipment free and clear of all Liens except Permitted
Liens. Upon ECC's request, Sweetheart shall execute and deliver to ECC UCC-1
financing statements (or similar documents) evidencing ECC's ownership interest
in the Equipment (or priority rights in respect thereto).
(b) Sweetheart shall affix, upon ECC's request and in a
conspicuous place on any item of Equipment, any reasonable decals or metal
plates as supplied by ECC showing ECC as the owner of the Equipment.
(c) Sweetheart shall keep the Equipment free from any markings
or labeling which might be interpreted as a claim of ownership thereof by
Sweetheart or any Person other than ECC. Sweetheart shall not remove an item of
Equipment from the Facility or transfer possession of the Equipment in any
manner without the prior written consent of ECC. No advertising or insignia
shall be placed on the Equipment without the prior consent of ECC.
4.7. ALTERNATIONS AND IMPROVEMENTS. Except as provided in Section
8.3(b), without the prior written consent of ECC, Sweetheart shall not make
any material alterations, additions or improvements to the Equipment. Unless
Sweetheart exercises its Purchase Right, all permitted alterations, additions
and improvements of any kind or nature made to the Equipment shall become the
property of ECC, free of any liens (other than Permitted Liens that remain
the obligation of Sweetheart or Liens created by ECC) upon the termination of
this Agreement, except that any of the foregoing which (i) are funded by
Sweetheart, (ii) are not required under Section 4.4(b), and (iii) can be
removed without damage to the Equipment and without adversely affecting its
commercial value, useful life or originally intended use, shall remain the
property of Sweetheart (but only if removed by Sweetheart prior to return of
the Equipment to ECC pursuant to Section 4.3).
4.8. INSPECTION AND REPORTS. ECC, or its employees or agents, may, but
shall not be obligated to, inspect the Equipment at the Facility during
Sweetheart's regular business hours and upon reasonable notice.
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4.9. MANUFACTURERS' WARRANTIES.
(a) Subject to Sweetheart's prior approval of the manufacturer,
except as otherwise expressly provided herein, ECC, not being the manufacturer
of the Equipment, nor manufacturer's agent, makes no warranty or representation,
either express or implied, as to the fitness, quality, design, condition,
capacity, suitability, durability, merchantability or performance of the
Equipment or of the material or workmanship thereof, it being agreed that the
Equipment is provided to Sweetheart "as is" and that all such risks, as between
ECC and Sweetheart, are to be borne by Sweetheart at its sole risk and expense.
Sweetheart accordingly agrees not to assert any claim whatsoever against ECC
based thereon.
(b) ECC shall provide copies of applicable manufacturers'
warranties which in each case shall be consistent with industry practice. ECC
shall not waive or otherwise agree to any alteration or amendment of such
warranties without the prior written consent of Sweetheart, which consent shall
not be unreasonably withheld (or which may be unreasonably withheld if the
modification limits the scope or duration of the warranty in a manner that
exposes Sweetheart to greater risks). Except as expressly provided herein,
Sweetheart shall look to the manufacturer for any claims related to the
Equipment. ECC hereby acknowledges that any manufacturer's and/or seller's
warranties are for the benefit of both ECC and Sweetheart. The benefits from
such warranties shall be allocated among the Parties in accordance with their
corresponding financial obligations in respect of the item covered by the
warranty. By way of example, (i) prior to the Warranty Termination Date, ECC
may claim and retain the benefits of any manufacturer's warranties relating to
the attainment of the Model Efficiency Level or the obligation to fund the ECC
Performance Guarantee; and (ii) after the Warranty Termination Date, any such
benefits may be claimed and retained by Sweetheart. Any warranties that
correspond to a repair or maintenance obligation to be funded by Sweetheart
shall be for the benefit of Sweetheart. The Party which most directly benefits
from the realization of a warranty claim shall control the manner in which such
claim is asserted and realized.
4.10. QUIET ENJOYMENT. ECC covenants that it will not interfere in
Sweetheart's quiet enjoyment of the Equipment hereunder during the term of
this Agreement so long as no event of default exists.
4.11. PERFORMANCE OF SWEETHEART'S OBLIGATIONS. If Sweetheart shall
fail to perform promptly any of its obligations under this Agreement with
respect to the Equipment, ECC may, at its option, perform any act or make any
payment that ECC deems reasonably necessary for the maintenance and
preservation of the Equipment and ECC's title thereto, including making
payments for satisfaction of Liens, repairs, taxes, levies and insurance, and
all sums so paid or accrued by ECC, and any reasonable legal fees accrued by
ECC in connection therewith, shall be paid by Sweetheart to ECC upon written
demand, together with interest at the rate of 10% per annum from the date of
demand until the sum is paid. The performance of any act or payment by ECC
as provided herein shall not be deemed a waiver or release of any obligation
or default on the part of Sweetheart.
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ARTICLE V.
PERSONNEL
5.1. PERSONNEL.
(a) Sweetheart shall utilize a sufficient number of trained,
qualified employees to staff and operate the Equipment and to otherwise attend
to the administrative, supervisory, marketing, sales and distribution functions
relating to the Principal Activity as contemplated in the Applicable Budget (the
"Personnel").
(b) The Economic Model sets forth the number of Personnel and
the general skills such Personnel need to operate the Equipment at the Model
Efficiency Level. It is acknowledged by the Parties that the Equipment will be
operated for a continuous 24 hour period, 365 days a year (with the exception
for any downtime to repair or maintain the Equipment as indicated in the
Economic Model).
(c) The Personnel shall be employees of Sweetheart and shall be
qualified to perform the tasks to be assigned to them. In Sweetheart's sole
discretion, certain of the Personnel may work on a part-time basis, and the
remainder of the time, such Personnel may be utilized by Sweetheart for its
other businesses so long as ECC's interests in respect of the Principal Activity
are not materially adversely affected and so long as the Principal Activity is
charged only for the work actually performed for the Principal Activity by the
Personnel. Sweetheart shall retain complete discretion over the continued use
of any of the Personnel, and shall have the right to substitute or replace
employees, provided, however, that the staffing shall always be sufficient to
manufacture, sell and distribute the Products in accordance with the Applicable
Budget and consistent with Sweetheart's obligations under the Contract.
5.2. NO VIOLATIONS OF LABOR LAWS. Sweetheart covenants and agrees that
it is, and shall remain during the term of this Agreement, in material
compliance with all applicable laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours.
ARTICLE VI.
FUNDING OBLIGATIONS
6.1. ECC'S FUNDING OBLIGATIONS. In addition to its obligation to fund
the ECC Performance Guarantee pursuant to Section 4.2, ECC shall pay to
Sweetheart an amount equal to the DCCD, if any, for each Fiscal Quarter
during the Pre Start Date Period (Sweetheart shall provide a calculation of
the DCCD, with such supporting documentation as ECC may reasonably request,
within 15 days after the end of each Fiscal Quarter, and ECC shall fund the
DCCD within ten business days after receiving such calculation). ECC shall
also reimburse Sweetheart for all freight charges with respect to the
Products which are charged by Perseco to Sweetheart pursuant to the terms of
the Contract.
6.2. SWEETHEART'S FUNDING OBLIGATIONS. Except as set forth in Sections
4.2 and 6.1 hereof, Sweetheart shall provide all of the working capital
required to operate the
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Principal Activity, and shall fund all labor costs attributable to the
Personnel who are employed with respect to the Principal Activity, inclusive
of all compensation payable to eacj Person actually performing services in
respect of the Principal Activity, and all employee benefits, insurance
premiums, taxes and other similar costs or expenses that arise from the
payment of such compensation (including overtime, sick, severance and
vacation pay, bonuses, medical, disability, unemployment and insurance
premiums or benefits, training costs other than those costs related to the
Equipment, workman's compensation insurance, and all employer and employee
taxes).
ARTICLE VII.
DISTRIBUTIONS
7.1. DISTRIBUTION PRIORITY: DURING THE PRE START DATE PERIOD. Within
30 days after the end of each Fiscal Quarter which begins during the Pre
Start Date Period, Sweetheart shall make distributions of Distributable Cash
(or other property in lieu of Distributable Cash) with respect to each
Product sold (without duplication), in the following cumulative order and
priority:
(a) First, to Sweetheart, to the extent of any Standard Cost of
Sales, less amounts previously distributed under this clause (a);
(b) Second, to Sweetheart, to the extent of any Actual Overhead,
less amounts previously distributed under this clause (b);
(c) Third, to Sweetheart, to the extent of any Production
Variances, less amounts previously distributed under this clause (c);
(d) Fourth, to ECC, to the extent of its contributions to fund
the DCCD pursuant to Section 6.1 hereof, less amounts previously distributed
under this clause (d);
(e) Fifth, to Sweetheart, to the extent of any Allocation of
General Overhead, less amounts previously distributed under this clause (e);
(f) Sixth, to Sweetheart, to the extent of the SG&A Allocation
Percentage of Net Sales, less amounts previously distributed under this clause
(f);
(g) Seventh, to Sweetheart and ECC, in proportion to, and to the
extent of (i) in the case of Sweetheart, any accrued, but unpaid, 10% per annum
return on the Infrastructure Enhancement Costs actually expended by Sweetheart,
and (ii) in the case of ECC, any accrued but unpaid, 10% per annum return on the
Invested Equipment Capital actually expended by ECC, computed in each case from
the date the funds were expended;
(h) Eighth, to Sweetheart, to the extent of any Displaced
Finished Goods Cash Costs, less amounts previously distributed under this clause
(h);
(i) Ninth, to Sweetheart and ECC, in proportion to, and to the
extent of (i) in the case of Sweetheart, (A) the cumulative Facility
Participation, less the 10% return
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paid pursuant to clause (g)(i) above and less the distributions made pursuant
to this Section 7.1(i), and (B) the cumulative Specified Infrastructure
Enhancement Distribution, less the 10% return paid pursuant to clause (g)(i)
above and less the distributions made pursuant to this Section 7.1(i), and
(ii) in the case of ECC, the cumulative Equipment Profit Participation, less
the 10% return paid pursuant to clause (g)(ii) above and less the
distributions made pursuant to this Section 7.1(i);
(j) Tenth, to Sweetheart and ECC, in proportion to, and to
the extent of, (i) in the case of Sweetheart, any Excess Infrastructure
Enhancement Costs, and (ii) in the case of ECC, any Excess Investment in
Equipment, in each case determined as of the end of the Fiscal Quarter in
question;
(k) Eleventh, 20% to Sweetheart and 80% to ECC, until ECC has
received distributions under this clause (k) equal to 20% of Net Sales
through the end of the relevant Fiscal Quarter; and
(l) Twelfth, 80% to Sweetheart and 20% to ECC.
7.2. DISTRIBUTION PRIORITY: AFTER THE PRE START DATE PERIOD. Within 30
days after the end of each Fiscal Quarter during the Post Start Date Period,
Sweetheart shall make distributions of Distributable Cash (or other property
in lieu of Distributable Cash) with respect to each Product sold (without
duplication), in the following cumulative order and priority:
(a) First, to Sweetheart, to the extent of any Standard Cost
of Sales during the Post Start Date Period, less amounts previously
distributed under this clause (a);
(b) Second, but only before the Warranty Termination Date, to
Sweetheart, to the extent of any Unfavorable Production Variances during the
Post Start Date Period, less amounts previously distributed under this clause
(b);
(c) Third, to Sweetheart, to the extent of any Manufacturing
Overhead during the Post Start Date Period, less amounts previously
distributed under this clause (c);
(d) Fourth, to Sweetheart, to the extent of the SG&A
Allocation Percentage of Net Sales during the Post Start Date Period, less
amounts previously distributed under this clause (d);
(e) Fifth, but only before the Warranty Termination Date, to
Sweetheart, to the extent of its cumulative Sweetheart Preliminary
Distribution, less amounts previously distributed under this clause (e);
(f) Sixth, to Sweetheart and ECC, in proportion to, and to
the extent of (i) in the case of Sweetheart, (A) the Facility Participation
payable with respect to the Fiscal Quarter, and (B) the Specified
Infrastructure Enhancement Distribution payable with respect to the Fiscal
Quarter, and (ii) in the case of ECC, the Equipment Profit Participation
payable with respect to the Fiscal Quarter;
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(g) Seventh, but only before the Warranty Termination Date,
to ECC, to the extent of its cumulative ECC Preliminary Distribution, less
amounts previously distributed under this clause (g);
(h) Eighth, to Sweetheart and ECC, in proportion to, and to
the extent of, (i) in the case of Sweetheart, any Sweetheart Deficit Account,
and (ii) in the case of ECC, any ECC Deficit Account;
(i) Ninth, but only before the Warranty Termination Date, 80%
to Sweetheart and 20% to ECC; and
(j) Tenth, 100% to Sweetheart.
7.3. ECC PERFORMANCE GUARANTEE OFFSET. Notwithstanding anything herein
to the contrary, Sweetheart may reduce (on a dollar for dollar basis without
duplication) any amount it owes ECC under Sections 7.1 and 7.2 hereof by the
amount of any unpaid ECC Performance Guarantee then owed to Sweetheart.
7.4. SUMMARY SCHEDULES. For reference purposes, summaries of the
distributions to be made pursuant to Sections 7.1 and 7.2 during the Pre
Start Date Period and Post Start Date Period are attached as Exhibits D and
E, respectively.
ARTICLE VIII.
MANAGEMENT
8.1. OPERATIONS.
(a) Prior to the Start Date, ECC shall manage the
manufacturing operations relating to the Principal Activity, and, in this
connection, shall review and approve all costs contributing to the DCCD;
provided, however, ECC cannot unreasonably withhold its approval if such
costs are consistent with the costs projected in the Applicable Budget.
(b) On and after the Start Date, Sweetheart shall manage all
manufacturing operations relating to the Principal Activity.
(c) Except as set forth in Section 8.2, Sweetheart shall
manage all operations of the Principal Activity (other than manufacturing),
including the administration of the Contract, warehousing, raw material
purchases, labor procurement and supervision, shipping and receiving.
8.2. REPRESENTATIVES.
(a) The fundamental business strategies (as set forth in
Section 8.3 hereof) in connection with the Principal Activity shall be
determined by the joint agreement of Sweetheart and ECC. To administer this
process, each Party shall designate two representatives (each, a
"Representative") to act on its behalf. Each Representative shall be entitled
to cast one vote. Each of Sweetheart and ECC shall be entitled to name an
alternate Representative to serve in the place of any Representative
appointed by it should any such
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Representative not be able to attend a meeting or meetings. Each
Representative or alternate Representative shall serve at the pleasure of the
designating Party. Each Party shall bear the costs accrued by any
Representative, and no Representative shall be entitled to compensation in
respect of the Principal Activity or from the other Party for serving in such
capacity. Any Representative may bring with him or her a reasonable number of
non-voting observers (including lawyers and accountants) to any meeting of
the Representatives.
(b) All decisions of the Representatives shall be made by a
majority of Representatives. A vote of the Representatives may be taken
either in a meeting or by written consent.
(c) The Representatives shall hold regularly scheduled
quarterly meetings in person for the first two years after the Effective
Date. Thereafter, such regular meetings will be held in periodic intervals as
mutually agreed by the Representatives upon five days written notice (unless
such notice is waived by all Representatives). Any Representative may call a
special meeting of the Representatives during the initial two year period
upon five days written notice (unless such notice is waived by all
Representatives), which meeting may be held by conference telephone in
accordance with Section 8.2(e) below.
(d) The location of the meetings of the Representatives shall
alternate between a site chosen by Sweetheart and a site chosen by ECC,
unless otherwise established by the Representatives.
(e) After the first two years, regular or special meetings of
the Representatives may be held by conference telephone or similar
communications equipment by means of which all individuals participating in
the meeting can communicate with each other.
8.3. FUNDAMENTAL BUSINESS STRATEGIES. The following shall be deemed
fundamental business strategies:
(a) annual and capital budgets, including Standard Cost of
Sales, intercompany allocations of Fixed or Variable Overhead or pricing for
services, which are inconsistent with the Economic Model or the Applicable
Budget for the Fiscal Year ended September 30, 1998, distribution policies or
any material deviations therefrom;
(b) modifications to the Equipment beyond those minor
modifications that do not detrimentally affect efficiency levels or
materially impair its value (Sweetheart shall make commercially reasonable
efforts to notify ECC of such modifications);
(c) modifications to the composition and process
"specifications" for the Product;
(d) the entering into, or material amendment of, or early
termination of, the Contract;
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(e) any transaction that would materially increase the
obligations of either Party beyond those contemplated in this Agreement; and
(f) any sale or disposition by ECC or Sweetheart of their
rights or obligations under this Agreement or the Ancillary Agreements,
excluding a disposition to an Affiliate (provided the transferring party
remains liable for its obligations under this Agreement and the Ancillary
Agreements), or a disposition to a non-Affiliate pursuant to a merger or sale
or disposition of all or substantially all of the Party's assets (provided
the non-Affiliate assumes liability for the obligations of the transferring
Party under this Agreement and the Ancillary Agreements).
8.4 BUDGET APPROVAL.
(a) For the Fiscal Year ended September 30, 1998, the
Representatives shall prepare and agree to a proposed capital and operating
budget that will be consistent with the costs set forth in the Economic
Model, and which shall establish the amounts (or, alternatively, the
procedures for determining the amounts) of each Party's direct, internal
costs that are considered a component of Infrastructure Enhancement Costs or
Invested Equipment Capital for such Fiscal Year and for any subsequent Fiscal
Year.
(b) For each subsequent Fiscal Year, the Representatives
shall prepare a proposed quarterly and annual operating and capital budget
for the Fiscal Year in conjunction with Sweetheart's normal budgeting
process. Such budget shall be accompanied by an operating plan prepared by
the Representatives setting forth the underlying assumptions and
implementation plans in connection with the budget. The Representatives
shall act in good faith and cooperate with each other in applying the
principles and standards reflected in this Agreement (including the Exhibits)
in developing a mutually acceptable budget. Such budget shall include the
Standard Cost of Sales, Standard Labor Rates, Variable Overhead, Fixed
Overhead, Excess Investment in Equipment Amortization and Excess
Infrastructure Enhancement Costs Amortization, and other items of projected
revenue and expense that are expected to comprise Distributable Cash for the
fiscal period covered by the budget. It is agreed by the Parties that, once
determined, Fixed Overhead shall remain constant for the entire Fiscal Year.
(c) The Representatives shall determine the Standard Cost of
Sales, Standard Labor Rates, Variable Overhead and Fixed Overhead (each a
"Budget Item") for each Fiscal Year, taking into account both the actual
material, labor and overhead costs of Sweetheart during the current Fiscal
Year, as well as the expected costs of Sweetheart for the upcoming Fiscal
Year. If the Representatives cannot agree on any Budget Item by the start of
the Fiscal Year, the dispute shall be settled pursuant to the mechanism set
forth in Section 12.1 hereof. Prior to the resolution of the dispute, the
then current Budget Item shall be used for making distributions pursuant to
Article VII hereof. As soon as the dispute is resolved, the new Budget Item
shall be applied retroactively to the first day of the Fiscal Year, and
distributions to ECC and Sweetheart, as applicable, pursuant to Article VII
hereof for the next Fiscal Quarter shall be reduced or increased, as the case
may be (on a dollar for
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dollar basis without duplication), by any amount ECC or Sweetheart, as
applicable, owes as a result of the new Budget Item, including interest at a
rate of 10% per annum on such amount.
ARTICLE IX.
RECORDS, AUDITS AND REPORTS
9.1. RECORDS, AUDITS AND REPORTS.
(a) At Sweetheart's expense (which is compensated through
overhead allocations), proper and complete records and books of account for
the Principal Activity shall be kept in which shall be entered fully and
accurately all transactions and other matters relating to the Principal
Activity in accordance with Sweetheart's normal accounting procedures and
policies. The books and records shall at all times be maintained at the
principal executive office of Sweetheart.
(b) At a minimum, Sweetheart shall keep at its principal
executive office the following records:
(i) Copies of the minutes of any meetings of the
Representatives and any written consents filed by the Representatives in
lieu of a meeting;
(ii) Copies of any communications and related calculations
relating to any Party's (A) obligation to fund capital or otherwise make
payments under this Agreement, or (B) right to receive distributions
pursuant to Article VII or Section 11.7; and
(iii) Copies of any budgets approved by the Representatives,
and any amendments thereto.
(c) The Representatives shall maintain and preserve, during
the term of this Agreement, and for seven (7) years after the termination of
this Agreement, all accounts, books and other relevant documents relating to
the Principal Activity.
9.2. RIGHT TO REVIEW. ECC shall coordinate its audit of the Principal
Activity to coincide with Sweetheart's normal audit cycle. ECC shall also
have the right at all reasonable times during Sweetheart's business hours
from December 1 through January 31 of each Fiscal Year, upon reasonable
notice, to audit, examine and make copies of or extracts from the books of
account and other books and records relating to the Principal Activity and
otherwise to receive information about them. Such rights may be exercised
through any agent or employee of ECC or one of its Affiliates designated by
ECC or by independent certified public accountants or attorneys designated by
ECC; provided, however, ECC shall not be charged any expense for document
requests reasonably necessary to calculate or confirm ECC's payment
obligations, or Sweetheart's or ECC's right to receive distributions pursuant
to Sections 7.1 or 7.2 hereof; and provided further that Sweetheart shall
reimburse ECC for the actual costs of the review if it is determined that, as
a result of the review, ECC is owed at least $150,000. Except as set forth
in the immediately preceding sentence, ECC shall bear all expenses incurred
in any examination made for its account.
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9.3. FINANCIAL STATEMENTS. As soon as practicable following the end of
each Fiscal Quarter and Fiscal Year (and in no event later than 30 days after
the end of each Fiscal Quarter and 60 days after the end of the Fiscal Year),
Sweetheart shall prepare and deliver to ECC and the Representatives, a
mutually agreed upon balance sheet for the Principal Activity as of the end
of such applicable fiscal period and, in connection with such fiscal period,
(i) the related profit and loss statement, (ii) the calculation of
Distributable Cash, DCCD and the ECC Performance Guarantee, if any, (iii) the
calculation of the Sweetheart and ECC Deficit Accounts and (iv) appropriate
notes to such financial statements, including an indication of the variances
from the Applicable Budget and a calculation of the items of expense for
which distributions were made pursuant to Sections 7.1 and 7.2. All
documents and financial reports shall be prepared in accordance Sweetheart's
normal accounting practices consistent with GAAP principles. A statement
from the Accountants based on a limited review not constituting an audit will
be provided in conjunction with all Fiscal Quarter and Fiscal Year reports.
As soon as practicable following the end of each calendar month (and in no
event later than 30 days after the end of such month), Sweetheart shall
prepare and deliver to ECC and the Representatives a mutually agreed upon
profit and loss statement for the Principal Activity as of the end of such
month and for the Fiscal Year to date, together with a revised estimate of
the results of operations for such Fiscal Year.
ARTICLE X.
INDEMNIFICATION AND INSURANCE
10.1. INDEMNIFICATION BY SWEETHEART. Sweetheart shall defend,
indemnify and hold ECC, its subsidiaries and Affiliates, and its and their
officers, directors, managers, shareholders, partners, employees and agents,
harmless and shall pay all losses, damages, fees, expenses or costs
(including reasonable attorneys' fees) (each, a "Loss") accrued by them based
upon any claim or action (other than claims or actions arising out of ECC's
or the indemnified party's negligent or intentional acts or omissions or
failure to meet the Model Efficiency Level) relating to:
(a) third party claims for personal injury or property damage
involving any Product produced after the Start Date;
(b) claims made by Sweetheart employees;
(c) raw material purchases by Sweetheart;
(d) operation and maintenance of the Facility and the
Equipment (except to the extent ECC is obligated therefor);
(e) failure of Sweetheart to meet its funding obligations
pursuant to this Agreement; and
(f) any breach by Sweetheart in any material respect of this
Agreement, including any representation, warranty or covenant.
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10.2. INDEMNIFICATION BY ECC. ECC shall defend, indemnify and hold
Sweetheart, its subsidiaries and Affiliates, and its and their officers,
directors, shareholders, employees and agents, harmless and shall pay any
Loss accrued by them based upon any claim or action (other than claims or
actions arising out of Sweetheart's or the indemnified party's negligent or
intentional acts or omissions) relating to:
(a) safety of Equipment through the Warranty Termination
Date, including, but not limited to, OSHA compliance;
(b) FDA compliance of Products which conform in all material
respects to the specifications in the Contract;
(c) failure of ECC to meet its funding obligations pursuant
to this Agreement (including the ECC Performance Guarantee);
(d) claims made by ECC employees; and
(e) any breach by ECC in any material respect of this
Agreement, including any breach of any representation, warranty or covenant.
10.3. INDEMNIFICATION PROCEDURES.
(a) Any Person making a claim for indemnification pursuant to
this Article X (an "Indemnified Party") must give the Party from whom
indemnification is sought (an "Indemnifying Party") written notice of such
claim (an "Indemnification Claim Notice") promptly after the Indemnified
Party receives any written notice of any action, lawsuit, proceeding,
investigation or other claim (a "Proceeding") against or involving the
Indemnified Party by a government entity or other third party or otherwise
discovers the liability, obligation or facts giving rise to such claim for
indemnification; provided that the failure to notify or delay in notifying an
Indemnifying Party will not relieve the Indemnifying Party of its obligations
pursuant to this Article X except to the extent that such failure actually
harms the Indemnifying Party. Such, notice must contain a description of the
claim and the nature and amount of such Loss (to the extent that the nature
and amount of such Loss is known at such time).
(b) With respect to the defense of any third-party Proceeding
against or involving an Indemnified Party in which a government entity or
other third party in question seeks only the recovery of a sum of money for
which indemnification is provided in this Article X, at its option, an
Indemnifying Party may appoint as lead counsel of such defense any legal
counsel selected by the Indemnifying Party; provided that before the
Indemnifying Party assumes control of such defense it must first:
(i) enter into an agreement with the Indemnified Party (in
form and substance reasonably satisfactory to the Indemnified Party)
pursuant to which the Indemnifying Party agrees to be fully responsible
(with no reservation of any rights other than the right to be subrogated
to the rights of the Indemnified Party) for any Loss relating to such
Proceeding and unconditionally guarantees the
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payment and performance of any liability or obligation which may arise
with respect to such Proceeding or the facts giving rise to such claim
for indemnification, and
(ii) furnish the Indemnified Party with evidence that the
Indemnifying Party, in the Indemnified Party's reasonable judgment, is
and will be able to satisfy any such liability.
(c) Notwithstanding anything in Section 10.3(b) to the contrary:
(i) the Indemnified Party will be entitled to participate
in the defense of such third-party claim and to employ counsel of its
choice for such purpose at its own expense provided that the Indemnifying
Party will bear the reasonable fees and expenses of such separate counsel
accrued prior to the date upon which the Indemnifying Party effectively
assumes control of such defense;
(ii) the Indemnifying Party will pay the reasonable fees and
expenses of legal counsel retained by the Indemnified Party, if
(A) the Indemnified Party reasonably believes
that an adverse determination of such Proceeding could be
detrimental to or injure the Indemnified Party's reputation or
future business prospects, in which case, the Indemnified Party
will execute a release limiting the Indemnifying Party's
liability with respect to such Proceeding to an amount mutually
agreed upon by the Parties,
(B) the Indemnified Party reasonably believes
that there exists or could arise a conflict of interest which,
under applicable principles of legal ethics, could prohibit a
single legal counsel from representing both the Indemnified Party
and the Indemnifying Party in such Proceeding, or
(C) a court rules that the Indemnifying Party has
failed or is failing to prosecute or defend vigorously such
claim; and
(iii) the Indemnifying Party and Indemnified Party must
obtain the prior written consent of the other party (which will not be
unreasonably withheld) prior to entering into any settlement of such
claim or Proceeding or ceasing to defend such claim or Proceeding,
provided, however, the Indemnifying Party may enter into such settlement
without the Indemnified Party's consent if such settlement is for money
damages only.
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10.4. INSURANCE. Sweetheart shall obtain or provide, and maintain
at all times, product liability insurance as is reasonable and customary for
the industry and, in any event, in an amount necessary to satisfy any
requirement of McDonald's, against claim of personal injury or property
damage made with respect to the Products, with such insurer as shall be
reasonably satisfactory to ECC; provided, however, any insurer rated by AM
Best (or a comparable agency) at a rating of A-10 or better (or a comparable
rating) shall at all times be deemed a reasonably satisfactory insurer. Each
such insurance policy will require that the insurer give ECC at least 30 days
prior written notice of any alteration in or cancellation of the terms of
such policy. Sweetheart shall furnish to ECC a certificate or other evidence
reasonably satisfactory to ECC that such insurance coverage is in effect and
that ECC is an additional insured with respect to such policy.
ARTICLE XI.
TERMINATION; PURCHASE RIGHTS
11.1. MUTUAL TERMINATION. This Agreement and the Principal Activity
shall terminate ten years from the Operations Date (such ten year period is
defined as the "Term"). At any time during the Term, Sweetheart and ECC can
mutually agree to terminate this Agreement and the Ancillary Agreements and
to determine the effect of such termination.
11.2. PRIOR TO START DATE.
(a) Prior to the Start Date, either Sweetheart or ECC may
terminate this Agreement and the Ancillary Agreements if the Start Date is
delayed more than 18 months beyond the date the first Line of Equipment is
installed (such 18 month period shall be suspended during any period in which
a Casualty Loss or Force Majeure Event forces a suspension of operations).
(b) If ECC terminates this Agreement pursuant to Section
11.2(a), Sweetheart shall have a right to purchase the Equipment (a "Purchase
Right") pursuant to Section 11.5.
(c) If Sweetheart terminates this Agreement pursuant to
Section 11.2(a), Sweetheart shall not have a Purchase Right.
11.3. AFTER THE START DATE DURING THE INITIAL TERM. After the Start
Date and during the initial term of the Contract (expected to be three years)
(the "Initial Term"), neither Sweetheart nor ECC shall have the right to
terminate this Agreement or the Ancillary Agreements.
11.4. AFTER THE START DATE AND THE INITIAL TERM. After the Start
Date and After the Initial Term:
(a) ECC may terminate this Agreement and the Ancillary
Agreements upon (i) 6 month's written notice to Sweetheart (provided,
however, that such termination shall not be effective prior to the end of any
extended term of the Contract, and, provided
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further, that Sweetheart shall have a Purchase Right with respect to the
Equipment); (ii) Sweetheart's material breach of this Agreement or the
Ancillary Agreements and failure to initiate and pursue diligently a cure of
such breach within 60 days thereafter; or (iii) Sweetheart's Bankruptcy.
(b) Sweetheart may terminate this Agreement and the Ancillary
Agreements upon (i) 6 month's written notice to ECC (provided, however, that
such termination shall not be effective prior to the end of any extended term
of the Contract); (ii) ECC's material breach of the Agreement or the
Ancillary Agreements and failure to initiate and pursue diligently a cure of
such breach within 60 days thereafter (provided, however, that Sweetheart
shall have a Purchase Right with respect to the Equipment); or (iii) ECC's
Bankruptcy (provided, however, that Sweetheart shall have a Purchase Right
with respect to the Equipment).
(c) Sweetheart may terminate this Agreement, but continue the
Sublicense Agreement and shall have a Purchase Right with respect to the
Equipment, upon 90 days written notice to ECC, provided that such termination
shall not be effective prior to the Warranty Termination Date.
(d) In the event this Agreement is terminated by ECC pursuant
to Section 11.4(a)(ii) or (iii) or by Sweetheart pursuant to Section
11.4(b)(i), Sweetheart shall not have a Purchase Right.
(e) In the event Sweetheart terminates this Agreement upon
notice less than twelve months prior to the effective date of such
termination, Sweetheart shall pay to ECC the EarthShell Profit Participation
for the twelve month period following termination.
11.5. SWEETHEART'S PURCHASE RIGHT.
(a) If Sweetheart has a Purchase Right with respect to the
Equipment, Sweetheart shall have the right to purchase all (but not less than
all) of the Equipment by providing written notice to ECC. Such notice shall
set forth which Equipment Sweetheart intends to purchase, the purchase price
therefor and the date of such purchase. All such Equipment shall be purchased
on an "as is" basis free and clear of all Liens created by ECC (other than
Permitted Liens) for ECC's actual unrecovered cost basis in such Equipment
(including an amount equal to the ECC Deficit Account), plus applicable sales
taxes, if any. Sweetheart's Purchase Right shall expire at the end of the
90th day after Sweetheart is notified of the event leading to the termination
of this Agreement.
(b) The closing of the purchase pursuant to the Purchase
Right shall take place on the date designated by Sweetheart, which date shall
not be more than 60 days nor less than 5 days after the delivery of the
notice. Prior to such closing, Sweetheart and ECC shall enter into a
definitive agreement which shall contain customary representations and
warranties from ECC regarding the Equipment ownership (it being understood
that the Equipment is being purchases "as is") and lien free status.
Sweetheart shall pay the purchase price in cash via a check or wire transfer
(at Sweetheart's option) on the date of closing.
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11.6. ECC'S RIGHT OF FIRST OFFER AND PURCHASE RIGHT.
(a) For ten years following Sweetheart's exercise of a
Purchase Right, ECC shall be granted a right of first offer to repurchase
such Equipment (or any material component thereof) prior to Sweetheart's
offer of the same to a non-Affiliate purchaser. ECC must exercise such right
of first refusal within 30 days of being given written notice of the terms
and conditions of the purchase offer (which purchase offer, at a minimum,
shall contain a cash purchase price). The procedure for such re-purchase by
ECC shall be the same as the procedure for Sweetheart's exercise of its
Purchase Rights as set forth in Section 11.5(b) hereof. If ECC does not
timely elect to purchase the Equipment (or material component thereof) on the
same terms and conditions of such purchase offer (including the cash purchase
price) within said 30-day time period, Sweetheart shall be free for a
six-month period thereafter to sell the Equipment (or material component
thereof) to a non-Affiliated purchaser on terms and conditions that are
comparable in all material respects to those offered to ECC. If Sweetheart is
unable to sell the Equipment (or material component thereof) on comparable
terms and conditions within said six-month period, the Equipment (or
remaining components thereof) shall again be subject to the right of first
offer. Following the end of the ten-year period, Sweetheart shall have no
obligation to sell the Equipment to ECC subject to this Section 11.6, except
as provided in Section 11.6(b) below.
(b) Notwithstanding anything herein to the contrary, ECC
shall have the option, exercisable within 60 days following termination of
the Sublicense Agreement, to purchase all, but not less than all, of the
Equipment then owned by Sweetheart or its Affiliates for such Equipment's
fair market value on the date the Sublicense Agreement is terminated. The
fair market value shall be mutually determined by Sweetheart and ECC, or in
the event they disagree, by any independent, qualified appraiser mutually
selected by Sweetheart and ECC (or by an arbitrator in the event either party
invokes the arbitration provisions set forth in Section 12.1 hereof). Unless
the Parties agree otherwise, if ECC timely elects such purchase option, (i)
ECC shall be required to purchase the Equipment "as is" and for a cash price
payable within 60 days after the fair market value of the Equipment is
finally determined, and (ii) assuming the purchase transaction closes,
Sweetheart shall transfer good and marketable title to the Equipment to ECC
free of all Liens except Permitted Liens (for which Sweetheart shall remain
responsible). If ECC does not timely elect to purchase the Equipment
following termination of the Sublicense Agreement, Sweetheart shall be free
to dispose of such Equipment in any manner it chooses.
(c) ECC shall be responsible for all applicable sales taxes
on the sale of any Equipment to ECC pursuant to this Section 11.6, and
Sweetheart shall allow ECC representatives reasonable access to inspect the
Equipment for purposes of determining whether ECC desires to exercise its
rights under this Section. This Section 11.6 shall not apply to any sale or
transfer by Sweetheart of the Equipment pursuant to a sale or transfer of all
or substantially all of its assets to another entity (whether by transfer of
assets, by merger of Sweetheart or pursuant to any reorganization in which
Sweetheart is not the surviving entity), provided that the transferee assumes
Sweetheart's rights and obligations under this Section 11.6.
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11.7 EFFECT OF TERMINATION. Upon the termination of this Agreement
pursuant to this Article XI, (a) the Sweetheart and ECC Preliminary Profit
Distributions, Equipment Profit Participation, Facility Participation,
Specified Infrastructure Enhancement Distribution, Excess Infrastructure
Enhancement Costs Amortization and Excess Investment in Equipment
Amortization shall cease to accrue following the date in which this Agreement
is scheduled to terminate (e.g., at the end of the notice period pursuant to
Section 11.4(a)(i) or (b)(i)), (b) any cash proceeds available upon or
following the termination of this Agreement, including any proceeds from the
collection of receivables or the sale of assets (other than the Equipment and
the Facility) shall be applied to discharge all expenses that reduce
Distributble Cash, (c) reserves for contingent liabilities shall be created
as reasonably determined by the Representatives, and (d) the balance of the
cash (including any funds ultimately released from reserves) shall be
distributed to the Parties in the manner and in the priority set forth in
Sections 7.1 or 7.2, as applicable. Following termination of this Agreement,
the Equipment shall be returned to ECC pursuant to Section 4.3 (unless
Sweetheart exercises the Purchase Right, if applicable, which transaction
shall be considered to have occurred following the return of the Equipment to
ECC), and the Facility shall be retained by Sweetheart free of any
obligations or restrictions under this Agreement.
ARTICLE XII.
GENERAL PROVISIONS
12.1. DISPUTE RESOLUTION.
(a) All claims, disputes, controversies and other matters in
question arising out of or relating to this Agreement, or to the alleged
breach hereof, which cannot be resolved by the Representatives shall be
settled by negotiation between the executives of Sweetheart and ECC. If such
executive negotiation is unsuccessful within ten business days, Sweetheart
and ECC shall submit the dispute to non-binding mediation with an independent
party mutually acceptable to Sweetheart and ECC (with the cost of the
mediation to be borne equally by Sweetheart and ECC). If Sweetheart and ECC
cannot mutually agree to a resolution within ten business days, either Party
may refer the dispute to binding arbitration in accordance with procedures
set forth in this Section 12.1. Without limiting the mandatory arbitration
provision set forth in this Section 12.1, each of Sweetheart and ECC (i)
waives the right to bring an action in any court of competent jurisdiction
with respect to any such claims, controversies and disputes (other than any
such action to enforce the award or other remedy resulting from any
arbitration pursuant to this Section 12.1), and (ii) waives the right to
trial by jury in any suit, action or other proceeding brought on, with
respect to or in connection with, this Agreement.
(b) Upon filing of a notice of demand for binding arbitration
by either Sweetheart or ECC, arbitration with the American Arbitration
Association, or comparable association if the American Arbitration
Association is no longer in existence, shall be commenced and conducted as
follows:
(i) All claims, disputes, controversies and other matters
in question shall be referred to and decided and settled by a standing
panel of three
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arbitrators, one selected by each of Sweetheart and ECC and the third by
the two arbitrators so selected. Selection of arbitrators shall be made
within thirty days after the date of the first notice of demand given
pursuant to this Section 12.1 and within thirty days after any resignation,
disability or other removal of such arbitrator. Following appointment,
each arbitrator shall remain a member of the standing panel, subject to
refusal for just cause or resignation or disability.
(ii) The cost of each arbitration proceeding, including
without limitation the arbitrators' compensation and expenses, meeting
room charges, court reporter transcript charges and similar expenses shall
be borne by the party whom the arbitrators determine has not prevailed in
such proceeding, or borne equally by Sweetheart and ECC if the arbitrators
determine that neither party has prevailed. The arbitrators shall also
award the party that prevails substantially in its pre-hearing position its
reasonable attorneys' fees and costs accrued in connection with the
arbitration. The arbitrators are specifically instructed to award
attorneys' fees for instances of abuse of the discovery process.
(iii) The sites of the arbitration shall be in Dallas, Texas,
unless Sweetheart and ECC agree otherwise.
(c) The arbitrators shall have the power and authority to,
and to the fullest extent practicable shall, abbreviate arbitration discovery
in a manner that is fair to Sweetheart and ECC in order to expedite the
conclusion of each alternative dispute resolution proceeding.
(d) The arbitration shall be governed by, and all rights and
obligations specifically enforceable under and pursuant to, the Federal
Arbitration Act (9 U.S.C. Section 1, et. seq.).
(e) The arbitrators are empowered to render an award of
general compensatory damages and equitable relief (including, without
limitation, injunctive relief), but are not empowered to award punitive
damages. The award rendered by the arbitrators (i) shall be final, (ii) shall
not constitute a basis for collateral estoppel as to any issue, and (iii)
shall not be subject to vacation or modification. The arbitrators shall
render any award or otherwise conclude the arbitration no later than 180 days
after the date notice is given pursuant to this Section 12.1.
12.2. FURTHER ASSURANCES. In connection with this Agreement, as
well as the transactions contemplated hereunder, each Party agrees to execute
and deliver such additional documents and instruments and to perform such
additional acts, as may be necessary or appropriate to effectuate, carry out
and perform all of the terms, provisions and conditions of this Agreement and
any such transactions. All approvals of either Party hereunder shall be in
writing.
12.3. AMENDMENTS. This Agreement (and any of the terms hereof) may
not be terminated, amended, supplemented, waived or modified orally, but only
by a document in
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writing signed by the Party against which the enforcement of the termination,
amendment, supplement, waiver or modification is sought.
12.4. NOTICES. All notices and other communications required or
permitted by the terms of this Agreement to be given to any Party shall be in
writing, and any notice shall become effective (i) five business days after
being deposited in the mails, certified or registered, with appropriate
postage prepaid for first class mail, or (ii) if delivered by hand or courier
or nationally recognized overnight service that provides for a signed
receipt, upon delivery, or, (iii) if delivered by facsimile, when received,
and in each case shall be directed to the address or facsimile number of such
Party set forth below, or at such other address or facsimile number as such
Party shall designate by like notice.
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If to ECC:
EarthShell Container Corporation
800 Miramonte Drive
Santa Barbara, CA 93109
Attention: Chief Executive Officer
Fax: (805) 897-3517
with a copy to:
Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: J. Nicholson Thomas
Telephone: (213) 229-7628
Fax: (213) 229-7520
If to Sweetheart:
Sweetheart Cup Company Inc.
10100 Reisterstown Road
Owings Mills, Maryland 21117
Attention: Vice President and General Counsel
Telephone: (410) 998-1815
Fax: (410) 998-1313
with a copy to:
Sweetheart Cup Company Inc.
10100 Reisterstown Road
Owings Mills, Maryland 21117
Attention: Vice President of Research & Engineering
Telephone: (410) 998-1270
Fax: (410) 998-1471
12.5. ENTIRE AGREEMENT. This Agreement, together with the
Sublicense Agreement and the Confidentiality Agreement and the schedules and
exhibits hereto and thereto, constitutes the entire agreement of the Parties
hereto or thereto with respect to the subject matter hereof or thereof and
supersedes all prior written and oral agreements and understandings with
respect to such subject matter.
12.6. SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
To the extent permitted by applicable law, the Parties waive any provision of
law that renders any provision hereof prohibited or
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unenforceable in any respect. Notwithstanding the foregoing, if any provision
is so prohibited or unenforceable, the Parties shall, to the extent lawful
and practicable, use their best efforts to enter into arrangements to
reinstate the intended benefits, net of the intended burdens, of such
provision.
12.7. 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 document.
12.8 GOVERNING LAW. This Agreement shall in all respects be governed
by and construed in accordance with the laws (excluding principles of conflict
of laws) of the State of Delaware applicable to agreements made and to be
performed entirely within such State, including all matters of construction,
validity and performance, except with respect to matters relating to real
property, as the laws of the state where the real property is located are
mandatorily applicable thereto.
12.9. ASSIGNMENT. Neither Sweetheart nor ECC may assign any of its
rights or obligations under this Agreement or the Ancillary Agreements
without the prior written approval of the other Party, provided that either
Party may (i) assign any or all of its rights and delegate any of its
obligations hereunder and thereunder to one or more of its Affiliates,
provided the assigning Party shall remain liable to perform its duties and
obligations hereunder and thereunder, (ii) assign its rights under this
Agreement to any lender as collateral security for providing financing for
the transactions contemplated hereby, or (iii) assign all of its rights and
delegate all of its duties hereunder and thereunder to any Person who
succeeds to all or substantially all of the Party's assets, provided the
transferee expressly agrees to assume all of the Party's duties and
obligations hereunder and thereunder.
12.10. SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of the Parties and their respective permitted successors and
assigns.
12.11. THIRD PARTY BENEFICIARIES. Except as expressly provided
herein, nothing in this Agreement shall be construed to give any Person
(other than the Parties and their permitted successors and assigns and any
Indemnified Party pursuant to Article X ) any legal or equitable right,
remedy or claim under or in respect of this Agreement or any covenants,
conditions or provisions contained herein or therein.
12.12. SPECIFIC PERFORMANCE. Sweetheart and ECC agree and
acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that, notwithstanding anything in
Section 12.1 to the contrary, either Sweetheart or ECC may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief in order to maintain the status
quo while the procedures set forth in Section 12.1 are pursued. Sweetheart
and ECC each agree that any proceeding contemplated hereby or any judgment
entered by any court in respect of any such suit, action or proceeding may be
brought in any federal or state court located in Los Angeles, California or
Baltimore, Maryland and Sweetheart and ECC each hereby submits to the
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. To the extent that service of process by mail is permitted by
applicable law,
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each Party irrevocably consents to the service of process in any such suit,
action or proceeding in such courts by the delivery of such process by hand,
at its address for process provided for in Section 12.5 hereof, and no such
service shall be effective until such delivery is made. Each Party
irrevocably agrees not to assert any objection which it may ever have to the
laying of venue of any such suit, action or proceeding in any federal or
state court located in Los Angeles, California or Baltimore, Maryland and any
claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum. Each Party waives any right to a
trial by jury.
12.13. DAMAGES. In any action for damages or enforcement of
indemnities relating to this Agreement, no Party, Affiliate of a Party or
beneficiary of an indemnity hereunder shall be entitled to receive punitive
damages.
12.14. WAIVERS. No failure or delay of any Party in exercising any
power or right under this Agreement shall operate as a waiver hereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power.
12.15. CUMULATIVE RIGHTS AND REMEDIES. The provisions and remedies
in this Agreement regarding termination and indemnification are cumulative
and shall not limit the rights and remedies of the Parties under applicable
law.
12.16. EXPENSES. Except as otherwise set forth in this Agreement,
each Party shall be responsible for its own expenses (including attorneys'
and accountants' fees) in connection with the negotiation and execution of
this Agreement, the Ancillary Agreements, the performance of its obligations
hereunder and thereunder, and the consummation of the transactions
contemplated hereby and thereby.
12.17. TABLE OF CONTENTS; HEADINGS. The table of contents and
headings of the articles, sections and other subdivisions of this Agreement
and the Exhibits are for convenience of reference only and shall not modify,
define or limit any of the terms or provisions of this Agreement or the
Exhibits.
12.18. CONSTRUCTION. Where specific language is used to clarify by
example a general statement contained herein, such specific language shall
not be deemed to modify, limit or restrict in any manner the construction of
the general statement to which it relates. The word "including" shall mean
including, without limitation. The language used in this Agreement shall be
deemed to be the language chosen by both Sweetheart and ECC to express their
mutual intent, and no rule of strict construction shall be applied against
any Party. Any pronouns in this Agreement relating to the male gender also
apply to the female and neuter genders unless the context clearly requires a
contrary interpretation. References to a Person are also to its successors
and assigns and references to any statute are also to all rules, regulations
and orders promulgated thereunder. All accounting terms not defined in this
Agreement shall have the meanings determined by generally accepted accounting
principles. As used in this Agreement, the term "knowledge," when used with
reference to
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any corporation or other entity, shall encompass the knowledge of each
officer and each director of such entity.
12.19. CONFLICT. In the event that this Agreement conflicts in any
way with an Ancillary Agreement, the provisions of this Agreement shall
govern.
12.20. FORCE MAJEURE. The failure of either Party to perform its
obligations under this Agreement shall not subject such Party to any
liability to the other or subject this Agreement to termination if such
failure is caused by a Force Majeure Event. The Party so affected shall
promptly notify the other Party of the Force Majeure Event, and shall use all
commercially reasonable efforts to remove such event as soon as reasonably
practical.
12.21. NO CREATION OF LEGAL ENTITY. The Parties agree that, for
accounting purposes, the provision of Equipment by ECC to Sweetheart pursuant
to this Agreement shall be considered a capital lease. For income tax
purposes only, the economic arrangement embodied in this Agreement shall be
treated as a partnership consistent with applicable tax law and the Parties
shall separately negotiate the provisions relevant to such treatment,
including the allocations of taxable income or loss, tax return preparation
and review, response to tax controversies, and tax elections. If Sweetheart
is advised by its outside legal counsel that the treatment of the Principal
Activity as a partnership for income tax purposes would violate the terms of
the Indenture, the Parties will cooperate with each other to the fullest
extent possible to restructure this Agreement so that the Principal Activity
and the other transactions contemplated under this Agreement (i) shall not
cause Sweetheart to violate the terms of its Indenture, and (ii) shall enable
EarthShell to report the distributions it receives under Sections 7.1 and 7.2
as business profits for purposes of the personal holding company tax
provisions; provided, however, no such restructuring shall alter in any
material way the basic economic rights or obligations of the Parties as
embodied in this Agreement. Sweetheart and ECC each hereby acknowledge and
agree that, notwithstanding the Parties' intentions that the Principal
Activity be treated as a partnership for income tax purposes, the Parties do
not intend to create a partnership or joint venture for state law purposes
and therefore do not intend this arrangement to be governed by the Uniform
Partnership Act or any similar judicial document. Sweetheart and ECC each
hereby acknowledge and agree that neither Party has the right to bind the
other Party except as explicitly set forth herein. The Parties agree that
they shall not represent to any third party that this Agreement creates a
separate legal entity, partnership or joint venture under any applicable
state law and shall not treat this Agreement as a partnership or similar
entity for any purpose other than income tax purposes. ECC acknowledges and
agrees that it has no legal or beneficial title or similar right to any
property utilized in the Principal Activity other than the Equipment and the
Licensed Technology (as defined in the Sublicense Agreement).
12.22. WAIVER OF RIGHTS OF PARTITION AND DISSOLUTION. Sweetheart and
ECC each hereby waive all rights it may have at any time to maintain any
action for partition or sale of any of the assets in connection with the
Principal Activity as now or hereafter permitted under applicable law.
Sweetheart and ECC each hereby waives rights to seek a court decree of
dissolution or to seek the appointment of a court receiver in connection with
the Principal Activity as now or hereafter permitted under applicable law.
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12.23. SURVIVAL OF RIGHTS, DUTIES AND OBLIGATIONS. To the extent the
terms of this Agreement provide for rights, interests, duties, claims,
undertakings and obligations subsequent to the termination or expiration of
this Agreement, such terms shall survive such termination or expiration. The
Parties' rights, duties and obligations under Articles IV, IX and XI and
Section 12.1 shall survive the termination of this Agreement. Except as
otherwise provided in Article X, the indemnification obligations set forth in
Article X shall survive for a three year period following termination of this
Agreement, provided that the obligation of the Parties to provide
indemnification shall continue in effect indefinitely as to any claim that
has been submitted in writing to the indemnifying Party prior to the date on
which the Indemnity to such claim relates shall have expired and identified
in writing as a claim for indemnification pursuant to Article X.
12.24. PUBLICITY. So long as this Agreement is in effect, neither
ECC nor Sweetheart shall issue or cause the publication of any press release
or other public announcement with respect to the transactions contemplated by
this Agreement without the consent of the other. Nothing in this Section
12.24 shall apply to (i) any communications from any Party to this Agreement
to any existing or prospective customer of such Party, including any
advertising by such Party, in the ordinary course of business, (ii) any
responses given by such Party to any inquiries made by securities analysts or
members of the financial press, or (iii) releases or announcements required
by law or the rules or regulations of any securities exchange, in which event
the Party issuing the communication, response, release or announcement shall
give the other Party, to the extent practicable, reasonable time to comment
on such item in advance of its issuance.
IN WITNESS WHEREOF, this Agreement has been executed by each of the
Parties as of the Effective Date.
EARTHSHELL CONTAINER
CORPORATION,
a Delaware corporation
By: /s/ Simon K. Hodson
----------------------------
Its:
----------------------------
SWEETHEART CUP COMPANY INC.,
a Delaware corporation
By: /s/ Daniel Carson
----------------------------
Its:
----------------------------
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EXHIBIT 10.33
LEASE AGREEMENT - COMMERCIAL BUILDING
In consideration of the rents and covenants hereinafter set forth, LESSOR
hereby leases to LESSEE and LESSEE hereby leases from LESSOR, the following
described Premises upon the following terms and conditions:
ARTICLE 1
GENERAL LEASE PROVISIONS
1.1 COMMENCEMENT DATE/INITIAL LEASE TERM: A term of seven (7) months,
commencing on February 1, 1997 (the "Commencement Date") and ending on August
31, 1997, thereafter continuing on a month to month basis.
1.2 LESSOR: PDG, Ltd., A California Limited Partnership.
1.3 LESSEE: EarthShell Container Corporation.
1.4 PREMISES: That industrial space identified as the southwestern portion
of 500 South Fairview Avenue, located in the unincorporated area of Goleis,
County of Santa Barbara, State of California, consisting of approximately
24,000 leasable square feet in (1) a building consisting of approximately
108,000 leasable square feet; and (2) a separate building consisting of
approximately 2,500 square feet known as the former gas station. The Premises
refers to the approximately 24,000 square foot leased area rather than the
entire 108,000 square foot building.
1.5 MINIMUM MONTHLY RENT: Fourteen Thousand Four Hundred Dollars ($14,400)
per month is payable on the first day of each month for the term of this
Lease, subject to rent adjustments as specified hereinafter:
1.6 PERMITTED LIENS: Warehousing, production and other related legal uses.
1.7 ADDRESSES FOR NOTICES:
To LESSOR: To LESSEE:
PDG Limited Mr. Richard K. Huirne
c/o Pacifica Property Management Co. EarthShell Container Corporation
1033 Anacapa Street 900 Miramonte Drive
Santa Barbara, CA 93101 Santa Barbara, CA 93109-1419
1.8 INITIAL SECURITY DEPOSIT: None
1.9 PREPAID RENT DEPOSIT: Fourteen Thousand Four Hundred Dollars
($14,400.00) for the month of February 1 - 28, 1997.
1.10 UTILITIES/SERVICES: LESSEE shall pay 100% of the following items
supplied to the Premises:
Electricity LESSEE Gas LESSEE Water/Sewer LESSEE
Janitorial (Interior) LESSEE
HVAC Maintenance LESSEE Trash LESSEE Security/Alarm LESSEE
1.11 LATE CHARGE: A late charge of Eight Hundred Sixty-Four Dollars ($864.00)
shall apply to all delinquent payments.
The General Lease Provisions specified above are subject to the terms
and conditions more fully set forth in subsequent articles. In the event of
any conflict between the General Lease Provisions specified above and the
balance of the Lease, the latter shall control.
ARTICLE 2
EXHIBITS
The following Exhibit is incorporated into this Lease: None
ARTICLE 3
PREMISES
3.1 DESCRIPTION: LESSOR hereby leases to LESSEE and LESSEE hereby leases
from LESSOR, as of the Commencement Date specified in Article 1.1, at the
rental rate and upon the terms and conditions hereinafter set forth, the
commercial space referred to in Article 1.5, hereinafter referred to as the
"Premises". The parties acknowledge that the figures represent a fair and
reasonable approximation of the square footage of the Premises and agree to
be bound by these stipulations for purposes of determining charges based upon
square footage as may be required herein. In reliance on this stipulation,
this agreement is entered into as to all other particulars.
3.2 PARKING FACILITIES: Any parking spaces provided by LESSOR in or about
the building or Premises are reserved and restricted as to their use. LESSOR
shall have the right to establish and enforce reasonable rules and
regulations concerning the use of the parking area, and LESSEE, its
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employees and customers will not park in the parking areas of the building
except in those areas, if any, specifically designated in writing by LESSOR.
3.3 RIGHT OF FIRST REFUSAL TO LEASE ADJACENT SPACE: LESSOR grants to LESSEE
a right of first refusal to lease adjacent space. By delivering to LESSEE a
written Intent To Lease, LESSOR shall notify LESSEE of serious interest to
lease other space in the building. For a period of three (3) business days
after receipt by LESSEE of an Intent to Lease, LESSEE shall have the right to
give written notice to LESSOR of LESSEE's exercise of LESSEE's right to lease
additional space in the building on the same terms and conditions as set
forth in the Intent to Lease. In the event that LESSOR does not receive
written notice of LESSEE's exercise of the right grant herein within said
three (3) day period, there shall be a conclusive presumption that LESSEE has
elected not to exercise LESSEE's right hereunder, and LESSOR may lease the
balance of the building to another party.
ARTICLE 4
TERM
4.1 INITIAL TERM: The initial term of this Lease shall begin on the
Commencement Date specified in Article 1.1. Subject to extension or sooner
termination as herein provided, this Lease shall continue for the initial
term specified in Article 1.1.
4.2 DELAY IN COMMENCEMENT: If for any reason LESSOR cannot deliver
possession of the Premises to LESSEE on the Commencement Date specified in
this Lease, this Lease shall not be void or voidable, nor shall LESSOR be
liable to LESSEE for any loss or damage resulting therefrom. The term of this
Lease shall not be extended by such delay; provided, however, that if LESSOR
is unable to deliver possession of the leased Premises to LESSEE within
thirty (30) days after the Commencement Date, either LESSEE or LESSOR may
terminate this Lease by giving ten (10) days' notice of such election, and
thereupon both parties hereto shall be relieved and discharged of all further
liability hereunder.
4.3 EARLY OCCUPANCY: If LESSEE is permitted by LESSOR to occupy the Premises
prior to the Commencement Date, LESSEE'S occupancy shall be subject to all
the provisions of this Lease. Early occupancy of the property shall not
advance the expiration date of this Lease. LESSEE shall pay, in advance, the
prorated minimum monthly rent for such partial month occupied and such other
prorated charges as specified in this Lease to be paid by LESSEE that are
attributed to the early occupancy period, and LESSEE shall further maintain
the insurance hereinafter required.
4.4 SURRENDER OF PREMISES/HOLDING OVER: LESSEE will surrender possession of
the Premises to the LESSOR at the expiration of the initial Lease term or
earlier termination of this Lease. LESSEE shall be liable for, and reimburse
LESSOR for, and indemnify LESSOR against, all damages incurred by LESSOR by
any delay of LESSEE in vacating the Premises as required under this Lease. If
LESSEE does not vacate the Premises upon expiration or earlier termination of
the Lease, and LESSOR thereafter accepts rent from LESSEE, LESSEE'S occupancy
of the Premises shall be a month-to-month tenancy, subject to all terms of
this Lease which can reasonably be applied to a month-to-month tenancy.
LESSEE acknowledges that LESSOR is under contract to sell the entire property
underlying the Premises and the adjacent parcel, and it may be the intention
of the buyer to demolish all of the existing improvements for redevelopment
of the land for shopping center purposes. LESSOR will notify LESSEE ninety
(90) days in advance of the close of escrow, and if the buyer desires that
LESSEE vacate the Premises, then LESSEE agrees to do so within said ninety
(90) days. Failure to vacate shall constitute an unlawful holdover of the
month to month occupancy, and the LESSOR shall be subject to substantial
damage should LESSEE not vacate within said ninety (90) days.
ARTICLE 5
MINIMUM MONTHLY RENTAL/DEPOSIT
5.1 MINIMUM MONTHLY RENTAL: LESSEE agrees to pay as a minimum monthly rent
the sum of Fourteen Thousand Four Hundred Dollars ($14,400.00).
5.2 PREPAID DEPOSITS: LESSEE shall pay to LESSOR upon the execution of this
Lease, prepaid rent in the amount as determined in Article 1.9, which amount
shall be allocated towards the payment of the minimum rent for the first
month specified in Article 1.1.
5.3 TIME AND MANNER OF PAYMENT: LESSEE agrees that all rent payable by
LESSEE herein shall be paid by LESSEE no later than the close of business on
the day which it is due, as specified in Article 1.5, without deduction,
set-off, prior notice or demand. Rent shall be payable at LESSOR'S address
specified in Article 1.7 or such other place as LESSOR may designate in
writing.
5.4 SECURITY DEPOSIT. LESSEE shall deposit with LESSOR upon execution of
this Lease, the amount specified in Article 1.8, as a security deposit for
performance by LESSEE of its obligations under this Lease. LESSEE agrees that
if LESSEE defaults in its performance of this Lease, or in the payment of any
sums owing to LESSOR, then LESSOR may, but shall not be obligated, to use the
security deposit or a portion thereof to cure such default or to compensate
LESSOR for any damage, including late charges, sustained by LESSOR and
resulting from LESSEE'S default. Immediately upon demand by LESSOR, LESSEE
shall pay to LESSOR an amount equal to the portion of the security deposit
so expended or applied by LESSOR as provided herein, in order to maintain a
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security deposit in the original amount initially deposited with LESSOR. If
LESSEE is not in default at the expiration or termination of this Lease,
LESSOR shall return the unexpended portion of the security deposit to LESSEE,
without interest. LESSOR'S obligation with respect to the security deposit
shall be that of a debtor and not of a trustee. LESSOR shall be entitled to
commingle the security deposit with the general funds of LESSOR. LESSEE
acknowledges that the security deposit is not to be applied to LESSEE'S last
month's rent.
ARTICLE 6
ADDITIONAL RENT
6.1 ADDITIONAL RENT: LESSEE agrees that unless this Lease otherwise
provides, all additional rents shall be paid with the minimum monthly rent
at the time and manner specified in Article 5.3.
ARTICLE 7
POSSESSION AND USE
7.1 PERMITTED USES: LESSEE agrees that the Premises shall be used and
occupied only for the purpose specified in Article 1.6, and for no other
purpose or purposes, without LESSOR'S prior written consent.
7.2 MANNER OF USE: LESSEE shall not cause or permit the Premises or
property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, or which annoys or interferes
with the rights of other lessees of the building or property in which the
Premises are located or adjacent thereto, or to otherwise commit a nuisance
or waste on or about the Premises.
7.3 CONTINUOUS OPERATION: Not Applicable.
7.4 COMPLIANCE WITH LAW: LESSEE shall, at LESSEE'S sole cost and expense,
comply with all of the regulations, requirements, ordinances and statutes of
all Municipal, State and Federal authorities now in force or which may
hereafter be in force, which pertain to the leased Premises and the use and
occupancy thereof by LESSEE.
7.5 INSURANCE HAZARDS: LESSEE shall neither engage in, nor permit others to
engage in, any activity or conduct that will cause the cancellation of, or
increase in premium for, any insurance maintained by LESSOR, and will pay any
increase in insurance premiums attributable to LESSEE'S particular use of the
leased Premises. LESSEE shall, at LESSEE'S sole expense, comply with all
requirements of any insurance organization or company pertaining to the use
of the Premises necessary for the maintenance of reasonable fire and public
liability insurance covering the building.
7.6 LESSEE'S WARRANTY ON USE OF PREMISES: LESSEE specifically warrants and
represents that it has fully investigated the leased Premises and determined
through such investigation that said Premises are usable by LESSEE, and has
further determined what fees and licenses may be imposed or required for such
use. In view of such investigation, and in consideration of the leasing of
the Premises by LESSOR to LESSEE, LESSEE hereby expressly acknowledges and
agrees that neither LESSOR, its leasing agents, employees or representatives
have made any warranty with reference to the ability of LESSEE to use the
Premises in a manner intended by LESSEE or what fees or licenses, if any
required, might be imposed or required of LESSEE for such use. LESSEE
expressly agrees to hold LESSOR, its leasing agents, employees and
representatives free and harmless from any and all claims, causes of action,
or liability arising or resulting from the inability of LESSEE to use the
Premises in a manner intended, whether such inability arises as a result of
any restriction of law, ordinance or statute enacted by any public agency,
entity, or for any reason whatsoever. LESSEE shall defend and hold harmless
LESSOR, its leasing agents, employees and representatives from any cost and
expense of defending any such adverse claim, including, but not limited to,
attorneys' fees and court costs incurred in connection with such defense.
LESSEE shall further pay any fees and charges as might be imposed for such
use.
7.7 NEGATION OF PARTNERSHIP/JOINT VENTURE: Nothing in this Lease is
intended, and no provision of this Lease shall be construed, to make LESSOR a
partner of, nor a joint venturer with LESSEE, or associated in any other way
with LESSEE in the operation of the leased Premises, or to subject the LESSOR
to any obligation, loss, charge or expense resulting from or attributable to
LESSEE'S operation or use of the Premises.
7.8 USE OF OTHER SPACE: LESSOR and LESSEE acknowledge that LESSOR will
continue to market the balance of the building in an effort to lease the
vacant space to other tenants. LESSOR shall ensure that the new tenant's
premises are securely demised so as not to interfere with LESSEE's
operations. LESSEE agrees to cooperate and work with LESSOR should LESSOR
produce said other tenants for the remaining vacant space.
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ARTICLE 8
UTILITIES
8.1 LESSEE'S OBLIGATION TO PAY: Except as may otherwise be provided in
Article 1.10, LESSEE shall make all arrangements for and shall pay the
charges when due for water, gas and heat, light, power, telephone service,
trash collection and all other sources of utilities supplied to the Premises
during the entire term of this Lease, and shall promptly pay all connection
and termination charges therefor. If the utilities are not separately
metered for the leased Premises, LESSEE shall pay its proportionate share of
the costs as reasonably determined by LESSOR in his discretion, or the
increased costs incurred by the LESSOR causing utility services to be
furnished to the building of which the leased Premises are a part, at the
time and manner provided for payment of rent in this Lease, unless such
Article 1.10 shall require LESSOR to furnish such utilities at the sole cost
and expense of LESSOR.
8.2 SUSPENSION OF SERVICES: The suspension and interruption in utility
services to the Premises for reasons beyond the control of LESSOR shall not
constitute a default by LESSOR or entitle LESSEE to any reduction or
abatement of rent.
ARTICLE 9
INDEMNITY AND INSURANCE
9.1 INDEMNITY BY LESSEE: LESSEE covenants with LESSOR that LESSOR, his
agents, servants, employees and property managers shall not be liable for any
damage or liability of any kind for any injury to or death of persons, or
for any damage to property of LESSEE or of any other persons occurring from
and after the Commencement Date of this Lease, arising from any cause
whatsoever by reason of construction, use, occupancy or enjoyment of the
Premises by LESSEE or any other person thereon; provided, however, LESSEE
shall not be liable for any damage, liability, injury or death occasioned by
the negligence or willful acts of LESSOR or its designated agents, servants
or employees, unless covered by insurance LESSEE is required to provide.
9.1.1 LESSEE shall indemnify, defend and hold LESSOR harmless from all
liability whatsoever on account of any such real or claimed damage,
liability, injury or death from all liens, claims, and demands arising out of
construction, use, occupancy or enjoyment of the Premises and its facilities,
and from any repairs, alterations or improvements which LESSEE may make or
cause to be made upon said Premises, whether such claims are made by guests,
invitees, employees, agents, unrelated third parties, and other reasonable
costs, expenses and liabilities incurred from the first notice to LESSOR that
any claim or demand is to be made or may be made.
9.1.2 LESSEE shall at all times occupy the Premises as specified in Article
7.2 and make sufficient use thereof so that LESSOR'S insurer shall not rate
the Premises as "vacant" and require a surcharge on the fire and extended
coverage insurance premium on account of such vacancy.
9.2.1 LESSEE'S INSURANCE OBLIGATION: From and after the Commencement Date of
the Lease, as provided for in Article 1.1, LESSEE shall carry and maintain at
its sole cost and expense, the following types of insurance, and in the
amount specified and in the form hereinafter provided;
1. PUBLIC LIABILITY AND PROPERTY DAMAGE: Bodily injury and property
damage liability insurance with coverage limits of not less than Two Million
Dollars ($2,000,000) combined for each occurrence and in the aggregate
insuring against any and all liability of the insured (LESSOR and LESSEE)
with respect to said Premises or arising out of the maintenance, use or
occupancy thereof. All such bodily injury liability insurance shall
specifically insure the performance by LESSEE of the indemnity agreement as
to the liability for injury to or death of persons and damage of property as
is more specifically provided for in Article 9.
2. LESSEE IMPROVEMENTS: Insurance covering LESSEE'S trade fixtures,
merchandise and personal property on or upon the Premises, in an amount not
less than ninety percent (90%) of their full replacement cost as they appear
from time-to-time during the term of this Lease, providing protection against
any peril included within the classification "all risk". Any policy proceeds
shall be used for the repair or replacement of the property damaged or
destroyed, unless this Lease shall cease and terminate under Article 16.
9.3 LESSOR'S INSURANCE OBLIGATION: LESSOR shall maintain casualty insurance
on the building in which the leased Premises are situated, in an amount not
less than ninety percent (90%) of the full replacement costs as they appear
from time-to-time during the term of this Lease, providing protection against
any peril included within the classification "all risk", and public liability
insurance on not less than the amount required to be carried by LESSEE.
9.4 MUTUAL WAIVER OF SUBROGATION RIGHTS: LESSOR and LESSEE hereby waive any
rights each may have against the other on account of any loss or damage
suffered by LESSOR or LESSEE, as the case may be, to their respective
property, the Premises, its contents or to other portions of the building
arising from any risk generally covered by "all risk" insurance; and the
parties each, on behalf of their respective insurance companies insuring the
property of either LESSOR or LESSEE against any such loss, waive any right of
subrogation that either may have against the other, as the case may be.
LESSEE on behalf of its insurance companies insuring the Premises, its
contents, LESSEE'S other property or other portions of the building, waives
any right of subrogation which
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such insurer or insurers may have against any of the parties to this Lease
Agreement. The foregoing waiver of subrogation shall be offered only so long
as no such policy carried by LESSOR will be invalidated thereby.
9.5 INDEMNITY BY LESSOR: LESSOR agrees to indemnify, defend and hold harmless
LESSEE from and against any and all claims, demands, actions, cause of
action, or liabilities of whatever kind or nature arising out of or in any way
related to (1.) the existence of hazardous materials on, under or about the
Premises at the commencement of this Lease or otherwise not attributable to
LESSEE's use of the Premises; and (2.) the negligence or willful acts of
LESSOR or its designated agents, servants or employees.
ARTICLE 10
LESSEE'S PERSONAL PROPERTY
10.1 INSTALLATION OF PROPERTY: LESSOR shall have no interest in any movable
equipment, furniture or trade fixtures owned by LESSEE, or installed in or
upon the leased Premises solely at the cost and expense of LESSEE. Prior to
creating or permitting the creation of any lien or security or reversionary
interest in any removable personal property to be placed in or about the
leased Premises, LESSEE shall obtain written agreement of the party holding
such interest to make such repairs necessitated by the removal of such
property and any damages resulting therefrom as may be necessary to restore
the leased Premises to the condition upon lease commencement excepting only
reasonable wear and tear, in the event said property is thereafter removed
from the leased Premises by said party, or by any agent or representative
thereof or purchaser thereof, pursuant to the exercise or enforcement of any
rights incident to the interests created, without any cost or expense to
LESSOR.
10.2 REMOVAL OF PERSONAL PROPERTY: LESSEE shall have the right to remove, at
its own cost and expense upon the expiration of this Lease, all removable
equipment, furniture or trade fixtures owned by or installed at the expense
of LESSEE on the leased Premises during the term of this Lease. All such
personal property shall be removed prior to the close of business on the last
day of the Lease term and LESSEE shall make such repairs necessitated by the
removal of said property and any damage resulting therefrom as may be
necessary to restore the leased Premises to good condition and repair,
excepting only reasonable wear and tear. Any such property not so removed
shall be deemed to be abandoned or, at the option of LESSOR, shall be removed
and placed in storage for the account, cost and expense of LESSEE.
ARTICLE 11
ALTERATIONS/LIENS
11.1 CHANGES BY LESSEE: Any alterations, additions, improvements or changes,
including any remodeling, painting or redecorating that LESSEE may desire to
make in, to, or upon the leased Premises, shall be made at LESSEE'S sole cost
and expense, and only after first submitting the plans and specifications
therefore to LESSOR, and obtaining the consent of LESSOR thereto in writing.
Any such alterations or improvements shall at once become a part of the
leased Premises, and, unless LESSOR exercises its option to require LESSEE
to remove any alterations that LESSEE has made to the Premises, shall be
surrendered to LESSOR upon expiration or sooner termination of this Lease.
11.2 NOTICE OF NONRESPONSIBILITY: LESSOR or its representatives shall have
the right to go upon and inspect the Premises at all reasonable times. LESSOR
shall have the right to post and keep posted thereon notices of
nonresponsibility or such other notices which LESSOR may deem to be proper
for the protection of LESSOR'S interest in the Premises. LESSEE shall, before
the commencement of any work which might result in any such lien, give to
LESSOR written notice of its intention to do so and sufficient time to enable
the posting of such notice.
ARTICLE 12
REPAIRS/MAINTENANCE
12.1 CONDITION OF THE PREMISES: By entry hereunder, LESSEE acknowledges it has
conducted an investigation of the Premises and accepts the Premises as being
in acceptable condition for LESSEE's proposed use. LESSEE accepts the
Premises in "as-is" condition.
12.2 LESSOR'S MAINTENANCE: The LESSOR shall have no obligations to maintain
any part of the building or Premises.
12.3 LESSEE'S MAINTENANCE: LESSEE agrees, at its own costs and expense, as
follows:
1. To maintain throughout the Lease term in at least the condition in which
it was in upon commencement of this Lease, all portions of the leased
Premises and property on which it is located, including, without limitation:
a. The interior of the leased Premises, including flooring, exposed
plumbing and wiring, and paint and finish;
b. Any windows or sky lights and doors (including the entrance
doors) contained within the Premises as described in Article 3.1;
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c. Any personal property situated in or on the Premises; and
d. Any heating, ventilation or air conditioning equipment used by
LESSEE.
2. To notify LESSOR promptly of any damage to the leased Premises
resulting from or attributable to the acts or omissions of LESSEE, its
invitees or authorized representatives, and thereafter, promptly to repair
all such damage as provided for herein.
ARTICLE 13
MECHANICS LIENS
13.1 LESSEE'S COVENANTS: LESSEE agrees that it will pay or cause to be paid,
all costs for work done by LESSEE or caused to be done by LESSEE on the
Premises, and LESSEE will keep the Premises free and clear of all mechanics
liens and other liens on account of work done by LESSEE or persons claimed
under LESSEE. LESSEE shall indemnify, defend and hold LESSOR harmless from
any and all liability, costs, damages, attorneys' fees and other expenses,
on account of a claim of lien of laborers or materialmen or others for work
performed or material supplied or furnished to LESSEE or persons claimed
under LESSEE.
ARTICLE 14
DAMAGE OR DESTRUCTION
14.1 ABATEMENT OF RENT: Should the leased Premises be damaged or destroyed
during any time of this Lease, there shall be an abatement or reduction of
the minimum monthly rent between the date of the destruction and the date of
restoration, based upon the extent of which the destruction interferes with
the LESSEE'S use of the leased Premises. Because of the short-term nature of
this lease, LESSEE shall not have any responsibility to repair or restore the
damaged Premises.
ARTICLE 15
ASSIGNING, SUBLETTING AND HYPOTHECATING
15.1 ASSIGNMENT AND SUBLETTING: LESSEE shall not sublet or assign this
Lease, or any part hereof or interest therein, or grant any rights hereunder,
without first obtaining the prior written consent of the LESSOR. Such consent
cannot be unreasonably withheld.
ARTICLE 16
DEFAULT BY LESSEE; LESSOR REMEDIES
16.1 INSOLVENCY OF LESSEE: If, during the term of the Lease, the LESSEE
shall:
1. Make an assignment for benefit of creditors; or
2. Have a voluntary or involuntary Petition filed by or against the
LESSEE under any law having for its purpose the adjudication of the LESSEE as
bankrupt or the extension of time of payment, composition, adjustment,
modification, settlement or satisfaction of the liabilities of the LESSEE, or
to which any property of the LESSEE may be subject and, if the Petition be
involuntary, if said Petition be granted; or
3. Have a receiver appointed for LESSEE by reason of the insolvency or
alleged insolvency of the LESSEE, and said receiver is not discharged within
ten (10) days or upon the hearing of a timely filed petition to dismiss,
absolve or otherwise terminate the receivership, which ever shall occur
later; or
4. Suffer any department of the State or Federal government or any
officer thereof duly authorized to take possession of the leased Premises and
the Improvements thereon by reason of the insolvency of the LESSEE, and the
taking of possession shall be followed by a legal adjudication of the
insolvency, bankruptcy or receivership of LESSEE; then upon the occurrence of
any such contingency, LESSOR shall be entitled to terminate this Lease for
any breach thereof by LESSEE by giving written notice of the termination to
LESSEE; and upon the giving of such notice, this Lease shall be terminated
and the same shall expire as fully and completely as if the day of such
notice were the date herein specifically fixed for the expiration of the term
of this Lease. The LESSEE will then quit and surrender the leased Premises
and the Improvements thereof to LESSOR, but the LESSEE shall remain liable as
hereinafter provided.
16.2 BREACH OF COVENANT; ABANDONMENT: If, during the term of this Lease,
LESSEE: (a) shall default in fulfilling any of the covenants or conditions of
this Lease (other than the covenant for the payment of rent or other monies
payable by LESSEE hereinunder, or with reference to the commission of a
nuisance or waste on the Premises); or (b) shall abandon or vacate the
leased Premises, LESSOR shall give to the LESSEE written notice as required
by the Code of Civil Procedure Section 1161 of such default or the
happening of such contingency, except that said statutory notice shall be
changed from a 3-Day Notice to a 10-Day Notice. If, at the expiration of ten
(10) days after service of such notice, the default or contingency upon
which said notice was based shall continue to exist, or in the case of a
default or a contingency which cannot with due diligence be
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cured within a period of ten (10) days, if the LESSEE fails to proceed
promptly after the service of such notice to prosecute the curing of such
default with all due diligence within a reasonable period of time, LESSOR may
terminate this Lease per said notice. Upon such termination, the LESSEE shall
quit and surrender the leased Premises and the improvements thereon to the
LESSOR, but the LESSEE shall remain liable as hereinafter provided.
16.3 FAILURE TO PAY RENT OR OTHER CHARGES: If the LESSEE shall default in
the payment of the minimum rent expressly reserved hereunder or any part of
the same, or shall default in the payment of any other rent or other charges
required to be paid by the LESSEE hereunder or any part of the same, and such
default shall continue for a period of three (3) days after written notice
thereof by LESSOR, as required by the Code of Civil Procedure Section 1161,
the LESSOR may terminate this Lease per said notice. Upon such termination,
the LESSEE shall quit and deliver the leased Premises and the improvements
thereon to the LESSOR, but the LESSEE shall be liable as hereinafter provided.
16.4 LESSOR'S DAMAGES: If LESSEE breaches this Lease and abandons the
Premises before the end of the term, or if LESSEE'S right of possession is
terminated by LESSOR because of a breach of this Lease pursuant to any of the
foregoing provisions of this Article or otherwise, then in any such case
LESSOR may recover from LESSEE all the damages suffered by LESSOR as a result
of LESSEE'S failure to perform LESSEE'S obligations hereunder, including, but
not restricted to, the worth at the time of the award (computed in accordance
with paragraph (b) of Section 1951.2 of the California Civil Code) of the
amount by which the rent then unpaid hereunder for the balance of the term
exceeds the amount of such rental loss for the same period which the LESSEE
proves could be reasonably avoided by LESSOR. Although LESSEE breaches this
Lease and abandons the property, the Lease shall continue in effect for so
long as LESSOR does not terminate the LESSEE'S right to possession and the
LESSOR may enforce all of the rights and remedies under this Lease, including
the right to recover rent as it becomes due under the Lease (in accordance
with paragraph (b) of Section 1951.4 of the California Civil Code). Nothing
contained herein shall diminish or take away the right of the LESSOR to seek
and obtain such equitable relief against LESSEE as may be appropriate.
16.5 LATE CHARGES: LESSEE'S failure to pay rent promptly may cause LESSOR to
incur unanticipated costs. The exact amount of such costs are impractical or
extremely difficult to ascertain. Such costs may include, but are not
limited to, processing and accounting charges and late charges which may be
imposed on LESSOR by any ground lease, mortgage or trust deed encumbering the
property. Therefore, if LESSOR does not receive any rent payment within five
(5) days after it is due, LESSEE shall pay LESSOR a late charge as specified
in Article 1.13. The parties agree that such late charges represent a fair and
reasonable estimate of the costs LESSOR will incur by reason of such late
payments. Said late charge shall become due and payable without further
demand by LESSOR. The payment of a late charge shall not excuse or cure a
default by LESSEE under this Lease.
16.6 INTEREST ON PAST DUE OBLIGATIONS: Any amount owed by LESSEE to LESSOR,
which is not paid when due, shall bear interest at the rate of 10% per annum
from the date due of such amount. However, interest shall not be payable on
late charges to be paid by LESSEE under this Lease. The payment of interest
on such amount shall not excuse or cure any default by LESSEE under this
Lease. If the interest rate specified in this Lease is lower than the rate
permitted by law, then the interest rate is hereby agreed to be the maximum
legal interest rate permitted by law.
16.7 REMEDIES NOT EXCLUSIVE: In addition to the rights hereinbefore given in
case of LESSEE'S breach or default, LESSOR may pursue any other remedy
available to LESSOR at law or in equity.
16.8 LESSOR'S RIGHT TO CURE DEFAULT: At any time after LESSEE commits a
default in the performance of any obligation by LESSEE under this Lease,
LESSOR shall be entitled to cure such default, or to cause such default to be
cured at the sole cost and expense of LESSEE. If by reason of any default by
LESSEE, LESSOR incurs any expenses or pays any sums or performs any act
requiring LESSOR to incur any expense or pay any sum, including reasonable
fees and expenses paid or incurred by LESSOR in order to prepare and post or
deliver any notice permitted or required by the provisions of this Lease, or
otherwise permitted or contemplated by law, then the amount so paid by or
incurred by LESSOR shall be immediately due and payable to LESSOR by LESSEE
as additional rent. LESSEE hereby authorizes LESSOR to deduct said sums from
any security deposit held by LESSOR, if LESSOR so elects, at LESSOR'S sole
option. If there is no security deposit, or if LESSOR elects not to use any
such security deposit, then such sum shall be paid by LESSEE immediately upon
demand by LESSOR.
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ARTICLE 17
LESSOR'S MANAGEMENT OF THE BUILDING
17.1 MANAGEMENT OF THE BUILDING: LESSOR shall have the right, at its sole
cost and expense and without liability to LESSEE, to close the common areas
of the building, if any, when and to the extent necessary for maintenance or
renovation purposes; to make changes to the common areas and parking areas,
if any, including without limitation, changes in the location and nature of
driveways, entrances, exits, parking spaces or the direction of the flow of
traffic; and to change the plan of the building in which the Premises are
situated to the extent necessary for its expansion or the remodelling or
renovation thereof, so long as the changes do not substantially interfere
with LESSEE's use or occupancy of the Premises, the ingress to and egress
from the leased Premises or the flow of vehicular traffic in or to the
building.
17.2 RULES AND REGULATIONS: LESSOR shall have the right from time to time
to promulgate, amend and enforce against LESSEE and all persons upon the
leased Premises reasonable rules and regulations for the safety, care and
cleanliness of the Premises and the building or for the preservation of good
order; provided, however, that all such rules and regulations shall apply
substantially equally and without discrimination to all lessees of LESSOR in
the building, and no such rule or regulation shall require LESSEE to pay
additional rent. LESSEE agrees to conform and to abide by such rules and
regulations, and a violation of any of them shall constitute a material
default by LESSEE under this Lease.
ARTICLE 18
WAIVER
18.1 WAIVERS: Except as otherwise provided in this Lease, all waivers must
be in writing and signed by the waiving party to be effective. LESSOR'S
failure to enforce any provision of this Lease or its acceptance of rent
shall not be a waiver and shall not prevent LESSOR from enforcing that
provision or any other provision of this Lease in the future. No statement on
a payment check from LESSEE or in a letter accompanying a payment check shall
be binding on LESSOR. LESSOR may, with or without notice to LESSEE, negotiate
such check without being bound to the conditions of such statement, and may
apply the funds to the account balance due and owing by LESSEE according to
LESSOR'S standard accounting procedure.
ARTICLE 19
LESSOR'S ACCESS
19.1 LESSOR or its agents may enter property at all reasonable times to show
the property to potential buyers, investors, lessees or other parties, or for
any other purpose LESSOR deems necessary with respect to the obligations and
responsibilities of LESSOR under this Lease. LESSOR shall give LESSEE prior
notice of such entry, except in the case of an emergency. LESSOR may place
customary "For Sale" or "For Lease" signs on the property, in such places and
at such times as are reasonably deemed necessary by LESSOR. In showing the
building LESSOR shall attempt to minimize interference with LESSEE's
operations.
ARTICLE 20
ATTORNEYS' FEES
20.1 In the event that any legal action is instituted by either of the
parties hereto to enforce or construe any of the terms, conditions or
covenants of this Lease, or the validity thereof, the party prevailing in any
such action shall be entitled to recover from the other party all court costs
and a reasonable attorneys' fee to be set by the court, and the costs and fees
incurred in enforcing any judgment entered therein.
ARTICLE 21
MISCELLANEOUS PROVISIONS
21.1 NOTICES: All notices hereunder shall be in writing and shall be deemed
to have been given on the date delivered, if personally delivered, or if
mailed, then on the first business day following the date on which it is
mailed, by certified or registered mail, postage prepaid, addressed to the
address specified in Article 1.9, or to such other address designated by the
party as provided for herein.
21.2 JOINT AND SEVERAL LIABILITY: Each person or entity named as a LESSEE
in this Lease, or who hereafter becomes a party to this Lease as a LESSEE in
the leased Premises, or as an assignee or sublessee of LESSEE, shall be
jointly and severally liable for the full and faithful performance of each
and every covenant and obligation required to be performed by LESSEE under
the provisions of this Lease.
21.3 BINDING ON SUCCESSORS: LESSOR and LESSEE agree that each of the terms,
conditions and obligations of this Lease shall extend to and bind or inure to
the benefit of (as the case may require) the respective parties hereto and
each and every one of their respective heirs, executors, administrators,
representatives, successors and assigns.
21.4 PARTIAL INVALIDITY: If any term or provision of this Lease or the
application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease or the application of
such term or provision to persons or circumstances other than those to which
it is
page 8
<PAGE>
held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Lease shall be valid and enforceable to the full extent
permitted by law.
21.5 COMPLETE AGREEMENT: This Lease and the Attachments and Exhibits hereto
constitute the entire agreement between the parties and may not be altered,
amended, modified or extended, except by an instrument in writing signed by
the parties hereto. The parties respectively acknowledge and agree that
neither has made any representations or warranties to the other not expressly
set forth herein.
21.6 SUBORDINATION: LESSEE agrees to execute, acknowledge and deliver to
LESSOR upon request, such documents and instruments as may be necessary to
subordinate this Lease to any mortgage or trust deeds that now exist, or may
hereafter be placed upon the Premises by LESSOR; to any and all advances made
or to be made thereunder; to the interest on all obligations secured thereby;
and to all renewals, modifications, considerations, replacements or extensions
thereof.
LESSOR and LESSEE have signed this Lease on the date specified,
adjacent to their signatures below, and have initialed all riders which are
attached to or are incorporated by reference in this Lease.
This Lease is made and entered into this 1st day of February, 1997.
LESSOR: LESSEE:
PDG, A Calif. Ltd. Partnership /s/ Scott Houston CFO for
- ------------------------------ ------------------------------
By: /s/ J.W. Beaver Earth Shell Container Corp.
- ------------------------------ ------------------------------
Its Agent 800 Miramonte Dr.
- ------------------------------ ------------------------------
Santa Barbara, CA 93109
- ------------------------------ ------------------------------
Date: 2-7-97 Date: 1/31/97
- ------------------------------ ------------------------------
page 9
<PAGE>
EXHIBIT 10.34
SECOND AMENDMENT TO
CREDIT AGREEMENT
This Second Amendment ("Second Amendment") amends that certain Credit
Agreement dated November 15, 1996 as amended by that certain First Amendment
dated October 6, 1997, by and between IMPERIAL BANK ("Bank") and EARTHSHELL
CONTAINER CORPORATION, a Delaware Corporation ("Borrower") (the "Agreement").
The parties desire to further amend the Agreement and consideration of the
mutual covenants and conditions hereof, agree as follows:
1. The dollar amount of "$13,000,000" in Section 1 of the First Amendment
is hereby amended to read "$14,000,000" The date of "October 6, 1997" is
hereby amended to read "December 31, 1997."
2. Except as herein, the Agreement remains unchanged and hereby ratified
and confirmed.
3. This Second Amendment shall be effective as of December 31, 1997 and the
parties hereby confirm that the Agreement as amended is in full force and
effect.
EARTHSHELL CONTAINER CORPORATION IMPERIAL BANK
"BORROWER" "BANK"
By: /s/ Scott Houston By: /s/ Donald D Douthwright
-------------------------- -------------------------
Scott Houston Donald D. Douthwright
Chief Financial Officer Regional Vice President
<PAGE>
Exhibit 10.35
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOTE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS OR THE LAWS OF ANY STATE AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT AND LAWS
OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE UNDER SUCH ACT AND LAWS.
WARRANT TO PURCHASE STOCK
Corporation: Earthshell Container Corporation, a Delaware corporation
Number of Shares: Equal to $50,000 divided by the Initial Exercise Price
Class of Stock: Common
Initial Exercise Price: Equal to 110% of the price per share of the initial
public offering of the Company.
Issue Date: December 31, 1997
Expiration Date: December 31, 2004 (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00
and for other good and valuable consideration, IMPERIAL BANK or registered
assignee ("Holder") is entitled to purchase the number of fully paid and
nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2
of this Warrant, subject to the provisions and upon the terms and conditions
set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. At any time following six (6) months after the
Company's initial public offering of its common stock (the "IPO"), but prior
to the Expiration Date, Holder may exercise this Warrant by delivering this
Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder
is exercising the conversion right set forth in Section 1.2, Holder shall
also deliver to the Company a check for the aggregate Warrant Price for the
Shares being purchased.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified
in Section 1.1, Holder may from time to time following the IPO, convert this
Warrant, in whole or in part, into a number of Shares determined by dividing
(a) the aggregate fair market value of the Shares issuable upon exercise of
this Warrant minus the aggregate
<PAGE>
Warrant Price of such Shares by (b) the fair market value of one Share. The
fair market value of the Shares shall be determined pursuant to Section 1.3.
1.3 FAIR MARKET VALUE. If the Shares are traded on a public market, the
fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not
traded on a public market, the Board of Directors of the Company shall
determine fair market value in its reasonable good faith judgement. The
foregoing notwithstanding, if Holder advises the Board of Directors in writing
that Holder disagrees with such determination, then the Company and Holder
shall promptly agree upon a reputable investment banking firm to undertake
such valuation. If the valuation of such investment banking firm is greater
than that determined by the Board of Directors, then all fees and expenses of
such investment banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be paid by Holder.
1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of
an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of mutilation, upon surrender and cancellation of
this Warrant, the Company at its expense shall execute and deliver, in lieu
of this Warrant, a new warrant of like tenor.
1.6 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY.
1.6.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"
means any sale, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any
reorganization, consolidation, or merger of the Company where the holders of
the Company's securities before the transaction beneficially own less than
50% of the outstanding voting securities of the surviving entity after the
transaction.
1.6.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this
Warrant shall be exercisable for the same securities, cash, and property as
would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record
date for the Acquisition and subsequent closing. The Warrant Price and the
number and type of securities subject to the Warrant shall
<PAGE>
be adjusted accordingly. The Company shall use reasonable efforts to cause
the surviving corporation to assume the obligations of this Warrant.
1.6.3. NONASSUMPTION. If upon the closing of any Acquisition the
successor entity does not assume the obligations of this Warrant and Holder
has not otherwise exercised this Warrant in full, then the unexercised
portion of this Warrant shall be deemed to have been automatically converted
pursuant to Section 1.2 and thereafter Holder shall participate in the
acquisition on the same terms as other holders of the same class of
securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend to holders of its common stock payable in common stock, or other
securities, subdivides the outstanding common stock into a greater amount of
common stock, or subdivides the Shares in a transaction that increases the
amount of common stock into which the Shares are convertible, then upon
exercise of this Warrant, for each Share acquired, Holder shall receive,
without cost to Holder, the total number and kind of securities to which
Holder would have been entitled had Holder owned the Shares of record as of
the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon
exercise or conversion of this Warrant, the number and kind of securities and
property that Holder would have received for the Shares if this Warrant had
been exercised immediately before such reclassification, exchange,
substitution, or other event. The Company or its successor shall promptly
issue to Holder a new Warrant for such new securities or other property. The
new Warrant shall provide for adjustments which shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Article 2
including, without limitation, adjustments to the Warrant Price and to the
number of securities or property issuable upon exercise of the new Warrant.
The provisions of this Section 2.2 shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased and
the number of Shares subject to the Warrant share be proportionately
decreased.
2.4 NO IMPAIRMENT. The Company shall not, by amendment of its Articles
of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed under this Warrant by the Company,
but shall at all times in good faith assist in carrying
<PAGE>
out all the provisions of this Article 2 and in taking all such action as may
be necessary or appropriate to protect Holder's rights under this Article
against impairment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting
forth such adjustment and the facts upon which such adjustment is based. The
Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
2.6 NO RIGHTS AS SHAREHOLDERS. This Warrant does not entitle Holder to
any voting rights or other rights as a stockholder of the Company prior to
the exercise of the Holder's rights to acquire Shares as provided herein.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder that all Shares which may be issued upon the exercise
of the purchase right represented by this Warrant, and all securities, if
any, issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any
liens and encumbrances except for restrictions on transfer provided for
herein or under applicable federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series
or other rights; (c) to effect any reclassification or recapitalization of
common stock; (d) to merge or consolidate with or into any other corporation,
or sell, lease, license, or convey all or substantially all of its assets, or
to liquidate, dissolve or wind up; or (e) offer holders of registration
rights the opportunity to participate in an underwritten public offering of
the Company's securities for cash, then, in connection with each such event,
the Company shall give Holder (a) at least 7 days prior written notice of the
date on which a record will be taken for such dividend, distribution, or
subscription rights (and specifying the date on which the holders of common
stock will be entitled thereto) or for determining rights to vote, if any, in
respect of the matters referred to in (c) and (d) above; (2) in the case of
the matters referred to in (c) and (d) above at least 7 days prior written
notice of the date when the same will take place (and specifying the date on
which the holders of common stock will be entitled to exchange their common
stock for securities or other property deliverable upon the occurrence of
such event); and (3) in the case of the matter referred to in (e) above, the
same notice as is given to the holders of such registration rights.
<PAGE>
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 REPURCHASE OBLIGATION. The Holder is not being granted any
registration rights with respect to the Shares. However, if a registration
statement for shares of the Company's common stock is declared effective
under the Securities Act of 1933, as amended, (other than (i) in connection
with the IPO, (ii) pursuant to a Registration Statement on Form S-4 or S-8 or
any successor forms, (iii) otherwise in connection with any exchange offer,
merger, sale of substantially all of the assets or other reorganization or
recapitalization of the Company or (iv) otherwise in connection with the
issuance of securities pursuant to employee stock options, stock awards or
other employee benefit plans) and the Company does not provide Holder the
opportunity to sell the Shares to be acquired upon exercise of the Warrant in
such public offering on substantially the same terms as the other selling
shareholders (or if there are no selling shareholders, on such terms as are
required by the managing underwriter of such offering), then the Holder shall
have the right for a period of ten days following the closing of such public
offering to require the Company to purchase the Warrant at a price equal to
the number of Shares that would have been acquired upon exercise of the
Warrant times the price per share at which the shares of common stock were
sold in such public offering, less the Warrant Price with respect to such
Shares.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM: NOTICE OF EXPIRATION. This Warrant is exercisable, in whole
or in part, at any time and from time to time on or before the Expiration Date
set forth above. The Company shall give Holder written notice of Holder's
right to exercise this Warrant in the form attached as Appendix 2 not more
than 90 days and not less than 30 days before the Expiration Date. If the
notice is not so given, the Expiration Date shall automatically be extended
until 30 days after the date the Company delivers the notice to Holder.
4.2 LEGENDS. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT
<PAGE>
AND LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE UNDER SUCH
ACT OR LAWS.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with
applicable federal and state securities laws by the transferor and the
transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company). The Company shall not require an opinion(s) of counsel if, in its
reasonable determination, there is no material question as to the
availability of an exemption from the registration and qualification
requirements of the Securities Act of 1933 and applicable state securities
laws as to the transfer.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Sections 4.2 and
4.3, Holder may transfer all or part of this Warrant or the Shares issuable
upon exercise of this Warrant (or the securities issuable, directly or
indirectly, upon conversion of the Shares, if any) by giving the Company
notice of the portion of the Warrant being transferred setting forth the
name, address and taxpayer identification number of the transferee and
surrendering this Warrant to the Company for reissuance to the transferee(s)
(and Holder, if applicable). Unless the Company is filing financial
information with the SEC pursuant to the Securities Exchange Act of 1934, the
Company shall have the right to refuse to transfer any portion of this
Warrant to any person who directly competes with the Company.
4.5 NOTICES. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from
time to time.
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
<PAGE>
4.9 HOLDER'S INTENT. This Warrant has been entered into by the Company
in reliance upon the following representation of Holder, which by its
acceptance hereof the Holder hereby confirms: The right to acquire Shares
will be acquired for investment and not with a view to the sale or
distribution of any part thereof, and the Holder has no present intention of
selling or engaging in any public distribution of the same except pursuant to
a registration or exemption.
"COMPANY"
EARTHSHELL CONTAINER CORPORATION
By /s/ Simon K. Hodson
------------------------------
Simon K. Hodson
Chief Executive Officer
By /s/ Scott Houston
------------------------------
Scott Houston
Chief Financial Officer
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase ____________ shares of
the Common Stock of ___________________ pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised
with respect to ____________ of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below;
_______________________________ ____________
(Name)
_______________________________
_______________________________
(Address)
3. The undersigned represents it is acquiring the shares solely for
its own account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with
applicable securities laws.
________________________________
(Signature)
______________________
(Date)
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
----------------
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear _____________:
This is to advise you that the Warrant issued to you described below
will expire on _____________, 19__.
Issuer:
Issue Date:
Class of Security Issuable:
Exercise Price Per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
(Name of Issuer)
By ______________________
Its _____________________
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PRO FORMA LOSS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
31-DEC-96 30-SEP-97
----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Actual Net Loss......................................... $ 16,950 $ 10,993
Add: Preferred Dividends................................ 7,016 8,612
----------- -----------
Pro Forma Net Loss...................................... $ 23,966 $ 19,605
----------- -----------
----------- -----------
Pro Forma Shares Outstanding:
Common Stock, issued and outstanding.................... 82,530,000 82,530,000
Shares assumed issuable related to
conversion of Series A Preferred Stock................ 6,988,850 6,988,850
Shares to be issued the proceeds from
which will be used to pay accrued dividends
at $19.00 per share................................... 369,257 453,263
Stock options:
Shares issuable related to stock options.............. 1,084,680
Less: Shares assumed repurchased at
$19.00 per share.................................... (339,403)
----------
Shares to be issued related to stock options............ 745,277 745,277
----------- -----------
Pro Forma Shares Outstanding............................ 90,633,384 90,717,390
----------- -----------
----------- -----------
Pro Forma Net Loss Per Share............................ $0.26 $0.22
----------- -----------
----------- -----------
Pro Forma Net Loss...................................... $ 23,966 $ 19,605
Less: Interest Expense.................................. (1,692) (2,422)
----------- -----------
Supplemental Pro Forma Net Loss......................... $ 22,274 $ 17,183
----------- -----------
----------- -----------
Supplemental Pro Forma Shares Outstanding:
Pro Forma Shares Outstanding............................ 90,633,384 90,717,390
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................................... 2,153,526 2,153,526
----------- -----------
Supplemental Pro Forma Shares Outstanding............... 92,786,910 92,870,916
----------- -----------
----------- -----------
Supplemental Pro Forma Net Loss Per Share............... $0.24 $0.19
----------- -----------
----------- -----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 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 14, 1997
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
February 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 271,978
<SECURITIES> 0
<RECEIVABLES> 24,741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 296,719
<PP&E> 3,164,000
<DEPRECIATION> (728,091)
<TOTAL-ASSETS> 2,732,628
<CURRENT-LIABILITIES> 42,457,208
<BONDS> 0
267
0
<COMMON> 3,150
<OTHER-SE> (39,727,997)
<TOTAL-LIABILITY-AND-EQUITY> 2,732,628
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,570,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,421,626
<INCOME-PRETAX> (10,991,812)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,992,612)
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
