<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1998
REGISTRATION NO. 333-13287
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
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 24, 1998
PROSPECTUS
13,200,000 Shares
[LOGO]
Common Stock
---------
Of the 13,200,000 Shares offered hereby, 10,526,316 Shares are being sold by
the Company and 2,673,684 Shares are being sold by certain stockholders. None of
the officers or directors of the Company is selling any Shares of Common Stock
in the offering. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Shares of Common Stock by the
Selling Stockholders.
Of the Shares being offered, 10,560,000 Shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,640,000 Shares are being
offered in a concurrent International Offering outside the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offering"), subject to transfers between the U.S. Underwriters and the
International Managers. The Price to Public and Underwriting Discount per Share
will be identical for the U.S. Offering and the International Offering. See
"Underwriting." The closing of the U.S. Offering and International Offering are
conditioned upon each other.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $17.00 and $21.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Company's Common Stock has been approved for quotation on
The Nasdaq Stock Market's National Market under the symbol "ERTH."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $1,620,000.
(3) The Company and certain of the Selling Stockholders have granted to the
U.S. Underwriters and the International Managers 30-day options to purchase
up to an aggregate of 1,980,000 additional Shares of Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. See "Underwriting." If such options are exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively,
and total Proceeds to Selling Stockholders will be $ .
--------------------
The Shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the Shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
---------------
JOINT BOOK-RUNNING MANAGERS
Salomon Smith Barney Credit Suisse First Boston
, 1998.
<PAGE>
[EarthShell packaging logo and
picture of EARTHSHELL cups,
bowls, hinged-lid container,
tray, breakfast platter and plate
with quotes as follows,
" `Finally, fast food packaging
that Mother Earth can love!'
Essam Khashoggi, Chairman of the
Board" and "From the earth, back
to the earth..."]
--------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
EARTHSHELL-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY.
ALI-ITE-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF E. KHASHOGGI
INDUSTRIES, LLC. BIG MAC-REGISTERED TRADEMARK- AND QUARTER POUNDER-REGISTERED
TRADEMARK- ARE REGISTERED TRADEMARKS OF MCDONALD'S CORPORATION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD ALSO CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" AND ARE URGED TO READ
THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
EarthShell Corporation (the "Company") is a development stage company
engaged in the licensing and commercialization of a proprietary composite
material for the manufacture of disposable packaging for the food service
industry, such as cups, plates, bowls and hinged-lid containers. This new
composite material is made primarily from commonly available raw materials such
as limestone, natural potato, corn and other starch binders, natural fibers and
functional coatings. The Company believes that food service disposables made of
this material ("EARTHSHELL products") can be designed to have certain superior
performance characteristics, such as greater strength and rigidity and can be
commercially produced at a cost that is competitive with comparable paper and
polystyrene food service disposables. The Company has produced prototype cups,
plates, bowls and hinged-lid containers. To date, however, these prototypes have
not been produced on fully integrated, commercial production lines and,
therefore, their actual cost of manufacture is unproven. EARTHSHELL products
offer a number of attractive environmental features that are expected to appeal
to customers concerned about the environment.
According to industry studies, more than $8.3 billion was spent in the
United States in 1994 on the types of food service disposables that the Company
believes can be replaced by EARTHSHELL products, and the Company believes that
international markets represent additional significant opportunities for
EARTHSHELL products. Food service disposables are currently manufactured from a
variety of materials, including paper and polystyrene. The Company believes that
none of these materials fully addresses all three principal concerns of the food
service industry--performance, cost and environmental impact. The Company
believes that EARTHSHELL products will best address the combination of these
concerns and therefore will be able to achieve significant penetration of the
food service disposables market.
The Company's objective is to establish EARTHSHELL products as the preferred
disposable packaging for the food service industry. The Company's strategy
includes both working with major purchasers of food service disposables to build
consumer demand for EARTHSHELL products and licensing its technology to or joint
venturing with existing manufacturers of disposable packaging to market, produce
and distribute EARTHSHELL products. An additional component of the Company's
strategy is to utilize outside experts in their respective fields to assist in
the commercialization of EARTHSHELL products.
As the first step in this strategy, the Company has worked closely with
McDonald's Corporation ("McDonald's") in developing and testing prototype
sandwich containers. As a result of this work, McDonald's has approved the
EARTHSHELL Big Mac sandwich container for use in McDonald's restaurants in the
United States. McDonald's primary packaging purchaser, Perseco, has entered into
a supply agreement with the Company's licensee, Sweetheart Cup Company Inc.
("Sweetheart"), pursuant to which Perseco 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
$63.0 million of the proceeds of this Offering to fund the initial engineering,
development and construction of such manufacturing lines, including the initial
manufacturing equipment to be used at Sweetheart's Owings Mills, Maryland
facility for the production of EARTHSHELL Big Mac sandwich containers. By the
end of 1999, the Company expects to have supplied equipment to licensees and
joint venture partners at multiple production sites for the manufacture of a
broad range of EARTHSHELL products, including cold cups, hot cups, plates,
bowls, sandwich containers and other hinged-lid containers.
The development of the composite material used to make EARTHSHELL products
("ALI-ITE composite material") is the result of more than 10 years of basic
materials science research by E. Khashoggi Industries, LLC and its predecessors
("EKI"). EKI is the Company's principal stockholder. As of February 17, 1998,
EKI had obtained 52 U.S. and 26 foreign patents and had 19 U.S. and 117 foreign
patent applications pending which are applicable to EARTHSHELL products
utilizing the EKI technology. The Company believes that these patents and patent
applications represent a strategic web of protection broadly covering EARTHSHELL
products, their material composition and the manufacturing processes used to
make them.
Since the Company's inception in November 1992, the Company has not
generated any revenues from operations and, as of December 31, 1997, had
incurred aggregate net losses of approximately $74.2 million. The Company has an
exclusive, worldwide, royalty-free license to use and license the EKI technology
to manufacture and sell disposable, single-use containers for packaging or
serving food or beverages intended for consumption within a short period of time
(less than 24 hours). The Company does not have the right to use the EKI
technology for any other purposes. See "Business--Relationship with EKI."
THE OFFERING
<TABLE>
<CAPTION>
Common Stock offered by:
<S> <C>
The Company..................... 10,526,316 shares
The Selling Stockholders........ 2,673,684 shares
----------------
Total......................... 13,200,000 shares
Common Stock offered for sale in:
U.S. Offering................... 10,560,000 shares
International Offering.......... 2,640,000 shares
----------------
Total......................... 13,200,000 shares
Common Stock to be outstanding
after the Offering.............. 100,045,166 shares (1)
Use of proceeds................... To engineer, develop and construct turnkey manufacturing
lines for lease to licensees or contribution to joint
ventures; expand EARTHSHELL's product development
center; repay indebtedness to EKI and bank borrowings;
market the introduction of EARTHSHELL products; pay
accrued dividends; secure additional patent protection;
and for general corporate purposes, including
anticipated operating losses.
Proposed Nasdaq National Market
symbol.......................... ERTH
</TABLE>
(1) Excludes options outstanding as of December 31, 1997 to purchase 1,158,040
shares of Common Stock and warrants to purchase 51,675 shares of Common
Stock (assuming an initial public offering price of $19.00 per share)
issuable upon completion of the Offering, and assumes that the 26,675 shares
of Series A Preferred Stock of the Company outstanding on the date hereof
will be converted into 6,988,850 shares of Common Stock.
4
<PAGE>
RISK FACTORS
As a development stage company, the Company faces numerous risks in
connection with the development, commercialization and introduction of
EARTHSHELL products, including risks related to the limited experience of the
Company and its licensees in manufacturing EARTHSHELL products, the need to
construct integrated manufacturing lines which can produce EARTHSHELL products
at competitive costs, delays in the development of EARTHSHELL products,
anticipated continuing operating losses until EARTHSHELL products achieve
significant market penetration, the reliance on third party licensees and joint
venture partners for the manufacture and distribution of EARTHSHELL products and
the right of certain of the Company's licensees to terminate their license
agreements at any time. For a description of certain risks to be considered
before making an investment in the Common Stock see "Risk Factors."
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO REFLECT (I) A RECAPITALIZATION AND STOCK SPLIT, TO BE EFFECTIVE
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
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------------------------- DECEMBER 31,
1993 (1) 1994 1995 1996 1997 1997
----------- --------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses........... $ 3,309 $ 10,930 $ 9,100 $ 10,159 $ 8,901 $ 42,400
General and administrative expenses......... 2,500 3,428 2,362 3,405 5,685 17,379
Interest (income) expenses, net............. (147) (290) 478 1,692 3,246 4,978
Depreciation and amortization............... 601 797 44 311 507 2,259
Patent expenses............................. 1,520 1,717 1,929 1,382 653 7,201
Net loss.................................... (7,783) (16,582) (13,914) (16,950) (18,992) (74,221)
Basic and diluted net loss per share (2).... (24.20) (48.53) (40.72) (49.61) (55.59)
Pro forma net loss per share (2)(3)(4)...... (.31)
Weighted average number of shares used in
computing pro forma net loss per share
(4)....................................... 90,760,372
Supplemental pro forma net loss per share... (.27)
Weighted average number of shares used in
computing supplemental pro forma net loss
per share (4)............................. 93,139,200
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (3) ADJUSTED (5)
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 8 $ 8 $ 131,660
Working capital (deficit).............................................. (48,308) (57,458) 128,513
Total assets........................................................... 3,778 3,778 135,430
Notes payable, payable to majority shareholder, accrued interest and
accrued dividends.................................................... 45,162 54,312 --
Deficit accumulated during development stage (6)....................... (74,221) (83,371) (83,406)
Stockholders' equity (deficit) (7)..................................... (44,567) (53,717) 132,248
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Basic and diluted net loss per share is calculated based on weighted average
shares outstanding of 321,667 shares for 1993 and 341,675 shares for 1994,
1995, 1996 and 1997.
(3) Pro forma to give effect to the assumed conversion of the Series A Preferred
Stock of the Company into Common Stock and the accrual of preferred
dividends of approximately $9,150,000 payable upon such conversion.
(4) As a result of the 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.
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 (481,573 shares); and (iv) the net shares
issuable related to stock options using the Treasury Stock Method (759,949
shares). Supplemental pro forma net loss per share has been calculated by
dividing pro forma net loss less interest expense and amoritization of loan
discount by the sum of (i) weighted average of common stock issued and
outstanding (82,530,000 shares); (ii) common stock issuable related to the
assumed conversion of Series A Preferred Stock (6,988,850 shares); (iii) the
number of shares (priced at $19.00 per share) the proceeds from which will
be used to fund dividends payable (481,573 shares); (iv) the net shares
issuable related to stock options using the Treasury Stock Method (759,949
shares) and (v) the number of shares (priced at $19.00 per share) the
proceeds from which will be used to repay the $33,319,000 indebtedness owed
to majority stockholder and approximately $11,879,000 notes payable to banks
(an aggregate of 2,378,829 shares).
(5) Adjusted to give effect to the receipt of the net proceeds of $186,000,000
from the sale of shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $19.00 per share and after
deducting underwriting discounts and estimated offering expenses) and the
application of the estimated net proceeds therefrom for the repayment of the
$33,319,000 indebtedness to EKI, $11,879,000 notes payable to banks and the
payment of preferred dividends of $9,150,000. See "Use of Proceeds" and
"Capitalization."
(6) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(7) No cash dividends were declared or paid in any of the periods presented
except as noted in note (3) above.
6
<PAGE>
RISK FACTORS
INVESTMENT IN THE SHARES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES.
GOING CONCERN AUDITOR'S OPINION; HISTORY OF OPERATING LOSSES
The Company has not had any sales of EARTHSHELL products to date. One of the
Company's primary use of proceeds is to procure and install equipment for its
licensees and joint ventures to manufacture EARTHSHELL products. At least until
the development of manufacturing capacity is complete and EARTHSHELL products
are sold, the Company will continue to incur losses. From its inception in
November 1992 through December 31, 1997, the Company had incurred aggregate net
operating losses of approximately $74.2 million. At December 31, 1997, the
Company had a working capital deficit of approximately $48.3 million and a
stockholders' deficit of $44.6 million. Since February 1995, the Company's
operations have been financed through loans from EKI, its principal stockholder,
and Imperial Bank. EKI and Imperial Bank, however, are under no obligation to
make additional loans or capital contributions to the Company. At December 31,
1997, the Company's outstanding borrowings from EKI and Imperial Bank totaled
$33.3 million and $11.9 million, respectively. The Imperial Bank line of credit
was increased to $14.0 million in December 1997 and is due and payable on 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 has commercially produced or distributed
any EARTHSHELL products. Licensee manufacturers are not obligated to achieve
minimum sales quotas and have the right to terminate their respective license
agreements at any time without penalty. Many of the Company's licensees and
joint venture partners manufacture paper or polystyrene packaging which will
compete with EARTHSHELL products. There can be no assurance that the Company's
licensees and joint venture partners will devote sufficient resources or
otherwise be able to successfully manufacture, distribute or market EARTHSHELL
products, and the failure of such persons to do so would have an adverse effect
on the business, financial condition and results of operations of the Company.
DEVELOPMENT OF MANUFACTURING PLANTS
The Company anticipates that it will provide manufacturing equipment by
leasing or contributing the equipment to licensees or joint venture partners and
that it may be necessary to guarantee the performance of its equipment in order
to induce existing manufacturers of food service disposables to begin
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production of EARTHSHELL products during their initial commercial introduction.
Under the Company's operating agreement with Sweetheart and letter of intent
with Prairie, the Company will be required to fund negative operating cash flow
prior to the date on which the turnkey manufacturing lines first meet certain
efficiency criteria and additional costs incurred as a result of the equipment
not continuing to satisfy these criteria for a two-year period following such
date. The Company's obligation to guarantee performance of manufacturing lines,
fund negative operating cash flows of its licensees or failure of the Company to
receive an adequate return on its investment in the equipment, may adversely
affect the business, financial condition and results of operations of the
Company. See "Business--License and Joint Venture Relationships."
RELIANCE ON FEW CUSTOMERS
McDonald's will be the first food service operator using EARTHSHELL
products. Under the terms of a non-binding letter agreement between McDonald's
and the Company, the terms of which are incorporated into the supply agreement
between Sweetheart and Perseco, it is contemplated that McDonald's will have the
right, under certain circumstances, to purchase the first commercial production
available for any subsequently developed EARTHSHELL products in the quick-serve
restaurant industry and to require that EARTHSHELL or its licensees satisfy
McDonald's demand for any quick-serve packages prior to sale to any other
organizations. The Company is not a party to any development contract with
McDonald's, and McDonald's is therefore free to discontinue its development
relationship with the Company at any time. The loss of McDonald's or any other
initial purchasers of the Company's products, or the exercise of McDonald's
priority rights under certain circumstances, could delay the introduction and
market acceptance of one or more EARTHSHELL products and have an adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Relationship with McDonald's."
RELIANCE ON EKI
The Company does not own the technology necessary for the manufacture of
EARTHSHELL products and is dependent upon its royalty-free, exclusive license
from EKI for the use of the technology. The Company's use of the technology is
limited to the development, manufacture and sale of certain specified food
service disposables for use in the food service industry and the Company has no
right to exploit opportunities for the application of this technology or
improvements outside this field of use. EKI may terminate the license at any
time if the Company is in breach of any material obligations under the Amended
and Restated License Agreement between the Company and EKI (the "License
Agreement") and does not cure such breach within a specified period. If EKI were
to file for or be declared bankrupt, the Company would likely be able to retain
its rights under the License Agreement with respect to U.S. patents; however, it
is possible that steps could be taken to terminate its rights under the License
Agreement with respect to international patents. The Company shares certain key
management personnel with EKI, relies on EKI and EKI's scientific and technical
personnel for substantially all of its scientific and technical services and
leases its office and research and development space from EKI. Scientific and
technical services are provided to the Company by EKI pursuant to an Amended and
Restated Technical Services and Sublease Agreement (the "Technical Services
Agreement"), terminating on December 31, 2002, for the design and development of
EARTHSHELL products and the operation of its product development center. The
Company is also dependent on EKI for further development and refinement of the
basic technology used in EARTHSHELL products, although EKI is not obligated to
complete any further development or refinement under the terms of the License
Agreement. Any disruptions in the operations or financial condition of EKI or
the failure by EKI to perform services required by the Company could have an
adverse effect on the business, financial condition and results of operations of
the Company. See "Business--Relationship with EKI."
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POTENTIAL CONFLICTS WITH EKI
The Company and EKI are both controlled by a common indirect, majority
equity owner, Essam Khashoggi, and they share certain directors and officers,
including Mr. Khashoggi, who is also the Chairman of the Board of the Company,
and Simon Hodson, the Vice Chairman of the Board, Chief Executive Officer and
President of the Company. Certain conflicts may arise between EKI and the
Company, particularly with respect to corporate opportunities, including, the
development of new markets and uses for products based on the ALI-ITE composite
material, the allocation of research and development resources, the devotion of
the common directors' and officers' time to the respective businesses and the
performance by EKI and the Company of their respective obligations under the
License Agreement, the Technical Services Agreement and the Amended and Restated
Agreement for Allocation of Patent Costs (the "Patent Allocation Agreement").
Under the Patent Allocation Agreement, the Company is obligated to pay or
reimburse EKI for all costs and expenses associated with filing, prosecuting,
acquiring and maintaining certain patents or patent applications. The costs and
expenses incurred in connection with these patents and patent applications will
be controlled by EKI. Any patents granted will be the property of EKI, and EKI
may obtain a benefit therefrom other than under the License Agreement, including
the utilization and/or licensing of the patents and related technology in a
manner or for uses unrelated to the license granted to the Company. See
"Business--Relationship with EKI" and "--The Technology."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of the Offering, Essam Khashoggi, the Chairman of the Board
of the Company, will be the beneficial owner of approximately 73.4% of the
outstanding shares of Common Stock directly or indirectly through various
entities that he controls, including EKI. Thus, Mr. Khashoggi will have the
ability to elect all of the directors of the Company, to control the direction
and policies of the Company, to determine the outcome of corporate transactions
requiring the approval of the Company's stockholders, including mergers,
consolidations and the sale of all or substantially all of the assets of the
Company, and to prevent or cause a change in control of the Company. Mr.
Khashoggi also will have the power to control the Company's relationship with
EKI, which he also controls, and upon which the Company is dependent, among
other things, for its research and development efforts. See "--Reliance on EKI",
"--Potential Conflicts with EKI" and "Principal and Selling Stockholders."
CERTAIN FEDERAL TAX CONSEQUENCES
The Company intends to take appropriate measures to avoid being classified
as a personal holding company, including primarily entering into joint venture
relationships to reduce its royalty and other passive type income to less than
60% of its "adjusted ordinary gross income" (generally, ordinary gross income,
as distinguished from capital gains income, adjusted to reflect certain
statutory exclusions and deductions) for any given year. If the Company were to
be classified as a personal holding company for federal income tax purposes, the
Company would be subject to an additional federal tax equal to 39.6%, generally,
of its undistributed after tax earnings for each taxable year in which it is so
classified. There can be no assurance that the Company will be successful in its
effort to avoid classification as a personal holding company. In the event that
the Company is unsuccessful in these efforts, the Company intends to make
distributions to its stockholders of all or part of its after tax earnings for
the applicable taxable year to minimize its liability for the personal holding
company tax. There can be no assurance, however, that the Company will have
adequate cash reserves to make such distributions. If made, such distributions
would likely be treated as dividends taxable as ordinary income for federal and
state income tax purposes. The application of the personal holding company tax
to the Company's undistributed after tax earnings would have an adverse effect
on the business, financial condition and results of operations of the Company.
See "Dividends" and "Certain United States Federal Tax Considerations."
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PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of the licensed technology. Although
the Company and EKI seek to protect the licensed technology through, among other
things, U.S. and foreign patents, there can be no assurance that the patent and
patent applications licensed to the Company are sufficient to protect the
Company's technology or that any patent obtained by EKI and licensed to the
Company will not be held invalid, circumvented or infringed by others. The
Company also relies on trade secrets and proprietary know-how that it seeks to
protect in part by confidentiality agreements with its licensee manufacturers,
proposed joint venture partners, employees and consultants. These agreements
have limited terms (typically five years or less) and there can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by the Company's competitors.
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Although the Company knows of no infringement of patents held by others,
it is always possible that a third party may assert infringement. Patent and
patent applications on formulations of ALI-ITE composite material are based in
part on specific proportional mixtures of the components of the material. The
Company continues to undergo testing and modification of the components and
their proportional mixtures to balance environmental, economic and performance
concerns. There can be no assurance that the mixture that is ultimately
determined to be optimal will be protected under the Company's patents or that
it will not be subject to a patent held by others. If the optimal mixture is not
protected under the Company's patents or is subject to a patent held by others
and a third party asserts patent infringement, it would have an adverse effect
on the Company's business, financial condition and results of operations. The
Company is aware of at least one other patent held by others which protects
materials and methods for manufacturing materials containing some similar
components as are found in ALI-ITE composite material. EKI has entered into an
agreement to purchase this technology, subject to certain conditions. See
"Business--Patents, Proprietary Rights and Trademarks."
The Company believes that it owns or has the rights to use all technology
expected to be incorporated into its products, but an adverse determination in
any such proceedings or in other litigation or infringement proceedings to which
the Company may become a party could subject the Company to significant
liabilities and costs to third parties or require the Company to seek licenses
from third parties. The Company could incur substantial costs in seeking
enforcement of its licensed patents against infringement or the unauthorized use
of its trade secrets and proprietary know-how by others or in defending itself
against claims of infringement by others. Accordingly, an adverse determination
in a judicial or administrative proceeding or failure to obtain necessary
licenses would prevent the Company from manufacturing or licensing others to
manufacture certain of its products, which could have an adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Patents, Propriety Rights and Trademarks."
DEVELOPMENT OF EARTHSHELL PAPER PRODUCTS
The Company's sandwich container is, and certain other EARTHSHELL products
will be, made out of the proprietary ALI-ITE composite material which is formed
into a moldable, foamed material. EKI has also licensed to the Company
technology to develop a paper-like, sheet application of ALI-ITE composite
material which the Company has formed into prototype food service disposables,
such as paper cups, french fry scoops and paper plates. EKI and the Company have
not completed the development of EARTHSHELL paper roll stock or related
manufacturing processes. If the Company decides to continue the development of
the paper-like sheet application of ALI-ITE composite material, such development
would require substantial time, effort and expense. No assurance can be given
that EKI or the Company will be successful in developing EARTHSHELL paper roll
stock, related manufacturing processes, or specific
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EARTHSHELL paper products, that such technology will be protected under the
Company's patents, or when such products might be commercially introduced. See
"Business--Food Service Disposables Market."
RAW MATERIAL SUPPLIES
While the Company believes that sufficient quantities of all raw materials
used in EARTHSHELL products are generally available, the unavailability of any
raw materials could result in delays in the commercial introduction and could
hinder acceptance of EARTHSHELL products, thereby adversely affecting the
Company's business, financial condition and results of operations. In addition,
the Company and its licensees may become significant consumers of certain key
raw materials, such as starch, and if such consumption is substantial in
relation to the available resources, raw materials prices may increase which in
turn may increase the cost of EARTHSHELL products. See "Business--Manufacturing
of EARTHSHELL Products" and "--Raw Materials."
COMPETITION; RISK OF TECHNOLOGICAL ADVANCEMENT
Competition among existing food and beverage container manufacturers in the
food service industry is intense. At present, most of these competitors have
substantially greater financial and marketing resources at their disposal than
does the Company, and many have well-established supply, production and
distribution relationships and channels. Companies producing competitive
products may reduce their prices or engage in advertising or marketing campaigns
designed to protect their respective market shares and impede market acceptance
of EARTHSHELL products.
Recently, a number of paper and plastic disposable packaging manufacturers
and converters and others have made efforts to increase the recycling of these
products. Increased recycling of paper and plastic products could lessen their
negative environmental impact, one significant basis upon which the Company
intends to compete. A number of companies have introduced starch-based materials
or are attempting to develop plastics that they claim are biodegradable and
other specialty polymers as potential environmentally superior packaging
alternatives. It is expected that many existing packaging manufacturers may
actively seek competitive alternatives to the Company's products and processes.
The development of competitive, environmentally attractive, disposable food
service containers, whether or not based on the Company's products and
technology, could render the Company's technology obsolete and could have an
adverse effect on the business, financial condition and results of operations of
the Company. See "--Dependence on Licensee and Joint Venture Partners."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
At present the Company is largely dependent upon obtaining and retaining the
services of qualified scientific and technical personnel, many of whom are
employees of EKI and whose services are provided pursuant to an Amended and
Restated Technical Services Agreement (the "Technical Services Agreement"). In
addition, the Company is highly dependent upon its Vice Chairman of the Board,
Chief Executive Officer and President, Simon Hodson. The loss of Mr. Hodson or
the services of certain key EKI technical personnel could adversely affect the
Company. Mr. Hodson has entered into a two-year employment agreement with the
Company that expires on September 30, 1999, subject to the Company's right to
renew the contract for one additional year. The Company does not hold keyman
insurance on any of its personnel. See "Management--Executive Officers and
Directors."
FDA REGULATION
The manufacture, sale and use of EARTHSHELL products is subject to
regulation by the U.S. Food and Drug Administration (the "FDA"). The FDA's
regulations are concerned with substances used in food packaging materials, not
with specific finished food packaging products. Thus, food or beverage
containers will be in compliance with FDA regulations if the components used in
the food and beverage containers:
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(i) are approved by the FDA as indirect food additives for their intended uses
and comply with the applicable FDA indirect food additive regulations; or (ii)
are generally recognized as safe ("GRAS") for their intended uses and are of
suitable purity for those intended uses. Each of the components of the
EARTHSHELL BigMac sandwich container and all other current prototype products is
either approved by the FDA as an indirect food additive for its intended use,
codified in the FDA's regulations as GRAS for its intended use, or a commonly
recognized food ingredient regarded by the Company and its consultants as GRAS
for its intended use. The Company, however, has not sought the concurrence of
the FDA in this determination. The Company intends to ensure that the raw
materials used in the EARTHSHELL Big Mac sandwich container are of suitable
purity for their intended uses by specifying standards to be met by suppliers of
raw materials and by material and product testing. There is no requirement that
the Company or a manufacturer of EARTHSHELL products seek FDA concurrence that
certain components are GRAS for their intended uses or that the raw materials
are of suitable purity for their intended uses. As a result, the Company
believes that the EARTHSHELL Big Mac sandwich container and other current
prototype products will be in compliance with all requirements of the FDA and do
not require FDA approval. There can be no assurance, however, that the FDA would
agree with these conclusions.
If the FDA were to disagree with the Company's determinations with respect
to the EARTHSHELL sandwich container or future products, the FDA could ask the
Company to voluntarily withdraw the products from the marketplace. They could
also initiate legal action to remove the products from the marketplace and, if
appropriate, pursue additional sanctions against the Company and its management.
Such actions by the FDA could have an adverse effect on the business, financial
condition and results of operations of the Company. See "Business--Government
Regulation."
BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS
Certain stockholders of the Company will receive substantial benefits from
the sale of Common Stock offered hereby. Specifically, (i) the Company intends
to use approximately $36.9 million of the net proceeds of the Offering to repay
certain indebtedness to its principal stockholder, EKI, (ii) upon the intended
repayment of approximately $14.0 million of Company borrowings under a line of
credit with Imperial Bank, EKI and the Chairman of the Board of the Company, Mr.
Essam Khashoggi, will be released from personal guarantees with respect to such
borrowings, and (iii) the Company intends to use approximately $9.1 million (as
of December 31, 1997) to pay accrued dividends on the Series A Preferred Stock.
In addition, the Selling Stockholders will sell 2,673,684 shares of Common Stock
in the Offering and receive approximately $47.6 million in net proceeds
(4,653,684 shares and $82.9 million in net proceeds if the over-allotment option
is exercised in full and all the option shares are sold by the Selling
Stockholders), based upon an initial public offering price of $19.00 per share
(the midpoint of the estimated initial public offering price range) after
deducting the estimated underwriting discounts, but excluding any expenses to be
reimbursed. See "Certain Transactions."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The stock market from time to time
has experienced extreme price and volume fluctuations which often have been
unrelated to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, development or disputes concerning proprietary rights, changes in
earnings estimated by analysts, and economic and other external factors, as well
as period-to-period fluctuations in financial results of the Company, may have a
significant impact on the market price and marketability of the Common Stock.
Fluctuations or decreases in the trading price of the Common Stock may adversely
affect the liquidity of the trading market for the Common Stock and the
Company's ability to raise capital through future equity financing. The initial
public offering price of the Common Stock in the Offering will be determined by
negotiations among the Company, the Selling
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Stockholders and the Representatives of the Underwriters based on several
factors and may not be indicative of prices that will prevail in the trading
market. See "Underwriting."
DILUTION AND ABSENCE OF DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the net tangible book value per share of the Common Stock. Accordingly, the
purchasers of shares of Common Stock in the offering will experience immediate
and substantial dilution of net tangible book value per share of $17.68. To
date, the Company has not paid any dividends on its Common Stock. Although the
Company currently intends to retain all available funds for use in its business
to the extent possible, the Company will be required to pay accrued dividends,
which were approximately $9.1 million as of December 31, 1997, on its Series A
Preferred Stock, upon conversion of the Series A Preferred Stock, which is
expected to occur following completion of the Offering. If necessary, upon
achieving positive net income, the Company intends to make distributions of its
earnings to stockholders in order to minimize the personal holding company tax
levied on its undistributed personal holding company income, if any. See
"--Certain Federal Tax Consequences," "Dividend Policy" and "Certain United
States Federal Tax Considerations."
EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the 13,200,000 shares offered hereby
(15,180,000 shares if the over-allotment option is exercised in full) will be
eligible for immediate sale in the public market without restriction unless they
are held by affiliates of the Company. The 86,845,166 outstanding shares not
sold in the Offering will be "restricted securities" within the meaning of Rule
144 ("Rule 144") promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemptions contained in Rule 144. Of these shares, approximately 85,260,852
shares held by current stockholders will be eligible for sale pursuant to Rule
144 beginning 90 days after the completion of the Offering, subject to the
volume and manner of sale limitations of Rule 144. All stockholders who are not
Selling Stockholders (other than one stockholder who owns 262 shares of Common
Stock), including the directors, officers, EKI and certain principal
stockholders of the Company, beneficially holding (upon completion of the
Offering) an aggregate of 78,397,674 shares, have agreed, subject to certain
exceptions, not to sell or otherwise dispose of any such shares for at least 180
days after the date of the Underwriting Agreement relating to the Offering
without the prior written consent of the Representatives of the Underwriters.
All Selling Stockholders of the Company beneficially holding (upon completion of
the Offering) an aggregate of 8,447,230 shares (or 6,467,230 shares if the
over-allotment option is exercised in full and all the option shares are sold by
the Selling Stockholders) have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any such shares for at least 270 days after the
date of the Underwriting Agreement relating to the Offering without the prior
written consent of Salomon Brothers Inc. The Company has granted certain
"demand" and "piggy-back" registration rights to all of the Company's current
stockholders, including EKI, with respect to the shares of Common Stock owned by
them. No predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market, particularly by directors and officers of the
Company, or the perception that such sales could occur, could have an adverse
impact on the market price. See "Certain Transactions" and "Shares Eligible for
Future Sale."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law include provisions that may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company and
preventing certain changes of control. See "Description of Capital Stock--
Anti-Takeover Law and Charter Provisions."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 10,526,316 shares
offered by the Company are estimated to be approximately $186.0 million, based
upon an assumed offering price of $19.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders. The Company currently intends to use the net proceeds of
the Offering to: (i) facilitate the development of manufacturing capacity for
EARTHSHELL products by engineering, developing and constructing turnkey
manufacturing lines for lease to licensees or contribution to joint ventures
(approximately $63.0 million); (ii) expand the EARTHSHELL product development
center (approximately $10.0 million); (iii) launch an initial public relations
and advertising campaign (approximately $10.0 million); (iv) pay accrued
dividends on the Series A Preferred Stock (approximately $9.1 million as of
December 31, 1997); (v) secure additional patent protection for its licensed
technology; and (vi) establish a fund for the enforcement and protection of
patents ((v) and (vi) together, approximately $7.4 million).
In addition, approximately $50.9 million of the net proceeds of the Offering
will be used by the Company to repay certain indebtedness owed to its principal
stockholder, EKI (approximately $36.9 million in principal, accrued interest and
accounts payable as of the date hereof), and Imperial Bank (approximately $14.0
million as of the date hereof). The debt owed to EKI, which was incurred at
various times between February 1995 and the date hereof, bears interest at the
prime rate published in THE WALL STREET JOURNAL as adjusted on the first day of
each calendar quarter, and is due and payable upon demand by EKI. At December
31, 1997, this indebtedness bore interest at an annual rate of 8.5%. The
indebtedness to Imperial Bank, which was incurred at various times between June
1996 and the date hereof bears interest at an annual rate of 1% in excess of the
Bank's prime lending rate as announced from time to time. At December 31, 1997,
this indebtedness bore interest at an annual rate of 9.5%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The remaining net proceeds (approximately $35.6 million) will be used by the
Company for general corporate purposes, including the employment of additional
personnel, the continued design and development of EARTHSHELL products and
anticipated operating losses. Except as indicated, the Company cannot presently
determine the specific amounts of funds, and the timing of any payments, that
may be required in connection with the use of the portion of the net proceeds
allocated to general corporate purposes. The Company's management will have
broad discretion in applying the net proceeds, and the Company reserves the
right to change the use of proceeds if unanticipated developments in the
Company's business or changes in economic or competitive conditions make shifts
in the allocation of net proceeds necessary or desirable. Pending application of
the net proceeds for the above purposes, the Company intends to invest the net
proceeds from the Offering in investment-grade, short-term, interest-bearing
securities.
DIVIDEND POLICY
Upon conversion of the Series A Preferred Stock, the Company will be
required to pay accrued dividends thereon (approximately $9.1 million as of
December 31, 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 December 31, 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>
DECEMBER 31, 1997
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (1) ADJUSTED (1)(2)
---------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Note payable, accounts payable, and accrued interest to majority
stockholder........................................................ $ 33,319 $ 33,319 $ --
Notes payable to banks (2)(3)........................................ 11,843 11,843 --
Dividends payable.................................................... -- 9,150 --
---------- ------------- ---------------
Total indebtedness and dividends payable......................... $ 45,162 $ 54,312 $ --
---------- ------------- ---------------
---------- ------------- ---------------
Preferred Stock, par value $.01 per share: 10,000,000 shares
authorized; 9,170,000 Series A shares designated; 6,988,850 Series
A shares issued and outstanding; no shares outstanding pro forma
and as adjusted (4)................................................ $ 70 $ -- $ --
Common stock, par value $.01 per share: 200,000,000 shares
authorized; 82,530,000 shares issued and outstanding actual;
89,518,850 pro forma; 100,045,166 shares issued and outstanding pro
forma as adjusted (5).............................................. 825 895 1,000
Additional paid-in capital (preferred and common).................... 28,759 28,759 214,654
Deficit accumulated during the development stage..................... (74,221) (83,371)(6) (83,406)(3)(6)
---------- ------------- ---------------
Total stockholders' equity (deficit)............................. $ (44,567) $ (53,717) $ 132,248
---------- ------------- ---------------
---------- ------------- ---------------
Total capitalization............................................. $ (89,729) $ (108,029) $ 132,248
---------- ------------- ---------------
---------- ------------- ---------------
</TABLE>
- ------------------------------
(1) Pro forma to give effect to the assumed conversion of the 26,675 shares of
Series A Preferred Stock of the Company outstanding into 6,988,850 shares of
Common Stock and the accrual of $9,150,000 in dividends on such preferred
stock which are payable upon such conversion.
(2) Pro forma as adjusted to give effect to the receipt of the net proceeds of
approximately $186,000,000 from the sale of shares of Common Stock offered
by the Company hereby (at an assumed initial public offering price of $19.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated net
proceeds therefrom for the repayment of the $33,319,000 indebtedness to EKI,
$11,879,000 in notes payable to banks, and the payment of preferred
dividends of $9,150,000. See "Use of Proceeds" and "Capitalization."
(3) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(4) Assumes the application of the 262-for-one stock split to the Company's
26,675 shares of Series A Preferred Stock issued and outstanding at December
31, 1997.
(5) Excludes 1,158,040 shares issuable upon exercise of outstanding stock
options. See "Management--Stock Option Plans."
(6) Gives effect to $9,150,000 of dividends payable upon conversion of shares of
Series A Preferred Stock to shares of Common Stock.
17
<PAGE>
DILUTION
The pro forma net tangible deficit of the Company as of December 31, 1997
was $53.7 million, or $.60 per share, assuming the conversion of the Company's
outstanding Series A Preferred Stock into 6,988,850 shares of Common Stock as of
such date. Net tangible deficit per share is determined by dividing the tangible
deficit of the Company (tangible assets less total liabilities) by the number of
shares outstanding. Without taking into account any changes in such pro forma
net tangible deficit after December 31, 1997 other than to give effect to the
sale of the 10,526,316 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $19.00 per share, pro forma net
tangible book value of the Company as of December 31, 1997 would have been
approximately $132.2 million, or $1.32 per share (after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company). This represents an immediate increase in pro forma net tangible
book value of $1.92 per share to existing stockholders and an immediate dilution
of $17.68 per share to new stockholders. Dilution to new stockholders is
determined by subtracting the pro forma net tangible book value per share after
the Offering from the initial public offering price per share. The following
table illustrates this per-share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 19.00
Pro forma net tangible deficit per share before Offering
(1)..................................................... $ (.60)
Increase per share attributable to new stockholders....... 1.92
---------
Pro forma net tangible book value per share after
Offering.................................................. 1.32
---------
Dilution per share to new stockholders...................... $ 17.68
---------
---------
</TABLE>
- ------------------------------
(1) The table excludes shares issuable and proceeds that would be received upon
exercise of options outstanding on December 31, 1997. See "Management--Stock
Option Plans" and "Description of Capital Stock."
The following table summarizes, as of December 31, 1997, the number of
shares purchased from the Company, the total investment made and the average
price per share invested by existing stockholders and new stockholders.
<TABLE>
<CAPTION>
SHARES
PURCHASED (1)(2) TOTAL INVESTMENT AVERAGE
----------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 89,518,850 89.5% $26,685,000 11.8% $ .30
New stockholders.............. 10,526,316 10.5 200,000,000 88.2 19.00
------- ------- ----------- ------- ---------
Total..................... 100,045,166 100% $226,685,000 100% $ 2.27
------- ------- ----------- ------- ---------
------- ------- ----------- ------- ---------
</TABLE>
- ------------------------------
(1) Includes shares of Common Stock issuable upon conversion of the 26,675
shares of Series A Preferred Stock of the Company outstanding into 6,988,850
shares of Common Stock. Excludes 1,158,040 shares issuable upon the exercise
of outstanding stock options. See "Management--Stock Option Plans" and
"Description of Capital Stock."
(2) Sales by the Selling Stockholders in the Offering will reduce the number of
shares held by existing stockholders to 86,845,166 or approximately 86.8%
(or approximately 84.8% if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares purchased by new
stockholders to 13,200,000 shares (or approximately 15.2% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the Offering.
18
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below at December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997 and from
November 1, 1992 (inception) through December 31, 1997, are derived from the
financial statements of the Company, audited by Deloitte & Touche LLP,
independent auditors, included elsewhere in this Prospectus. The balance sheet
information for the years ended December 31, 1993, 1994, and 1995 and statements
of operations data for 1993 and 1994 are derived from audited financial
statements that are not included elsewhere in this Prospectus. The financial
data for the year ended December 31, 1993 also includes the Company's results of
operations for the period from November 1, 1992 (inception) through December 31,
1992.
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------------------------- DECEMBER 31,
1993 (1) 1994 1995 1996 1997 1997
----------- --------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development expenses....................... $ 3,309 $ 10,930 $ 9,100 $ 10,159 8,901 $ 42,400
General and administrative expenses..................... 2,500 3,428 2,362 3,405 5,685 17,379
Interest (income) expenses, net......................... (147) (290) 478 1,692 3,246 4,978
Depreciation and amortization........................... 601 797 44 311 507 2,259
Patent expenses......................................... 1,520 1,717 1,929 1,382 653 7,201
Net loss................................................ (7,783) (16,582) (13,914) (16,950) (18,992) (74,221)
Basic and diluted net loss per share (2)................ (24.20) (48.53) (40.72) (49.61) (55.59)
Pro forma net loss per share (2)(3)(4).................. $ (.31)
Weighted average number of shares used in computing pro
forma net loss per share (4).......................... 90,760,372
Supplemental pro forma net loss per share............... (.27)
Weighted average number of shares used in computing
supplemental pro forma net loss per share (4)......... 93,139,200
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 ACTUAL PRO FORMA (3)
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 16,170 $ 2,885 $ 266 $ 21 $ 8 $ 8
Working capital (deficit)......................... 15,230 (124) (14,569) (31,489) (48,308) (57,458)
Total assets...................................... 17,640 3,250 2,228 2,817 3,778 3,778
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... 624 3,267 13,560 29,873 45,162 54,312
Deficit accumulated during development stage...... (7,783) (24,365) (38,279) (55,229) (74,221) (83,371)
Stockholders' equity (deficit) (7)................ 16,700 118 (12,678) (28,732) (44,567) (53,717)
<CAPTION>
PRO FORMA AS
ADJUSTED
(5)(6)
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 131,660
Working capital (deficit)......................... 128,513
Total assets...................................... 135,430
Notes payables, payable to majority stockholder,
accrued interest and accrued dividends.......... --
Deficit accumulated during development stage...... (83,406)
Stockholders' equity (deficit) (7)................ 132,248
</TABLE>
- ----------------------------------
(1) Represents the financial results for the period from November 1, 1992
(inception) through December 31, 1993.
(2) Basic and diluted net loss per share is calculated based on weighted average
shares outstanding of 321,667 shares for 1993 and 341,675 shares for 1994,
1995, 1996 and 1997.
(3) Pro forma to give effect to the assumed conversion of the Series A Preferred
Stock of the Company into Common Stock and the accrual of preferred
dividends of approximately $9,150,000 payable upon such conversion.
(4) As a result of the 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.
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 (481,573 shares); and (iv) the net shares
issuable related to stock options using the Treasury Stock Method (759,949
shares). Supplemental pro forma net loss per share has been calculated by
dividing pro forma net loss less interest expense and amortization of loan
discount by the sum of (i) weighted average of common stock issued and
outstanding (82,530,000 shares); (ii) common stock issuable related to the
assumed conversion of Series A Preferred Stock (6,988,850 shares); (iii) the
number of shares (priced at $19.00 per share) the proceeds from which will
be used to fund dividends payable (481,573 shares); (iv) the net shares
issuable related to stock options using the Treasury Stock Method (759,949
shares) and (v) the number of shares (priced at $19.00 per share) the
proceeds from which will be used to repay the $33,319,000 indebtedness owed
to majority stockholder and approximately $11,879,000 notes payable to banks
(an aggregate of 2,378,829 shares).
(5) Adjusted to give effect to the receipt of the net proceeds of approximately
$186,000,000 from the sale of shares of Common Stock offered by the Company
hereby (at an assumed initial public offering price of $19.00 per share and
after deducting underwriting discounts and estimated offering expenses) and
the application of the estimated net proceeds therefrom for the repayment of
the $33,319,000 indebtedness to EKI, $11,879,000 in notes payable to banks
and the payment of preferred dividends of $9,150,000. See "Use of Proceeds"
and "Capitalization."
(6) Reflects write-off of unamortized original issue discount of $35,000 related
to stock warrants issued with debt.
(7) No cash dividends were declared or paid in any of the periods presented
except as noted in note (3) above.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AUDITED FINANCIAL STATEMENTS AND UNAUDITED FINANCIAL STATEMENTS AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
The Company was organized in November 1992 as a Delaware corporation and
remains a development stage enterprise. The Company's principal stockholder,
EKI, has been involved since July 1985 in the development of various new
material technologies including the ALI-ITE composite material. The Company was
formed to develop, license and commercialize food service disposables made of
the ALI-ITE composite material ("EARTHSHELL products"). The Company has an
exclusive, worldwide, royalty-free license from EKI to use certain technology
for this purpose. The Company intends to license or joint venture with existing
manufacturers of food service disposables for the manufacture and distribution
of EARTHSHELL products. The Company expects to derive revenues primarily from
license royalties, income from joint ventures and lease payments from equipment
leased to manufacturers of EARTHSHELL products.
The Company has incurred aggregate net losses of approximately $74.2 million
from its inception in November 1992 through December 31, 1997. The Company has
been unprofitable to date and expects to continue to suffer operating losses
until its products are commercially introduced and achieve widespread market
acceptance and significant market penetration. Since its inception, the Company
has not generated any revenues from operations. Successful future operations
will depend upon the ability of the Company, its licensees and joint venture
partners to commercialize multiple EARTHSHELL products.
The Company has financed its operations from inception primarily through the
private placement of preferred stock and loans from its principal stockholder,
EKI, and Imperial Bank. The Company's principal activities to date have included
material and product development, development of commercial manufacturing
processes, demonstration of the licensed technology, licensing the technology to
key manufacturers and producers and seeking patent protection of the licensed
technology. The Financial Statements reflect the costs and expenses related to
the development of the licensed technology as it relates to food service
disposables since the Company's formation in 1992.
Since inception, the Company has relied on EKI to provide extensive
administrative, management and technical support. The Company and EKI entered
into the Technical Services Agreement which continues through December 31, 2002.
Under the terms of the Technical Services Agreement, the Company pays EKI for
all direct project labor hours incurred by technical personnel and direct
expenses incurred on approved projects. In addition, under the Patent Allocation
Agreement, the Company reimburses EKI for the costs and expenses of filing,
prosecuting, acquiring and maintaining certain patents and patent applications
relating to the technology licensed to the Company under the License Agreement.
The Technical Services Agreement superseded a Technical Services and Sublease
Agreement which terminated on September 30, 1997 (the "Prior Technical Services
Agreement") and the Patent Allocation Agreement superseded an Agreement for
Allocation of Patent Costs which terminated on September 30, 1997 (the "Prior
Patent Allocation Agreement"). See "Business--Relationship with EKI."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's net loss increased $2.0 million from $17.0 million for the
year ended December 31, 1996 to $19.0 million for the year ended December 31,
1997.
20
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL products decreased $1.3 million
from $10.2 million for the year ended December 31, 1996 to $8.9 million for the
year ended December 31, 1997. The amount of research and development services
billed by EKI to the Company decreased $1.6 million from $9.1 million for the
year ended December 31, 1996 to $7.5 million for the year ended December 31,
1997. In 1996, the Company incurred higher research and development expenses
primarily due to development and operation of the Company's sandwich container
pilot line at a research facility in Rock Hill, South Carolina operated by
Genpak, one of the Company's licensees. The Company completed its development
efforts with Genpak near the end of 1996 and relocated the pilot line to Santa
Barbara, California in the fourth quarter of 1996 and, accordingly, costs
related to this off-site manufacturing effort were not incurred during 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $2.3 million from $3.4 million for the year ended December
31, 1996 to $5.7 million for the year ended December 31, 1997. This increase was
primarily due to the recognition of compensation expense of $3.1 million
resulting from the extension of the terms of certain option agreements in
October 1997 that have been deemed as re-grants and, therefore, have been
treated as stock options granted at prices below market. Similarly in 1996, the
Company recognized compensation expense of $650,000 related to executive stock
options.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $196,000 from $311,000 for the year ended December 31, 1996 to
$507,000 for the year ended December 31, 1997. The increase in depreciation
expense was mainly a result of the purchase of pilot manufacturing equipment
formerly located at the Genpak, Rock Hill, South Carolina facility for the
Company's Santa Barbara product development center.
PATENT EXPENSES. Legal fees under the Patent Allocation Agreement with EKI
decreased $729,000 from $1.4 million for the year ended December 31, 1996 to
$653,000 for the year ended December 31, 1997. The decrease was primarily a
result of filing fewer new patent applications.
INTEREST (INCOME) EXPENSES, NET. Total interest expense increased $1.5
million from $1.7 million for the year ended December 31, 1996 to $3.2 million
for the year ended December 31, 1997. The increase in interest expense during
1997 was due to additional borrowings from EKI and additional borrowings against
the Company's line of credit.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net loss increased $3.0 million from $14.0 million for the
year ended December 31, 1995 to $17.0 million for the year ended December 31,
1996.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL products increased $1.1 million
from $9.1 million for the year ended December 31, 1995 to $10.2 million for the
year ended December 31, 1996. The increase for the year ended December 31, 1996
compared to 1995, was primarily due to the Company's development manufacturing
efforts on the EARTHSHELL sandwich container pilot line at the Genpak research
facility in South Carolina and its relocation near the end of 1996 to Santa
Barbara. Also, in preparation for the Offering, the Company increased its
efforts in the environmental science and marketing areas related to the
EARTHSHELL sandwich container resulting in increased expenses from $543,000 to
$914,000 for the years ended December 31, 1995 and 1996, respectively. The
Company was billed by EKI for research and development services totaling $9.1
million and $8.4 million for the years ended December 31, 1996 and 1995,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $1.0 million from $2.4 million for the year ended December
31, 1995 to $3.4 million for the year ended
21
<PAGE>
December 31, 1996. This increase was primarily due to the recognition of
compensation expense of $650,000 related to one executive's stock options which
vested during 1996, a severance payment of $75,000, and legal and filing fees
related to the Offering of $427,000.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $267,000 from
$44,000 for the year ended December 31, 1995 to $311,000 for the year ended
December 31, 1996. The increase was primarily due to purchase of commercial
scale pilot manufacturing equipment for EARTHSHELL sandwich containers which
totaled $1.2 million in 1996.
PATENT EXPENSES. Legal fees under the Prior Patent Allocation Agreement
with EKI decreased $547,000 from $1.9 million for the year ended December 31,
1995 to $1.4 million for the year ended December 31, 1996. The decrease was
primarily a result of filing fewer patent applications.
INTEREST (INCOME) EXPENSES, NET. Total interest expense increased $1.2
million from $510,000 for the year ended December 31, 1995 to $1.7 million for
the year ended December 31, 1996. The increase in interest expense was due to
additional borrowings from EKI of $9.2 million and borrowings against the line
of credit of $7.1 million for the year ended December 31, 1996. Due to the
reduction of excess cash for investment purposes in 1996, interest income
decreased $29,000 from $32,000 for the year ended December 31, 1995 to $3,000
for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net loss decreased $2.7 million from $16.6 million for the
year ended December 31, 1994 to $13.9 million for the year ended December 31,
1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures
for the development of EARTHSHELL products decreased $1.8 million from $10.9
million for the year ended December 31, 1994 to $9.1 million for the year ended
December 31, 1995. The decrease was primarily due to the change in the billing
structure between the Company and EKI under the Prior Technical Services
Agreement and a reduction in project costs related to the development and
testing of a commercial scale paper line totaling $1.2 million. The Company was
billed by EKI for technical services totaling $8.4 million and $9.5 million for
the years ended December 31, 1995 and 1994, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses decreased $1.0 million from $3.4 million for the year ended December
31, 1994 to $2.4 million for the year ended December 31, 1995. This decrease was
due primarily to the elimination in 1995 of the $1.2 million in administrative
fees which were paid to EKI in 1994. Other significant but largely offsetting
changes in general and administrative expenses in 1995 compared to 1994 included
an increase in salary expense. In the latter part of 1994, the Company hired key
executives to position itself for commercial product introduction. As a result,
the Company's compensation expense increased $251,000 from $861,000 for the year
ended December 31, 1994 to $1.1 million for the year ended December 31, 1995. In
addition, general legal fees increased $168,000 from $380,000 for the year ended
December 31, 1994 to $548,000 for the year ended December 31, 1995. The Company
recorded a $51,000 write down of assets in the first quarter of 1994. In 1995,
surplus research materials and equipment were sold for $89,000. In total, these
equipment expense related transactions resulted in a reduction in miscellaneous
income and expense of $140,000.
PATENT EXPENSES. Legal fees under the Prior Patent Allocation Agreement
with EKI increased $212,000 from $1.7 million for the year ended December 31,
1994 to $1.9 million for the year ended December 31, 1995. The increase was due
primarily to the filing of additional patent applications in foreign countries.
DEPRECIATION AND AMORTIZATION. Depreciation expense decreased $753,000 from
$797,000 for the year ended December 31, 1994 to $44,000 for the year ended
December 31, 1995. The decrease was largely due to the sale on December 31, 1994
of substantially all of the Company's laboratory equipment and leasehold
22
<PAGE>
improvements to EKI at their original acquisition price. In addition, the
Company sold commercial process equipment originally purchased for a pilot
manufacturing line to a third party in March 1995. During 1995, the Company
purchased additional commercial processing equipment. As of December 31, 1995,
the Company's fixed assets consisted of office equipment and deposits on
equipment related to the sandwich container production line with a net book
value of $1.9 million, whereas at December 31, 1994 the Company's fixed assets
had a net book value of $242,000.
INTEREST (INCOME) EXPENSES, NET. Interest income for the year ended
December 31, 1995 totaled $32,000 compared to $291,000 for the year ended
December 31, 1994. The reduction in interest income was due to the reduced level
of excess cash available for investment purposes. During 1995, the Company
obtained working capital loans from EKI which totaled $6.2 million. Intercompany
charges payable to EKI under the Prior Technical Services Agreement and Prior
Patent Allocation Agreement totaling $8.6 million were converted to demand notes
in 1995. Accordingly, interest expense for 1995 was $510,000.
LIQUIDITY AND CAPITAL RESOURCES
As a development stage company, since its inception in November 1992, the
Company has had no operating revenues and does not expect to have any revenues
until at least the fiscal quarter ending June 30, 1999. Through December 31,
1997, the Company had incurred aggregate net operating losses of approximately
$74.2 million.
Funds to finance the operation of the Company through December 31, 1997 have
been obtained primarily from a private placement of its Series A Preferred Stock
and borrowings from EKI and Imperial Bank. In September 1993, the Company raised
$25.7 million from the private placement of Series A Preferred Stock with
issuance costs of $1.2 million. From inception through December 31, 1997, the
Company borrowed approximately $10.8 million from EKI (excluding the
intercompany payables owed to EKI) and $11.9 million from Imperial Bank under a
line of credit. In connection with the line of credit, the Company executed a
general security agreement that grants Imperial Bank a security interest in the
Company's License Agreement with EKI. From inception through December 31, 1997,
the Company received approximately $45.6 million in cash from financing
activities. Outstanding loans from, and payables owed to, EKI totaled $33.3
million as of December 31, 1997. Credit extended under the Imperial Bank line of
credit as of December 31, 1997 totaled $11.9 million. The Imperial Bank line of
credit was increased to $14.0 million in December 1997 and the Company expects
to have fully drawn down the line at the time of the Offering.
From inception through December 31, 1997, the Company had used approximately
$39.0 million of cash for operating activities and approximately $6.6 million of
cash in investing activities. Net cash used in investing activities has
consisted primarily of manufacturing and lab equipment purchases. Since
inception, capital expenditures have amounted to $7.2 million.
Primarily because of the Company's history of operating losses and its
reliance on its stockholders to provide cash flow to sustain operations, there
is substantial doubt about the Company's ability to continue as a going concern
unless the Company is able to obtain equity financing through the Offering,
loans from its principal stockholder or otherwise. Without the proceeds of the
Offering or other funding, the Company would run out of cash to fund its
operations. The report of independent accountants on the Company's financial
statements included herein includes an explanatory paragraph to this effect.
The Company anticipates that it will borrow from third-party lenders a
portion of the funds required to purchase equipment and construct turnkey
manufacturing lines for its licensee and joint venture partners. The Company
believes that the net proceeds of the Offering (estimated to be approximately
$186 million, based on assumed offering price of $19.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses) together with such third-party financing will be sufficient to meet
its foreseeable working capital requirements through at least the next two
years. The Company currently intends to use the net proceeds to facilitate the
development of manufacturing capacity
23
<PAGE>
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 licensed technology and to establish a fund for the enforcement and
protection of patents, to pay accrued dividends on the Series A Preferred Stock,
and for general corporate purposes, including anticipated operating losses. Of
the $63.0 million that the Company intends to use in the engineering,
development and construction of initial manufacturing lines, the Company expects
that approximately $19 million will be expensed as development and engineering
costs. In addition, the Company has agreed to reimburse EKI, pursuant to the
Patent Allocation Agreement, up to $6.5 million in connection with the purchase
of certain technology, subject to amounts expended on the purchase of
manufacturing equipment and the use of such technology. See "Certain
Transactions--License Agreement and Patent Allocation Agreement." Proceeds
available for working capital are currently estimated to be approximately $35.6
million.
The Company has no commitments for any additional financing, and there can
be no assurance that any such commitments can be obtained on favorable terms, if
at all. If the Company is unable to obtain additional financing as needed, the
Company may be required to reduce the scope of its anticipated manufacturing
ramp-up and products introduction, which could have an adverse effect on the
Company's business, financial condition and results of operations.
NET OPERATING LOSS TAX CARRYFORWARDS
The Company has sustained net operating losses ("NOLs") for federal income
tax purposes in the aggregate amount of approximately $47.2 million from its
inception through December 31, 1997. Under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company generally is entitled to reduce its future
federal income tax liabilities by carrying unused NOLs forward for a period of
15 years to offset future taxable income earned.
In the event that the Company is subject to the federal personal holding
company tax in any taxable year, the Company can only use its NOLs, if any, from
the immediately preceding taxable year to offset its income subject to the
personal holding company tax for such year. See "Certain United States Federal
Tax Considerations."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and "Business," as well as within
the Prospectus generally. Actual results could differ materially from those
anticipated in the forward-looking statements as a result of the risk factors
set forth herein and the matters set forth in the Prospectus generally.
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 $63.0 million of the
proceeds of this Offering to fund the initial engineering, development and
construction of such manufacturing lines, including the initial manufacturing
equipment to be used at Sweetheart's Owings Mills, Maryland facility for the
production of EARTHSHELL Big Mac sandwich containers. By the end of 1999, the
Company expects to have supplied
25
<PAGE>
equipment to licensees and joint venture partners at multiple production sites
for the manufacture of a broad range of EARTHSHELL products, including cold
cups, hot cups, plates, bowls, sandwich containers and other hinged-lid
containers.
The development of the composite material used to make EARTHSHELL products
("ALI-ITE composite material") is the result of more than 10 years of basic
materials science research by E. Khashoggi Industries, LLC and its predecessors
("EKI"). EKI is the Company's principal stockholder. As of February 17, 1998,
EKI had obtained 52 U.S. and 26 foreign patents and had 19 U.S. and 117 foreign
patent applications pending which are applicable to EARTHSHELL products
utilizing the EKI technology. The Company believes that these patents and patent
applications represent a strategic web of protection broadly covering EARTHSHELL
products, their material composition and the manufacturing processes used to
make them.
Since the Company's inception in November 1992, the Company has not
generated any revenues from operations and, as of December 31, 1997, had
incurred aggregate net losses of approximately $74.2 million. The Company has an
exclusive, worldwide, royalty-free license to use and license the EKI technology
to manufacture and sell disposable, single-use containers for packaging or
serving food or beverages intended for consumption within a short period of time
(less than 24 hours). The Company does not have the right to use the EKI
technology for any other purposes. See "--Relationship with EKI."
BACKGROUND
Disposable food and beverage containers used in the food service industry
are currently manufactured from a variety of materials, including paper, plastic
and polystyrene. The Company believes that no disposable packaging material has
been developed, however, which addresses all of the three principal concerns of
the food service industry--performance, cost and environmental impact.
For example, while polystyrene products are relatively inexpensive and
provide good insulation, their manufacture and disposal have been shown to have
adverse environmental consequences. Production of polystyrene products results
in the depletion of certain non-renewable resources, such as crude oil and
natural gas, and also results in the release of significant amounts of
hydrocarbons into the atmosphere, which can contribute to the formation of smog.
Because polystyrene does not easily degrade, polystyrene litter can accumulate
and remain visible on beaches, lake shores and roadways. Environmentally
concerned consumers have actively lobbied against the use of polystyrene
packaging, and a number of communities have banned polystyrene disposables.
Because of environmental concerns, a number of quick-serve restaurant chains
have reduced their use of polystyrene products in favor of paper.
Paper products in many instances are more expensive than polystyrene
products, may offer reduced functional performance and have their own set of
adverse environmental consequences. The paper industry uses the wood from
millions of trees each year, and the manufacture of paper products requires
substantial amounts of energy and releases significant amounts of pollutants
into both the air and water. Corrugated paper-plastic laminate sandwich
containers and paper wraps have both been used as replacements for polystyrene
sandwich containers, but are generally less rigid and offer inferior heat
insulation. Similarly, paper hot cups are much less effective at heat insulation
than polystyrene foam cups, resulting in "double cupping" in some instances.
A number of companies have introduced plastic and starch-based materials as
potential environmentally superior packaging alternatives. To date, many of
these materials have suffered from either unacceptable performance limitations
or have not proven to be economically viable as disposable packaging.
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:
27
<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 is working with an engineering and
construction firm to deliver manufacturing lines at the licensee's or joint
venture partner's facilities in order to ensure that manufacturing equipment is
properly installed, integrated and producing EARTHSHELL products to meet
anticipated market demands. The Company intends to use $63.0 million of the
proceeds of the Offering to fund the initial engineering, development and
construction of turnkey manufacturing lines for lease to licensees or
contribution to joint ventures. As early as the end of 1998, the Company expects
that the construction of a multi-line manufacturing operation at Sweetheart's
Owings Mill, Maryland plant to supply containers for McDonald's Big Mac sandwich
will be completed. Subsequent lines for sandwich containers and other EARTHSHELL
products will be constructed at strategic locations determined in conjunction
with the Company's licensees. By the end of 1999, the Company expects to have
supplied equipment to licensees at multiple production sites for the manufacture
of a broad range of EARTHSHELL products including cold cups, hot cups, plates,
bowls, sandwich containers and other hinged-lid containers.
DEVELOP INTERNATIONAL MARKETS. The Company's international strategy is to
introduce EARTHSHELL products in foreign markets through quick-serve restaurant
industry leaders who will have already introduced EARTHSHELL food service
disposables in the United States. The Company intends to enter into strategic
licenses or joint ventures with key international packaging suppliers. The
Company does not expect to begin building overseas manufacturing capability
before the end of 1999.
PROTECT EARTHSHELL TECHNOLOGY. The Company, together with EKI, will
continue to seek to develop and maintain a web of patent protection covering
EARTHSHELL products, the material composition and the manufacturing processes
used to make them. As of February 17, 1998, EKI had received 52 U.S. and 26
foreign patents with regard to the compounds, manufacturing processes and
product designs applicable to EARTHSHELL products and had 19 U.S. and 117
foreign patent applications pending. The Company and EKI intend to continue to
seek domestic and international patent protection for further developments in
the technology and intend to vigorously enforce their rights against any person
infringing the technology.
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<PAGE>
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, 1995, 1996 and 1997 were approximately
$9.1 million, $10.2 million and $8.9 million, respectively. The Company's
research and development efforts are ongoing and the Company expects to continue
to incur substantial research and development expenses in the future.
MANUFACTURING OF EARTHSHELL PRODUCTS
While the Company's pilot manufacturing line utilizes commercial equipment,
EARTHSHELL products have not been manufactured on a fully integrated production
line or at the consistent manufacturing throughputs which will be required to
successfully manufacture EARTHSHELL products at the costs and in the quantities
necessary for their commercial introduction. Based on the limited production of
the EARTHSHELL sandwich containers and other prototype products by the Company,
the Company believes that EARTHSHELL products can be manufactured on known
commercial processing equipment, subject to certain application specific
modifications. The EARTHSHELL manufacturing process consists of blending the
component ingredients of ALI-ITE composite material in a mixer, depositing the
mixture into heated cavity molds, heating the molded mixture for approximately
one minute, removing the product, trimming excess material, spraying on
functional coatings and printing any desired graphics. The Company estimates
that the cost of the machinery and installation required for a fully integrated
commercial manufacturing line with annual production capability of 150 million
sandwich containers or 550 million cups is approximately $2.0 million.
The Company has identified multiple equipment manufacturers that produce
machinery on which the Company believes that EARTHSHELL products can be
produced, subject to application specific modifications. The Company believes
that these and other equipment manufacturers can produce a sufficient amount of
equipment to support the projected commercial introduction of EARTHSHELL
products. The Company believes that the design, construction and start up of the
first commercial plant to produce the EARTHSHELL Big Mac sandwich container will
take approximately 12 months, and that the design, construction and start up of
the first commercial plant for other EARTHSHELL product lines, such as hot 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 intends to rely on its licensees and joint venture partners for
the manufacture and distribution of EARTHSHELL products. As part of the
Company's strategy of supporting the development of sufficient production
capacity to meet anticipated customer demand for EARTHSHELL products, the
Company intends to use $63.0 million of the proceeds of the Offering to
engineer, develop and construct turnkey manufacturing lines in cooperation with
its licensees and joint ventures, of which the Company believes approximately
$19.0 million will be expensed as development and engineering costs. The Company
expects that the construction of a multi-line manufacturing operation at
Sweetheart's Owings Mill, Maryland plant to supply containers for McDonald's Big
Mac sandwich will be completed as early as the end of 1998. In addition, the
Company intends to expand its product development center in Santa Barbara,
California by adding mold design capacity and pilot manufacturing lines to
support the development, testing and introduction of new products in each major
product category. Subsequent lines for producing additional sandwich container
and other EARTHSHELL products will be built at strategic locations determined in
conjunction with licensees. By as early as the end of 1999, the Company expects
to have supplied equipment to licensees and joint venture partners at multiple
production sites for the manufacture of a broad range of EARTHSHELL products,
including cold cups, hot cups, plates, bowls, sandwich containers and other
hinged-lid containers. The Company intends to engage design engineering firms to
deliver manufacturing lines on a turnkey basis in order to ensure that enough
manufacturing equipment is properly installed, integrated and producing
EARTHSHELL products to meet the ramp-up demands. See "Risk Factors--Dependence
on Licensees and Joint Venture Partners" and "--Development of Manufacturing
Plants."
Most EARTHSHELL products will require one or more product specific coatings
to deliver specific performance characteristics. The EARTHSHELL Big Mac sandwich
container has an interior (food contact side) wax coating which serves
principally as a moisture barrier. The container also has an exterior coating
which contributes to the flexibility and stability of the product. The Company
intends to identify and develop other product specific coatings and additives
for use with its products on an ongoing basis.
EARTHSHELL products use commonly available raw materials, such as limestone,
natural potato and corn starch, natural fiber and functional coatings. The
Company and certain of its licensees believe that these raw materials are
currently available from multiple existing suppliers in amounts sufficient to
satisfy projected demand. The Company and its licensees have identified multiple
qualified suppliers of raw materials for the manufacture of EARTHSHELL products.
See "Risk Factors--Raw Material Supplies."
MARKETING
The Company's primary marketing strategies are to develop consumer awareness
of the brand name EARTHSHELL and the environmental advantages of EARTHSHELL
products and to work directly with major users and distributors of food service
disposables to encourage the purchase of EARTHSHELL products. In working with
significant food service operators, the Company has developed prototype products
designed to meet operator specifications. These operators are able to use the
prototype products to perform market tests and determine product performance and
cost. The Company believes that the adoption of EARTHSHELL products by
influential users will accelerate market penetration of EARTHSHELL products, as
well as promote the interest of existing container manufacturers in producing
and distributing EARTHSHELL products.
The Company intends to use a portion of the proceeds of the Offering to
expand its product development center at which it intends to develop and produce
sample EARTHSHELL products for commercial testing by food service operators. The
product development center will enable Company 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
31
<PAGE>
approximately 13 employees, including product development engineers, and
technical support staff in the first year following the Offering to staff this
facility.
In order to introduce EARTHSHELL products to the public, the Company intends
to use a portion of the proceeds of the Offering to launch an advertising
campaign which will include school education packets, network television and
print advertising describing the benefits of EARTHSHELL products. This
advertising campaign will be designed to develop a high level of consumer
awareness of the brand name EARTHSHELL and the environmental benefits of
EARTHSHELL products. As an additional part of the Company's strategy of
establishing brand name recognition, most licensees will either be required to
place the EARTHSHELL logo on all EARTHSHELL products or will be required to pay
an additional 2% royalty.
Distribution of EARTHSHELL products is expected to be accomplished through
the established product distribution networks of existing manufacturers and
distributors of food service disposables who become licensees of or joint
venture partners with the Company. Because these manufacturers have extensive
experience in the marketing and distribution of food service disposables, the
Company does not expect to employ substantial numbers of sales or marketing
personnel.
RELATIONSHIP WITH MCDONALD'S
Since 1991, the Company has worked closely with McDonald's in developing and
testing two products, the Big Mac sandwich container and a sandwich container
for the Quarter Pounder with Cheese sandwich ("QPC"). While McDonald's primary
packaging purchaser, Perseco, has entered into a supply agreement to purchase
EARTHSHELL Big Mac sandwich containers from a Company licensee, the Company is
not a party to any development contract with McDonald's and McDonald's is free
to discontinue its development relationship with the Company at any time.
McDonald's is a stockholder in the Company.
Extensive testing of the EARTHSHELL QPC sandwich container by McDonald's
included a market test in approximately 40 Las Vegas area restaurants from
September to November 1996. The Company's QPC sandwich container experienced
certain product performance shortcomings during this Las Vegas test, including
excess breakage and the need of McDonald's employees to use two hands to close
and latch the container. In part in response to these test results, the Company
has made ongoing improvements to the EARTHSHELL sandwich container, including
the redesign of the container's original tab and slot latch design to permit
one-handed closing, the reconfiguration of the secondary packaging used to ship
the container to reduce breakage in shipping, and improvement in the container's
exterior coating to reduce breakage in shipping and use. As a result of this
process, McDonald's has approved the EARTHSHELL Big Mac sandwich container for
use in McDonald's restaurants in the United States. This approval is expressed
in a non-binding letter agreement which sets forth various terms and conditions
for the use of the EARTHSHELL sandwich container in McDonald's restaurants,
including many of the terms and conditions included in the Perseco-Sweetheart
supply agreement described below. In addition, as part of an agreement with
McDonald's and a leading environmental group, the Company has agreed to make
certain improvements to the EARTHSHELL Big Mac Sandwich container, including
lowering the weight, and McDonald's has agreed to undertake certain other
packaging modifications. The Company anticipates that McDonald's will require a
limited regional verification of the EARTHSHELL Big Mac sandwich container
manufactured on a fully-integrated commercial production line prior to the
national roll-out of the product.
McDonald's primary packaging supplier, Perseco, has entered into a supply
agreement with Sweetheart, a leading manufacturer of disposable packaging (the
"Perseco--Sweetheart Supply Agreement"), pursuant to which Perseco is expected
to purchase not less than 1.8 billion EARTHSHELL Big Mac sandwich containers
over a three-year period. Perseco's agreement to purchase EARTHSHELL Big Mac
sandwich 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
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McDonald's to purchase the first commercial production available for any
subsequently developed EARTHSHELL products applicable to the quick-serve
restaurant industry and satisfaction of McDonald's demand for any quick-serve
package prior to the sale to any other organizations. The Company has entered
into a license agreement and an operating agreement with Sweetheart which
contemplates that the Company will fund and build, at Sweetheart's Owings Mills,
Maryland facility, the manufacturing capacity necessary to produce the
EARTHSHELL Big Mac sandwich containers to be sold to Perseco. See "--License and
Joint Venture Relationships."
LICENSE AND JOINT VENTURE RELATIONSHIPS
The Company intends to grant licenses to, and enter into joint venture
relationships with, a broad group of companies throughout the world to
manufacture and distribute EARTHSHELL products. The Company expects both license
agreements and joint venture relationships will typically be on a non-exclusive
basis (except in some foreign countries where an exclusive relationship may be
appropriate) with a specific geographic and product scope.
The Company and Sweetheart have entered into a license agreement (the
"Sweetheart License Agreement") pursuant to which the Company has licensed, on a
non-exclusive basis, its technology to Sweetheart for the manufacture and
distribution of hinged-lid sandwich containers to Perseco for use in McDonald's
restaurants in the United States and Canada. The Sweetheart License Agreement
provides for a 20% royalty payable to the Company on the price paid by Perseco
for the containers. The pre-existing license agreement between the Company and
Sweetheart was terminated as a result of the parties entering into the
Sweetheart License Agreement. Under the Sweetheart License Agreement, the 20%
royalty will commence to accrue at the time certain efficiency and cost levels
relating to the equipment provided by the Company to Sweetheart are met (the
"Start Date"). The Company and Sweetheart also entered into an Operating
Agreement (the "Operating Agreement"), pursuant to which the Company has agreed,
at its expense, to purchase, install and make available to Sweetheart at
Sweetheart's Owings Mills, Maryland facility approximately four lines of
equipment for the production of the EARTHSHELL Big Mac sandwich containers in
return for the Company's right to receive certain equity distributions in
addition to the royalty. Pursuant to the Operating Agreement, the Company will
fund certain operating costs prior to the Start Date and certain incremental
costs incurred by Sweetheart if the equipment does not meet certain efficiency
and cost criteria for a two-year period following the Start Date.
Pursuant to the Sweetheart License Agreement, the Company has agreed that it
will not enter into a more favorable license agreement with any third party to
sell sandwich containers to Perseco or McDonald's. The Company has also agreed,
under certain circumstances, to reimburse Sweetheart for certain freight costs
charged by Perseco pursuant to the Perseco--Sweetheart Supply Agreement. The
Sweetheart License Agreement also provides that any improvements developed by or
for Sweetheart will be owned by Sweetheart, but will be subject to an
irrevocable, non-exclusive license to the Company. In addition, under the
Operating Agreement, the Company has agreed to indemnify Sweetheart for, among
other things, claims relating to the safety of the operating equipment,
intellectual property matters and compliance of the McDonald's containers with
FDA regulations. The Operating Agreement terminates at the end of 10 years,
subject to earlier termination upon the occurrence of certain events. Upon
termination, Sweetheart has reserved the right, under certain conditions, to
purchase the equipment from the Company at a price equal to the Company's
unrecovered cost basis.
The Company has also entered into a letter of intent with Prairie Packaging
Inc. ("Prairie") which contemplates that the Company and Prairie will enter into
definitive agreements for the manufacture and 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%
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(less a 2% discount if EARTHSHELL products produced by the licensees bear the
EARTHSHELL logo) of the gross sales price of EARTHSHELL products sold by either
of them. Under the terms of these agreements, the manufacturers are not
obligated to achieve minimum sales quotas and have the right to terminate the
license agreements at their election without penalty. Unless sooner terminated,
each license continues in effect until the expiration of the Company's license
from EKI. Each of the Genpak and Dopaco license agreements also provides that,
during the first three years of its term, if the licensee experiences an adverse
material change in circumstances, such as a significant and unexpected increase
in the cost of necessary raw materials, the Company and the licensee will
negotiate appropriate adjustments in the terms of the license. Under the
agreements, all domestic licenses (within the United States) granted by the
Company are required to contain substantially the same terms and conditions so
that no domestic licensee will gain a material advantage over another licensee
by virtue of the license agreement. None of the licensees are currently
producing or distributing any products under the terms of these license
agreements.
In addition, the Company expects to enter into joint venture or combined
joint venture and license relationships in which it would expect to derive joint
venture and license revenues of not less than 20% of the wholesale price of the
EARTHSHELL products sold by the joint venture. The terms of such joint ventures
may include the contribution by the Company of turnkey manufacturing lines, the
grant of exclusive or non-exclusive licenses for defined territories and
products and, may provide during the initial commercial introduction of
EARTHSHELL products, guarantees of manufacturing line efficiency for a limited
period of time and, funding to meet the joint venture's start-up costs. The
Company anticipates, however, that the terms of such relationships may vary
significantly between joint ventures.
The Company intends to provide ongoing assistance and technical support to
its licensee manufacturers and joint venture partners. This support will be
designed to facilitate the application of the licensed technology, further
develop manufacturing processes, reduce production costs and allow the Company
to monitor product quality. Support will be provided by the Company primarily
through EKI technical personnel working on behalf of the Company pursuant to the
Technical Services Agreement and through outside independent consulting firms
which have assisted the Company in developing its products.
Although it has no current intention of doing so, in addition to license
agreements and joint venture relationships, the Company may also decide to
construct its own commercial production facilities and manufacture and
distribute EARTHSHELL products directly. See "Risk Factors--Dependence on
Licensees and Joint Venture Partners."
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The Company's licensed technology is the subject of numerous issued and
pending patents in both the United States and foreign countries. The Company
believes that these patent and patent applications represent a strategic web of
patent protection broadly covering the EARTHSHELL products, their material
composition and the manufacturing processes used to make them. The Company has a
license from EKI to the rights to 52 U.S. and 26 foreign patents, as well as 19
U.S. and 117 foreign pending patent applications (as of February 17, 1998)
relating to the compositions, products and manufacturing processes used to
produce EARTHSHELL food and beverage containers. The patents currently issued in
the United States and internationally expire between 2012 and 2014. Pending
patents, if granted, would give the Company additional patent protection through
2016. Seventeen of the issued U.S. patents relate specifically to molded food
and beverage containers manufactured from ALI-ITE composite material, the
formulation of ALI-ITE composite material used in the EARTHSHELL Big Mac
sandwich container and substantially all of 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
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Company will not be held invalid, circumvented or infringed by others. Patent
and patent applications on formulations of ALI-ITE composite material are based
in part on specific proportional mixtures of the components of the material. The
Company continues to undergo testing and modification of the components and
their proportional mixtures to improve environmental profile, reduce materials
and processing cost and improve product performance. There can be no assurance
that the mixture that is ultimately determined to be optimal will be protected
under the Company's patents or that it will not be subject to a patent held by
others. If the optimal mixture is not protected under the Company's patents or
is subject to a patent held by others and a third party asserts patent
infringement, it would have an adverse effect on the Company's business,
financial condition and results of operations. The Company has identified at
least one other series of patents held by a third party which protect materials
and methods for manufacturing materials containing some similar components as
are found in ALI-ITE composite material. EKI has entered into an agreement to
purchase this technology, subject to certain outstanding rights, and to license
it back to its current owner for limited purposes on a royalty-free, perpetual
basis. The Company's license from EKI will include a license to this technology.
For a period of five years following the introduction of EARTHSHELL products,
EKI has agreed that it will cause the Company to purchase a minimum of 70% of
the manufacturing equipment to be used by EARTHSHELL licensees (up to $70
million) from the current owner of the patents, provided such equipment can
obtain certain performance levels. The Company has agreed to reimburse EKI,
pursuant to the Patent Allocation Agreement, up to $6.5 million in connection
with the purchase of certain technology, subject to amounts expended on the
purchase of manufacturing equipment and the use of such technology. See "Certain
Transactions--License Agreement and Patent Allocation Agreement."
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Although the Company knows of no infringement by its products of patents
held by others, it is always possible that a third party may assert
infringement. The Company believes that it owns or has the rights to use all
technology incorporated into its products, but an adverse determination in any
such proceedings or in other litigation or infringement proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties or require the Company to seek licenses from third parties.
Although patent and intellectual property disputes have often been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses would prevent the Company from manufacturing or
licensing others to manufacture certain of its products, which could have an
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies on proprietary know-how and trade secrets which are
not the subject of patents. Some of this proprietary information is licensed
from EKI and some has been developed by the Company. To protect its rights in
proprietary know-how and trade secrets, both the Company and EKI require certain
licensees, joint venture partners, employees, consultants, advisors and
collaborators to enter into confidentiality agreements. These confidentiality
agreements, however, have limited terms (typically, five years or less), and
there can be no assurance that these agreements will provide meaningful
protection for the Company's and EKI's trade secrets, know-how or other
proprietary information in the 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
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the market for paper roll stock and expanded polystyrene resin. A large number
of manufacturers worldwide convert paper roll stock and expanded polystyrene
resin into paper and polystyrene food service disposables. Most of these
competitors currently have substantially greater financial and marketing
resources than the Company, and many have well-established supply, production
and distribution relationships and channels. To be successful, EARTHSHELL
products must be recognized as being superior, in either or both their
performance and environmental impact, to existing products and must be capable
of commercial production at prices competitive with those of existing products.
There can be no assurance that the EARTHSHELL products can be manufactured at
cost-competitive prices or that they will be able to achieve such recognition,
nor can there be any assurance that companies producing competitive products
will not reduce their prices or engage in advertising or marketing campaigns
designed to protect their respective market shares and impede market acceptance
of EARTHSHELL products. Additionally, some of the Company's licensees and joint
venture partners manufacture paper, plastic and foil packaging which will
compete with EARTHSHELL products. See "Risk Factors--Uncertain Production
Costs."
Recently, a number of paper and plastic disposable packaging manufacturers
and converters and others have made efforts to increase the recycling of these
products. Increased recycling of paper and plastic products could lessen their
negative environmental impact, one significant basis upon which the Company
intends to compete. A number of companies have introduced starch-based materials
as potential environmentally superior packaging alternatives, although, to date,
the Company believes that many of these products have suffered from performance
limitations and they have not proven to be economically viable methods of
packaging. A number of companies are developing composites or other materials
which may be used to manufacture food service disposables with reduced
environmental impact. To date, the Company believes that much of the 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 Big Mac sandwich
container and all other current prototype products is either approved by the FDA
as an indirect food additive for its intended use, codified in the FDA's
regulations as GRAS for its intended use, or a commonly recognized food
ingredient regarded by the Company and its consultants as GRAS for its intended
use. The Company has not sought the concurrence of the FDA in this
determination. The Company intends to ensure that the raw materials used in the
EARTHSHELL Big Mac sandwich container are of suitable purity for their intended
uses by specifying standards to be met by suppliers of raw materials and by
material and product testing. There is no requirement that the Company or a
manufacturer of EARTHSHELL products seek FDA concurrence that certain components
are GRAS for their intended uses or that the raw materials are of suitable
purity for their intended uses. As a result, the Company believes that the
EARTHSHELL Big Mac sandwich container and other current prototype products will
be in compliance with all requirements of the FDA and do not
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require FDA approval. There can be no assurance, however, that the FDA would
agree with these conclusions.
Other EARTHSHELL products under development may use components that are not
approved by the FDA as indirect food additives, or that cannot reasonably be
considered GRAS for their intended uses. If such a component is used, it will be
necessary for the manufacturers of the product, or the Company on their behalf,
to: (i) obtain an FDA indirect food additive approval covering the component and
its intended uses; (ii) obtain an informal determination from the FDA stating
that the substance will not be regulated as an indirect food additive because
the amount of the substance migrating to food is considered insignificant by the
FDA and therefore below the FDA's "threshold of regulation", or (iii) submit a
notification to the FDA regarding a food contact substance. A food additive
petition must be supported by detailed information concerning the composition
and manufacture of the food additive, as well as by the results of testing to
establish the safety of the additive. Typically, safety testing at exaggerated
doses in several species of laboratory animals is required. The testing required
to support a food additive petition could take a considerable length of time to
perform. According to FDA data, from October 1994 to March 1995, the average
time for FDA review and approval of a food additive petition was 48 months from
the date of submission. A request to the FDA for an informal determination that
a substance need not be the subject of an indirect food additive petition must
be supported by a more limited amount of data than needed to support an indirect
food additive petition. The FDA has announced that it anticipates being able to
respond to these informal determination requests within three to four months.
The Food and Drug Administration Modernization Act of 1997, which became
effective February 19, 1998, adds a new provision to the Federal Food, Drug, and
Cosmetic Act that permits the manufacturer or supplier of a food contact
substance to notify the FDA at least 120 days before beginning distribution of
the substance. The notification would have to set forth the manufacturer's or
supplier's rationale for why the substance is safe. Unless the FDA notifies the
submitter within the 120-day period that it disagrees with the submitter's
conclusion that the food contact substance is safe, the substance could be
lawfully distributed in commerce. The FDA is required to adopt regulations to
implement this provision. At this time, it is not possible to determine whether
the notification procedure, as implemented by the FDA, will be suitable for any
of the Company's products. See "Risk Factors--FDA Regulation."
RELATIONSHIP WITH EKI
EKI is the Company's principal stockholder and, upon consummation of the
Offering, will own approximately 63.7% of the Company's outstanding Common
Stock. EKI has licensed certain of its technology to the Company and has entered
into various other agreements with the Company pursuant to which it provides
technical and other services upon the Company's request. See "Risk
Factors--Reliance on EKI," "--Potential Conflicts with EKI" and "--Control by
Principal Stockholder."
LICENSE AGREEMENT
The Company's principal asset is a world-wide, exclusive, royalty-free
license (the "License") to use and license others the right to use EKI's
proprietary technology in manufacturing, selling, and otherwise commercially
developing EARTHSHELL "Food Service Disposables."
Pursuant to the License Agreement, the Company is authorized and empowered
to grant licenses to manufacturers of food and beverage containers and also to
enter into joint ventures with or invest in other 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-
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containing cartons are within the scope of "Food Service Disposables," (ii)
boxes or containers for the long-term storage of single or multiple servings of
foods or which are designed to extend the shelf life of foods beyond same-day
consumption (E.G., dry cereal boxes, egg cartons, pre-packaged frozen food
containers and packaging, dairy product containers, produce containers,
condiment packaging, and meat and deli trays), (iii) aseptic or sealed
packaging, (iv) secondary packaging (E.G., corrugated containers and paper bags)
and (v) wrapping products for consumer use.
The License Agreement expires in the United States on the date the last U.S.
patent of EKI (including any extensions or subsequently filed additional
patents) relating to the licensed technology expires, and expires outside the
United States on the date the last patent of EKI issued anywhere in the world
relating to the licensed technology expires. EKI currently has patents granted
in the United States that would extend protection of the licensed technology
through 2014 and anticipates that it will file additional patent applications
that would extend this protection to a later date. Following the expiration of
these patents and the License, the technology will no longer be subject to
patent protection and can be used by the Company and others without license from
EKI.
Under the terms of the License Agreement, the Company is required to use
commercially reasonable efforts to diligently exploit the License by actively
and aggressively manufacturing, marketing, advertising or selling "Food Service
Disposables" and granting sublicenses or entering into joint ventures to do the
same. If the Company develops or acquires any improvements to the "Food Service
Disposables," under the terms of the License Agreement the Company must assign
its rights in the improvement to EKI, and EKI will grant a license to such
improvement to the Company.
TECHNICAL SERVICES AGREEMENT
The Company's research and development activities are currently carried on
by EKI personnel pursuant to the terms of certain intercompany agreements which
are described below. The Company anticipates that following completion of the
Offering it will employ its own product design personnel who will be responsible
for the research and development of EARTHSHELL products for use in the
quick-serve restaurant and food service industries, while EKI will continue
broad research and development efforts with respect to the materials science of
inorganic materials and the specific use of ALI-ITE composite material in other
types of packaging.
Effective October 1, 1997, the Company and EKI entered into the Technical
Services Agreement and the Patent Allocation Agreement which supersede,
respectively, the Prior Technical Services Agreement and the Prior Patent
Allocation Agreement. Under the Technical Services Agreement, the Company has a
first priority right to the services of certain EKI technical personnel. The
Company is required to pay EKI for technical services requested by the Company
based on established hourly billing rates and reimburse EKI for its
out-of-pocket expenses related to specific research projects commissioned by the
Company. A leading technical consulting firm reviewed the hourly rates and
concluded that they were comparable to industry standards. EKI is not entitled
to receive compensation or reimbursement for services performed by non-technical
personnel, such as administrative staff, or for indirect and other overhead
charges that are not specifically related to a Company project. The Technical
Services Agreement expires on December 31, 2002. The agreement also extends the
sublease of the Company's headquarters through March 31, 2001, subject to the
Company's right to terminate the sublease on 30 days notice. Pursuant to the
Prior Technical Services Agreement and its predecessor agreement, the Company
became obligated to pay EKI approximately $8.4 million, $9.1 million and $7.5
million in 1995, 1996, and 1997, respectively.
PATENT ALLOCATION AGREEMENT
Under the Prior Patent Allocation Agreement (which terminated on September
30, 1997), the Company became obligated to pay or reimburse EKI for all costs
and expenses for technology which was directly related to food and beverage
containers within the field of use licensed to the Company under the License
Agreement or which had significant teachings with respect to such containers,
even though outside of the field of use. These patents are the property of EKI,
and EKI may obtain a benefit therefrom other than under the License, including
the utilization and/or licensing of the patents and related technology in a
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manner or for uses unrelated to the License. Pursuant to the Prior Patent
Allocation Agreement, the Company became obligated to reimburse EKI a total of
$1.9 million, $1.4 million and $653,000 in 1995, 1996, 1997, respectively.
Under the Patent Allocation Agreement, the Company will pay and reimburse
EKI for all costs and expenses associated with filing, prosecuting, maintaining
and acquiring patents and patent applications in connection with technology (and
associated improvements) that directly relate to Food Service Disposables (as
defined in the License Agreement), including the process of manufacturing such
articles. Following the second anniversary of the Patent Allocation Agreement,
the Company will pay and reimburse EKI for all costs and expenses associated
with filing, prosecuting, acquiring and maintaining patents and patent
applications in connection with technology that primarily benefits Food Service
Disposables licensed to the Company, including the process of manufacturing such
articles. EKI will pay for all other costs and expenses associated with patents
and patent applications relating to the technology licensed to the Company under
the License Agreement. The Company has agreed to reimburse EKI up to $6.5
million pursuant to the Patent Allocation Agreement in connection with the
purchase of certain technology, subject to amounts expended on the purchase of
manufacturing equipment and the use of such technology.
INDEBTEDNESS OWED TO EKI
Subsequent to December 31, 1994, the Company's operations have been funded
with loans from, and accounts payables owed to, EKI. As of December 31, 1997,
the indebtedness owed to EKI totaled $33.3 million, including a note payable in
the amount of $32.1 million, $636,000 in accrued interest and $622,000 in
accrued payables under the Prior Patent Allocation Agreement and Prior Technical
Services Agreement. The promissory note is payable on demand and provides for
interest at an initial annual rate of 8.50% compounded quarterly. The interest
rate on the note payable to EKI is adjusted quarterly to equal the current prime
rate as published in THE WALL STREET JOURNAL. Although the indebtedness owed to
EKI was incurred by the Company to fund its ongoing operations, EKI is under no
obligation to make additional loans or capital contributions to the Company.
GUARANTEES OF CREDIT AGREEMENT
EKI, Mr. Essam Khashoggi, the Chairman of the Board and an indirect
controlling stockholder of the Company, and a trust controlled by Mr. Khashoggi
guaranteed the borrowings under the $14.0 million line of credit provided by
Imperial Bank to the Company. The Imperial Bank credit facility will be paid in
full upon the consummation of the Offering and the guaranty will be released.
PERSONNEL
As of December 31, 1997, the Company had seven employees. In addition,
pursuant to the terms of the Technical Services Agreement, the Company has a
priority right to the services of 27 technical personnel serving as employees of
EKI as of December 31, 1997. The Company anticipates that during the one-year
period following completion of the Offering, the Company will add an additional
20 employees, of whom approximately 13 will be involved in product development,
approximately five will be involved in administration and at least two will be
involved in management. None of the Company's employees is represented by a
labor union and the Company believes that its relationship with its employees is
good.
PROPERTY
The Company's executive offices are located in Santa Barbara, California.
The Company subleases 1,600 square feet of office and research and development
space from EKI. This sublease expires upon the earlier of March 31, 2001 or 30
days after notice by the Company. The Company's monthly lease payments with
respect to this space are $5,600. The Company leases 24,000 square feet of space
on a month-to-month basis for its product development center in Goleta,
California. The Company's monthly lease payments with respect to this space are
$14,400.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Essam Khashoggi (1)(2)................. 58 Chairman of the Board
Simon K. Hodson (2).................... 43 Chief Executive Officer, President and Vice Chairman of the Board
Richard K. Hulme....................... 42 Executive Vice President and Chief Operating Officer
D. Scott Houston....................... 43 Chief Financial Officer
John Daoud (2)(3)...................... 62 Secretary and Director
James P. Argyropoulos (1)(5)........... 53 Director
Ellis B. Jones (3)(4).................. 44 Director
Layla Khashoggi........................ 40 Director
William Marquard (3)................... 77 Director
Graham H. Phillips..................... 59 Director
Jerold H. Rubinstein (1)(4)(5)......... 59 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Executive Committee.
(3) Member of the Audit Committee.
(4) Member of the Stock Option Committee.
(5) Member of the Conflicts Committee.
ESSAM KHASHOGGI has served as Chairman of the Board of the Company since its
organization in November 1992. Mr. Khashoggi has also served as Chairman of the
Management Committee and Chief Executive Officer of EKI from its inception in
June 1991. Since August 1987, Mr. Khashoggi has served as Chairman of the Board
of Concrete Technology Corporation ("CTC"), a member of EKI. Mr. Khashoggi has
also served as a director and officer of a number of domestic and foreign
companies engaged in manufacturing, real estate and design and has served as a
Trustee at the University of California Santa Barbara Foundation since August
1995.
SIMON K. HODSON has served as Chief Executive Officer and Vice Chairman of
the Board of the Company since its organization in 1992 and President of the
Company since October 15, 1997. Mr. Hodson also served as President of the
Company from December 1995 until May 1996. He also has served as President and
on the Management Committee of EKI from its inception in June 1991 and as
President and director of CTC since August 1987. Mr. Hodson was President of
National Cement & Ceramics Laboratories, Inc. ("NCCL"), a company previously
engaged in materials science research, from June 1990 through 1995. He is a
co-inventor of 58 issued U.S. patents and 29 issued foreign patents, as of
February 17, 1998, all belonging to EKI.
RICHARD K. HULME has served as an Executive Vice President since September
1996, and Chief Operating Officer since December 1995, as well as from February
1995 to May 1995. Mr. Hulme also served as a Director of the Company from
September 1994 through January 1997. Mr. Hulme served as President from
September 1994 until December 1995. From February 1991 until joining the
Company, Mr. Hulme was a Project Director and later a Vice President of JLW
Realty Advisors, an international real estate firm. From February 1986 through
January 1991, Mr. Hulme served as Vice President, Marketing/ Operations for CTC
and was involved in organizing and managing NCCL.
D. SCOTT HOUSTON has served as Chief Financial Officer of the Company since
July 1993. From August 1986 until joining the Company, Mr. Houston served EKI
and its affiliates in various positions, including as Chief Financial Officer
and Vice President of CTC from 1986 to 1990, as an officer and Director of NCCL
from 1989 to 1991, and as a consultant from 1991 to 1993. Prior to August 1986,
40
<PAGE>
Mr. Houston operated Houston & Associates, a consulting firm working with
start-up and troubled companies and real estate projects, which he founded in
September 1983. From July 1980 until September 1983, Mr. Houston held various
positions with the Management Information Consulting Division of Arthur Andersen
& Co., an international accounting and consulting firm.
JOHN DAOUD has served as Assistant Secretary and a Director of the Company
since its organization in 1992 and became its Secretary in May 1996. Mr. Daoud
has served as Chief Financial Officer and Secretary of EKI since its inception
in June 1991. Mr. Daoud has also served as President of Condas International
since 1987, and in such capacity and in his individual capacity has advised Mr.
Essam Khashoggi and his affiliated entities on certain financial matters since
1972. From 1970 to 1972, Mr. Daoud was a Senior Auditor with Price Waterhouse
and Company.
JAMES P. ARGYROPOULOS has served as a Director of the Company since January
1997. From 1989 to present, Mr. Argyropoulos has been a private investor in the
consumer goods industry and real estate. Mr. Argyropoulos has also been the
Chairman of the Board and Chief Executive Officer of The Walking Company, a
lifestyle specialty retailer, since August 1991. Mr. Argyropoulos acted as the
Chairman of the Board and Chief Executive Officer of The Cherokee Group Inc., a
shoe manufacturing and apparel business, between 1972 and 1989. Mr. Argyropoulos
is also a director of Corporate Express Inc., a delivery service company.
ELLIS B. JONES has served as a Director of the Company since December 1995.
Mr. Jones has been a Managing Director of Wasserstein Perella & Co., Inc. since
February 1995. Mr. Jones was also a Managing Director, from 1993 until February
1995, and a Director, from 1990 to 1992, in Corporate Finance of Salomon
Brothers Inc. Prior to that time, Mr. Jones was a Vice President at The First
Boston Corporation.
LAYLA KHASHOGGI has served as a Director of the Company since its
organization in 1992. Ms. Khashoggi currently serves as director and officer of
the Santa Barbara Zoo and the Laguna Blanca School. Ms. Khashoggi is Essam
Khashoggi's spouse.
WILLIAM MARQUARD has served as a Director of the Company since June 1994.
Mr. Marquard is a retired businessman. From 1952 through 1985, Mr. Marquard
served in various capacities for American Standard Corp. (and its predecessor,
Mosler, Inc.), including as President, Chief Executive Officer and Chairman. He
continued to serve as the Chairman of American Standard's Executive Committee
until 1988 and later served as its Chairman of the Board from 1989 until March
1992. Mr. Marquard serves as Chairman of the Board of Arkansas Best Corporation
and Mosler, Inc. He also serves as a Director of Americold Corporation, Earle M.
Jorgensen Co., Earle M. Jorgensen Holding Co., Kelso and Company, and Treadco,
Inc.
GRAHAM H. PHILLIPS has served as a Director of the Company since November
1997 and served as President of the Company from May 1996 to October 1997. Mr.
Phillips was Senior Vice President-- Marketing of the Company from January 1993
to May 1996. Mr. Phillips has been Chairman of the Board of Burson Marsteller
Worldwide, a major international public relations company, since October 1997.
Mr. Phillips was Chairman and Chief Executive Officer, from December 1989 to
June 1992, of Ogilvy & Mather Worldwide, one of the largest advertising groups
in the world. Mr. Phillips spent 28 years with Ogilvy & Mather in various client
service and management functions, serving in Europe, Canada and the United
States. Mr. Phillips currently serves as a consultant to the Company.
JEROLD H. RUBINSTEIN has served as a Director of the Company since June
1994. Mr. Rubinstein has served as the Chairman and Chief Executive Officer of
DMX, Inc., a start-up music network using new 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
41
<PAGE>
Officer of the American Broadcasting Company music division. Mr. Rubinstein was
also a founder of, and from 1971 to 1975 was a partner in, Segel, Rubinstein &
Goldman, a business management firm that handled the financial affairs of a
number of prominent members of the entertainment industry. Mr. Rubinstein is a
Director of United Service Advisors Inc.
The Company expects to appoint two additional independent directors who will
have substantial business experience to the Board of Directors within 30 days
after the consummation of the Offering. The directors are elected at each annual
meeting of stockholders for a one-year term and until their successors have been
elected and qualified. The Board has adopted a policy, to take effect upon
consummation of the Offering, to hold at least six in person meetings per year.
The officers of the Company are elected annually and serve at the discretion of
the Board of Directors. The holders of the Company's outstanding Series A
Preferred Stock currently have the right to elect one director. Mr. Marquard was
elected by the Series A stockholders. This right will terminate upon the
conversion or redemption of the Series A Preferred Stock, which the Company
currently anticipates will happen approximately 60 days after the completion of
the Offering. See "Description of Capital Stock--Preferred Stock."
A majority of the members of the Board's Audit Committee and Compensation
Committee are current independent directors. Promptly after the Offering, the
Audit Committee will be reconstituted to include only independent directors and
will include the two new independent directors. All of the members of the
Board's Conflicts Committee are disinterested directors with respect to the
financial interests of EKI. All of the members of the Board's Stock Option
Committee are disinterested directors. The Compensation Committee establishes
salaries, incentives and other forms of compensation for Directors, officers and
other employees of the Company, and is charged with administering various
incentive compensation and benefit plans. The Audit Committee oversees actions
taken by the Company's independent auditors and reviews internal audit controls.
In addition, the Audit Committee receives a report of the operations of the
Company directly from the Chief Financial Officer and general counsel, if any,
on a monthly basis and at each meeting. The Conflicts Committee administers on
behalf of the Company the License Agreement, the Technical Services Agreement
and the Patent Allocation Agreement. The Stock Option Committee oversees and
administers the Company's 1995 Stock Incentive Plan and 1994 Stock Option Plan.
In addition to the above-named Directors and executive officers, the
following employees of EKI have been instrumental in the development of the
Company's business:
DR. PER JUST ANDERSEN has served as the Vice President of Product
Engineering at EKI and has led EKI's technical development since he joined EKI
in 1992. Dr. Andersen's professional experience includes work as a Project
Manager and Industrial Researcher. Since 1983, he has worked with Royal
Copenhagen Porcelain, the Technological Institute of Denmark and was a worldwide
consultant in advanced concrete projects as a Senior Engineer at G.M. Idorn
Consult, Inc., where he held the position of Manager of Materials Optimization
and Instrumentation Development. In this capacity, Dr. Andersen led and
participated in major concrete consulting projects around the world, including
consulting with Spie-Battinole on the design of the concrete on the French side
of the French-English tunnel, with the U.S. Strategic Highway Research Program
in conjunction with Pennsylvania State University on concrete microstructure as
well as with major U.S. corporations and universities including Ameron,
Gifford-Hill American, Price Brothers, Purdue University, Northwestern
University, and University of Illinois at Champaign-Urbana. Dr. Andersen is the
co-inventor of 50 U.S. patents and 26 foreign patents, as of February 17, 1998,
all relating to the EARTHSHELL technology. Dr. Andersen received a M.Sc. in
Chemical Engineering from the Engineering Academy of Denmark, a M.Sc. in
Materials Science from Pennsylvania State University, and a 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.
42
<PAGE>
DR. BRUCE CHRISTENSEN has served as a Research Scientist of EKI since May
1994. From June 1993 until April 1994, Dr. Christensen was a Post-Doctoral
Fellow in the Materials Science and Engineering Department of Northwestern
University in the area of cement-based materials. During this period, Dr.
Christensen also served as a materials consultant to EKI. Dr. Christensen has
over 20 publications in international scientific journals, has co-authored two
book chapters and has presented approximately 15 papers at various professional
meetings on the subjects of cement chemistry and impedance spectroscopy. Dr.
Christensen earned a B.Sc. in Chemical Engineering and a B.Sc. in Materials
Science and Engineering from the University of Minnesota in June 1989, and a
Ph.D. in Materials Science and Engineering from Northwestern University in June
1993.
DR. DAVID DELLINGER has served as a Research Scientist of EKI since April
1992. From 1977 through 1982, Dr. Dellinger did field and laboratory geological
work for the U.S. Geological Survey. From 1982 until April 1992, he was enrolled
in the Ph.D. program in Geological Sciences at the University of California,
Santa Barbara, where he researched igneous petrology and geochemistry and taught
optical petrographic microscopy. From 1982 through 1996, Dr. Dellinger continued
to work concurrently as a geologist at the U.S. Geological Survey, and from 1990
through 1992 he worked as a geological consultant. Dr. Dellinger received a
B.Sc. in Geology at Stanford University in 1977 and a Ph.D. from the University
of California, Santa Barbara in March 1996.
DR. AMITABHA KUMAR has served as a Research Scientist of EKI since June
1994. From May 1988 through May 1994, Dr. Kumar worked as a Senior Research
Scientist at the Central Glass and Ceramic Research Institute in Calcutta,
India. Dr. Kumar currently also serves as associate editor for The Indian
Ceramic Society and has over 35 publications in international scientific
journals and has presented approximately 20 papers at seminars and symposiums.
Dr. Kumar is the co-inventor of two pending patents regarding the EARTHSHELL
technology; in addition, he has three patents from previous assignments in
India. Dr. Kumar earned a B.Sc. in Ceramics from Banaras Hindu University in
June 1978, and a M.Sc. and a Ph.D. in Solid State Science from Pennsylvania
State University in August 1985.
DR. JAN PER AXEL LOFVANDER has served as a Research Scientist of EKI since
December 1993. From August 1989 until November 1993, Dr. Lofvander was a
research engineer studying microstructural characterization in the Materials
Department at the University of California, Santa Barbara. Dr. Lofvander's
professional experience includes managing projects at the High Performance
Composites Center at University of California, Santa Barbara. Dr. Lofvander has
36 publications in international scientific journals and six industrial reports
relating to materials applications. Dr. Lofvander was co-founder of a consulting
company specializing in the manufacture and analysis of advanced materials. Dr.
Lofvander received his M.Sc. in Metallurgy and Materials Science from the Royal
Institute of Technology in Stockholm, Sweden in December 1984, and a Ph.D. in
Materials Science and Engineering from University of Illinois, Urbana-Champaign,
Illinois in June 1989.
DR. SHAODE ONG has served as a Research Scientist of EKI since June 1994.
Prior to joining EKI, Dr. Ong worked as a Research Associate in the Materials
Group in the School of Civil Engineering at Purdue University from January 1988
until May 1993. Dr. Ong is co-inventor for three pending patents regarding the
EARTHSHELL technology. He has 12 publications in international scientific
journals, and he has presented 10 papers at seminars and symposiums. Dr. Ong
received his B.Sc. in Building Materials Science from Tongji University,
Shanghai, China in July 1986, and a M.Sc. E. and a Ph.D. in Civil Engineering
Materials from Purdue University, West Lafayette, Indiana in May 1993.
SANDEEP KUMAR has served as a Research Scientist of EKI since August 1992.
Mr. Kumar received a B.Sc. in Ceramic Engineering from the Institute of
Technology in India in June 1988, and a M.Sc. in 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.
43
<PAGE>
DENISE MILLER has served as a Research Scientist of EKI since August 1992.
From March 1989 until June 1992, Ms. Miller was a Graduate Research Assistant in
the Engineering Materials Department of the University of California, Santa
Barbara. Ms. Miller has several professional publications as well as prior work
experience as an engineering consultant to Chevron. Ms. Miller received a B.Sc.
in Chemical Engineering from the University of California, Santa Barbara in
1986. In 1992, she obtained a M.Sc. in Mechanical Engineering with an emphasis
in Materials Processing at the University of California, Santa Barbara.
VERA JACQUELINE RUBLEE has served as a Research Scientist of EKI since
August 1993. From 1981 to 1992, Ms. Rublee pursued geological field research
with the British Columbia Geological Survey, as well as private exploration for
various companies and research at several academic institutions. Ms. Rublee
received a B.Sc. in Geology from the University of British Columbia in May 1985,
and a M.Sc. in Geology from the University of Ottawa in March 1994.
KRISTOPHER TURNER has served as a Research Scientist of the Company since
November 1993. From September 1990 until October 1993, Mr. Turner was a Graduate
Student Researcher at the University of California, Santa Barbara. Mr. Turner
received a B.Sc. in Metallurgical Engineering from the University of Texas, El
Paso in December 1989, and a M.Sc. in Materials from the University of
California, Santa Barbara in July 1993.
COMPENSATION OF DIRECTORS
Directors are eligible to receive automatic option grants to purchase 5,240
shares on an annual basis pursuant to the Company's 1995 Stock Incentive Plan.
The exercise price of the options is fixed at the fair market value of the
underlying shares on the date of grant. Prior to the November 3, 1997 amendment
to the 1995 Stock Incentive Plan, the Director options were issued to each
Director at the end of each one-year term. Options granted to Directors in
January 1997 for the 1996 fiscal year are exercisable at 80% of the price per
share at which the Company's Common Stock is first sold to the public. These
options vested immediately and expire no later than January 2002. On November 3,
1997, the 1995 Stock Incentive Plan was amended to authorize the grant of the
options to each Director at each annual meeting at which they are elected to
office, commencing with the 1997 fiscal year. Under the amendment, the Director
options vest and become exercisable on the day prior to the next annual meeting
of stockholders, if the director is then in office. As a result of the
amendment, each individual who served as a director of the Company for each of
the 1997 and 1998 fiscal years received an option to purchase 5,240 shares of
the Company's Common Stock at an exercise price of $15.20 per share for each
year. See "--Stock Option Plans." The Directors have never received any cash
compensation for their service as directors other than reimbursement for
out-of-pocket expenses incurred in connection with attendance at such meetings
and the Company has no current intention of paying cash compensation to the
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All decisions relating to executive compensation during 1997 were made by
the Company's Board of Directors. Mr. Hodson, Chief Executive Officer and
President of the Company, participated in deliberations of the Board of
Directors concerning 1997 executive officer compensation. Mr. Hodson did not
receive any cash compensation from the Company during the first nine months of
1997. Mr. Hulme, Executive Vice President of the Company since September 1996,
did not participate in deliberations of the Board of Directors concerning 1997
executive officer compensation.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1997, the
cash compensation of the Chief Executive Officer and the other executive
officers of the Company who received compensation in excess of $100,000 in such
year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY* BONUS (NUMBER OF OPTIONS) COMPENSATION
- ------------------------------------------------ --------- ---------- ----------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Simon K. Hodson(1).............................. 1997 $ 125,000 -- 15,720 $ 28,745(2)
Chief Executive Officer
Graham H. Phillips(3)........................... 1997 191,667 -- 267,240 --
President
Richard K. Hulme................................ 1997 220,000 -- 5,240 --
Executive Vice President and Chief Operating
Officer
D. Scott Houston................................ 1997 180,000 -- -- --
Chief Financial Officer
</TABLE>
- ------------------------------
* The Company provides various perquisites to its executives which are not
disclosed in accordance with SEC regulations because the value of such
perquisites is less than 10% of the executive's salary.
(1) Mr. Hodson was an employee of and was paid a salary by EKI until October 1,
1997 when Mr. Hodson entered into an employment agreement with the Company.
Mr. Hodson did not receive any compensation directly from the Company for
the first 9 months of 1997 and this amount is the actual amount the Company
paid Mr. Hodson in 1997. See "--Employment Agreements." In addition to
serving as Chief Executive Officer of the Company since its inception, Mr.
Hodson has served as President of the Company from October 15, 1997 to
present. See note 3.
(2) Reflects the Company's assumption of the remaining principal balance for an
automobile loan on Mr. Hodson's behalf.
(3) Mr. Phillips tendered his resignation as President of the Company effective
October 15, 1997 to become Chairman of Burson Marsteller Worldwide, a major
international public relations company. He continues as a consultant to the
Company and is paid a nominal retainer.
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in 1997 to the Chief
Executive Officer and the other Named Executive Officers.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED RATES
SHARES OPTIONS OF STOCK APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED IN 1997 (PER SHARE) DATE 5% 10%
- ---------------------------------- ----------- ----------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Simon K. Hodson................... 15,720 5 $ 15.20 1/8/02 $ 247,574 $ 535,755
Graham H. Phillips................ 262,000 83 $ 3.82 12/31/03 $ 7,108,637 $ 11,911,650
5,240 2 $ 15.20 11/4/02 $ 82,525 $ 178,585
Richard K. Hulme.................. 5,240 2 $ 15.20 1/8/02 $ 82,525 $ 178,585
D. Scott Houston.................. -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. The Company used
the midpoint of the range of the initial public offering of $19.00 as the
fair market value of the shares of Common Stock to compute these Potential
Realizable Values.
45
<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.
48
<PAGE>
CERTAIN TRANSACTIONS
LICENSE AGREEMENT AND PATENT ALLOCATION AGREEMENT
Pursuant to the License Agreement, the Company has been granted a
world-wide, exclusive, royalty-free license to utilize and sublicense others to
utilize EKI's proprietary technology in manufacturing, selling, and otherwise
commercially developing EARTHSHELL "Food Service Disposables". See
"Business--Relationship with EKI." The License grants the Company exclusive
rights to issued patents, pending patents and trade secrets to the extent that
they relate to food-service disposables produced from inorganic-based materials.
The Company also has certain business, reporting, indemnification and
confidentiality obligations under the License Agreement.
The Company and EKI entered into the Patent Allocation Agreement effective
October 1, 1997, which supersedes the Prior Patent Agreement and certain
provisions of the License Agreement. Until September 30, 1999, the Company will
pay all costs associated with prosecuting, filing, maintaining or acquiring
patents and patent applications in connection with technology that is directly
related to the food service disposable containers which are licensed to the
Company under the License Agreement ("Food Service Disposables"). After
September 30, 1999, the Company will pay all costs associated with prosecuting,
filing, maintaining or acquiring patents and patent applications in connection
with technology that primarily benefits the Food Service Disposables licensed to
the Company (as compared with the other technology owned by EKI). EKI will pay
for all other patent related costs. EKI and the Company will review, on a
biennial basis, the comparative benefits of each existing patent and patent
application to determine whether Food Service Disposables licensed to the
Company derive the principal benefits from the patent or patent application in
question and will allocate the associated patent costs for the ensuing two-year
period accordingly. No party will have the right to be reimbursed for any costs
following notification in writing by the other party that it does not desire to
incur such costs.
On February 16, 1998, EKI entered into a patent purchase agreement with a
third party for the purchase of certain technology that may be applicable to
starch-based disposable packaging. Pursuant to the terms of the Patent
Allocation Agreement, EKI will license such technology to the Company. In
connection with this purchase, the Company entered an agreement to pay to EKI
$3.5 million on or about December 31, 2003. The Company's obligation will be
reduced by 5% of the purchase price of any equipment purchased by EKI, the
Company or its licensees or joint ventures from the company which previously
owned the technology. In addition, the Company is required to pay $3 million
over the five year period commencing January 1, 2004 if EKI, the Company or the
Company's licensees or joint ventures have not purchased, by December 31, 2003,
at least $35 million of equipment from the company which previously owned the
technology and EKI, the Company or the Company's licensees or joint ventures use
the purchased technology.
Any costs incurred by EKI or the Company in connection with filing,
prosecuting, and maintaining patents or patent applications prior to December
31, 1997 were allocated in accordance with the terms and provisions of the Prior
Patent Agreement. Under the Prior Patent Agreement, the Company reimbursed EKI
for all costs associated with prosecuting, filing and maintaining patents and
patent applications in connection with technology that was directly related to
food and beverage containers within, or which had significant teachings with
respect to, the field of use licensed to the Company. EKI paid for all other
patent related costs. Under the Prior Patent Allocation Agreement, the Company
incurred, or reimbursed EKI for, total costs of $1.9 million, $1.4 million and
$653,000 in connection with the applications during 1995, 1996, and 1997
respectively. The patents and patent applications are the property of EKI, and
EKI may obtain a benefit therefrom other than under the License, including the
utilization and/or licensing of the patents and related technology in a manner
or for uses unrelated to the License.
TECHNICAL SERVICES AGREEMENT
In addition to the License Agreement and the Patent Allocation Agreement,
effective October 1, 1997 the Company and EKI entered into the Technical
Services Agreement which superseded the Prior
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<PAGE>
Technical Services Agreement. Pursuant to the Technical Services Agreement which
expires on December 31, 2002, the Company has a first priority right to the
services of certain EKI technical personnel. The Company pays EKI for technical
services specifically requested by the Company based on established hourly
billing rates and reimburses EKI for out-of-pocket expenses related to specific
research projects. In addition, the Technical Services Agreement extends the
sublease of the Company's headquarters, comprising approximately 1,600 square
feet, through March 31, 2001, subject to the right of the Company to terminate
the sublease on 30 days' written notice. The Company paid $67,000 to EKI each
year for the sublease of this space during 1995, 1996 and 1997.
The Technical Services Agreement superseded the Prior Technical Services
Agreement that was entered into between the Company and EKI on July 1, 1994 and
which terminated on September 30, 1997. Like the Technical Services Agreement,
the Prior Technical Services Agreement required EKI to render technical services
to the Company on a priority basis based on established hourly billing rates and
to reimburse EKI for its direct, out of pocket expenses incurred in connection
with the Company's specific research projects. The Company paid an aggregate of
$8.4 million, $9.1 million and $7.5 million to EKI for these services under the
Prior Technical Services Agreement during 1995, 1996, and 1997 respectively.
REGISTRATION RIGHTS
As additional consideration for EKI's services under the Prior Technical
Services Agreement, the Company entered into a Registration Rights Agreement
with EKI (the "Registration Rights Agreement"). The Registration Rights
Agreement provides certain registration rights for the 82,530,000 shares of
Common Stock originally issued to EKI (whether held by EKI or subsequent
transferees). The Company is also obligated, following the date one year after
the consummation of the Offering, to prepare and keep in place (at the Company's
expense) a Registration Statement on Form S-3 covering certain shares of Common
Stock currently held by EKI which will be issued upon the exercise of options to
be granted by EKI to its employees and consultants.
The Registration Rights Agreement grants two "piggyback" registration rights
for offerings of Common Stock by the Company (subject to cutback provisions for
the registration rights of other holders of Common Stock and the holders of the
Company's Series A Preferred Stock) and the right to participate in one demand
registration upon a request by the holders of 20,632,500 shares of Common Stock
originally issued to EKI, some of which shares have been transferred to other
holders. The holders of such shares will be responsible, on a pro-rata basis,
for most of the expenses relating to the exercise of the demand registration
right and a portion of the expenses relating to the exercise of their piggyback
registration rights. See "Shares Eligible for Future Sale."
INDEBTEDNESS OWED TO EKI
Subsequent to December 31, 1994, the Company's operations have been funded
with loans from, and accounts payables owed to, EKI. As of December 31, 1997,
the indebtedness owed to EKI totaled $33.3 million, including a note payable in
the amount of $32.1 million, $636,000 in accrued interest and $622,000 in
accrued payables under the Prior Patent Allocation Agreement and Prior Technical
Services Agreement. The promissory note is payable on demand and provides for
interest at an initial annual rate of 8.50% compounded quarterly. The interest
rate on the note payable to EKI is adjusted quarterly to equal the current prime
rate as published in THE WALL STREET JOURNAL. Although the indebtedness owed to
EKI was incurred by the Company to fund its ongoing operations, EKI is under no
obligation to make additional loans or capital contributions to the Company. The
Company intends to use a portion of the proceeds of the Offering to repay all of
the indebtedness owed to EKI. See "Use of Proceeds" and note 3 to the Financial
Statements of the Company included elsewhere herein.
GUARANTEES OF CREDIT AGREEMENT
EKI, Mr. Essam Khashoggi, the Chairman of the Board and an indirect
controlling stockholder of the Company, and a trust controlled by Mr. Khashoggi
guaranteed the borrowings under the $14.0 million line of credit provided by
Imperial Bank to the Company. The Imperial Bank credit facility will be paid in
full upon consummation of the Offering and the guaranty will be released.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of each class of the Company's voting securities as of
February 24, 1998, and as adjusted to reflect the sale of 10,526,316 shares of
Common Stock by the Company and the sale of 2,673,684 shares of Common Stock by
the Selling Stockholders, by (i) each person known by the Company to own
beneficially more than 5% of any class of voting securities of the Company, (ii)
each Director of the Company, (iii) each Named Executive Officer of the Company,
(iv) all Directors and executive officers as a group and (v) certain of the
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
-------------------------------------------------------
COMMON PREFERRED, SERIES
---------------------------------- A
PERCENT ------------------ NUMBER OF SHARES
OF CLASS PERCENT OF OF COMMON STOCK
NAME AND ADDRESS(3) NUMBER (1)(2) NUMBER CLASS BEING OFFERED
- ------------------------- ---------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Essam Khashoggi(4)(5).... 73,398,252 84.5% -- -- --
Simon K. Hodson(5)(6).... 15,720 * -- -- --
Richard K. Hulme(7)(9)... 267,240 * -- -- --
D. Scott Houston(7)...... 199,906 * -- -- --
James P.
Argyropolous(8)........ 1,053,240 1.2% -- -- --
John Daoud(5)............ 68,120 * -- -- --
Ellis Jones(9)........... 23,580 * -- -- --
Layla Khashoggi(5)(10)... 15,720 * -- -- --
William Marquard(5)...... 15,720 * -- -- --
Graham H.
Phillips(7)(8)......... 267,240 * -- -- --
Jerold H.
Rubinstein(5).......... 15,720 * -- -- --
All Directors and
Executive Officers as a
Group (11
Persons)(4)(5)(7)(8)(9)... 75,340,458 86.7% -- -- --
E. Khashoggi Industries
LLC(4)................. 63,771,848 73.4% -- -- --
E. Khashoggi Industries
Inc.(4)................ 7,478,790 8.6% -- -- --
Anaconda Opportunity
Fund, L.P.............. -- -- 1,805 6.8% 233,478
Carillon Bond Fund....... -- -- 500 1.9% 64,675
Charitable Lead Trust
Dtd. 2/3/83............ -- -- 310 1.2% 40,099
Financial Management
Advisors High Income,
L.P.................... -- -- 640 2.4% 82,785
Financial Management
Advisors High Yield
Capital Appreciation,
L.P.................... -- -- 811 3.0% 104,904
FMA High Yield Income LP,
Liquidating Trust...... -- -- 555 2.1% 71,790
David A. Gardner......... -- -- 500 1.9% 9,055
Hare & Co................ -- -- 2,000 7.5% 258,702
Mousseteek Free.......... -- -- 310 1.2% 40,099
G. Lynn Shostack......... -- -- 500 1.9% 27,164
Springtime Limited....... 3,056,754 3.5% 1,000 3.7% 297,508
W.S. Investments L.P..... -- -- 312 1.2% 40,357
Whittier Ventures, LLC... -- -- 500 1.9% 12,935
Williams, Jones &
Associates, Inc........ -- -- 4,875 18.3% 220,673
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)............... 2,550,570 2.9% 1,624 6.1% 1,169,460
<CAPTION>
COMMON SHARES BENEFICIALLY OWNED
AFTER OFFERING (1)
------------------------------------
PERCENT OF
NAME AND ADDRESS(3) NUMBER CLASS
- ------------------------- ---------- ----------
<S> <C> <C>
Essam Khashoggi(4)(5).... 73,398,252 73.4%
Simon K. Hodson(5)(6).... 15,720 *
Richard K. Hulme(7)(9)... 267,240 *
D. Scott Houston(7)...... 199,906 *
James P.
Argyropolous(8)........ 1,053,240 1.1%
John Daoud(5)............ 68,120 *
Ellis Jones(9)........... 23,580 *
Layla Khashoggi(5)(10)... 15,720 *
William Marquard(5)...... 15,720 *
Graham H.
Phillips(7)(8)......... 267,240 *
Jerold H.
Rubinstein(5).......... 15,720 *
All Directors and
Executive Officers as a
Group (11
Persons)(4)(5)(7)(8)(9) 75,340,458 75.3%
E. Khashoggi Industries
LLC(4)................. 63,771,848 63.7%
E. Khashoggi Industries
Inc.(4)................ 7,478,790 7.5%
Anaconda Opportunity
Fund, L.P.............. 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.................... 107,578 *
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....... 3,021,246 2.8%
W.S. Investments L.P..... 41,387 *
Whittier Ventures, LLC... 118,065 *
Williams, Jones &
Associates, Inc........ 1,056,577 1.1%
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)............... 1,806,598 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 63,771,848 shares held by EKI of which Mr. Khashoggi indirectly
owns a 90% beneficial interest, 7,478,790 shares held by E. Khashoggi
Industries Inc. of which Mr. Khashoggi indirectly owns a 100% beneficial
interest and 2,131,894 shares held by Mr. Khashoggi's other affiliated
entities. Mr. Khashoggi has sole voting and dispositive power with respect
to all such 73,382,532 shares.
(5) Includes options to purchase 15,720 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which will be
exercisable in 60 days.
(6) Does not include any of the shares held by EKI in which Mr. Hodson holds an
indirect 10% interest or any of the 810,366 shares held by CTC in which Mr.
Hodson holds an indirect 10% interest.
(7) Represents options to purchase shares of Common Stock that are fully vested
and exercisable.
(8) Includes options to purchase 5,240 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which will be
exercisable in 60 days.
(9) Includes options to purchase 10,480 shares of Common Stock issued to each
director under the 1995 Stock Incentive Plan all of which will be
exercisable in 60 days.
(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 December 31, 1997, there were 82,530,000 shares of Common Stock
outstanding, held of record by 89 stockholders. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
stockholders. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, holders of Common Stock would be entitled to share ratably in the
Company's assets remaining after payment of liabilities, and after provision is
made for each class of stock, if any, having preference over the Common Stock
(including as of the date of this Prospectus the Series A Preferred Stock
described below). Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All of the outstanding shares of Common Stock
are, and the Common Stock offered by the Company hereby, when issued for the
consideration set forth in this Prospectus, will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, rights, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. The Board of Directors, without stockholder approval, can
issue Preferred Stock with voting, conversion, and other rights which could
adversely affect the voting power and other rights of the holders of Common
Stock. The issuance of Preferred Stock in certain circumstances may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock,
and may adversely affect the market price of the Common Stock. At present, the
Company has no plans to issue any additional shares of Preferred Stock.
As of December 31, 1997, there were 26,675 shares of Series A Preferred
Stock outstanding (convertible into 6,988,850 shares of Common Stock), held of
record by 56 stockholders. Concurrently with or shortly following the
consummation of the Offering, the Company intends to deliver to the holders of
the Series A Preferred Stock notice of the Company's election to redeem all
outstanding shares of the Series A Preferred Stock approximately 60 days after
the date of such notice. The holders of the Series A Preferred Stock have the
right pursuant to the terms thereof to convert their Series A Preferred Stock
into Common Stock, with each share of Series A Preferred Stock being convertible
into 262 shares of Common Stock (assuming completion of the 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 73.4% of the Common Stock will be owned upon
completion of the Offering by EKI and its affiliates. EKI's principal office is
located in California, so that certain provisions of California corporate law
may apply to the Company, as described below, unless as a result of the Offering
there are more than 800 holders of its equity securities as of the applicable
date.
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt
include, without limitation, those provisions relating to the stockholders'
right to cumulate votes in elections of directors (cumulative voting is
mandatory under California law), the stockholders' right to remove directors
without cause (which under California law is subject to the stockholders' right
to cumulate votes), the right of stockholders to call a special meeting (such
right is mandatory under California law if the requesting stockholder owns at
least 10% of the voting stock) and the Company's ability to indemnify its
officers, directors and employees (which is more limited in California than in
Delaware). Notwithstanding the foregoing, a corporation may provide for a
classified board of directors, or eliminate cumulative voting, or both if it is
a "listed corporation." A "listed corporation" means a corporation with
outstanding shares listed on the New York Stock Exchange or the American Stock
Exchange, or a corporation with outstanding securities qualified for trading as
a national market security on Nasdaq if such corporation has at least 800
holders of its equity securities as of the record date of its most recent annual
meeting of stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
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
74,463,282 shares, and have owned such shares for Rule 144 purposes since the
incorporation of the Company. Of the shares owned by non-affiliates, 9,981,938
shares have been held by such non-affiliates in excess of two years. See "Risk
Factors-- Effect on Share Price of Shares Eligible for Future Sale."
Any employee, officer, director, advisor or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the Company becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934.
The Company has entered into a Registration Rights Agreement with EKI (the
"EKI Registration Rights Agreement"). The EKI Registration Rights Agreement
provides certain registration rights for the 82,530,000 shares of Common Stock
originally issued to EKI (whether held by EKI or subsequent transferees). The
Company is also obligated, following the date one year after the consummation of
the Offering, to prepare and keep in place (at the Company's expense) a
Registration Statement on Form S-3 covering certain shares of Common Stock
currently held by EKI which may be transferred upon the exercise of options to
be granted by EKI to its employees and consultants. The EKI Registration Rights
Agreement grants two "piggyback" registration rights for offerings of Common
Stock by the Company (subject to cutback provisions for the registration rights
of other holders of Common Stock and the holders of the Company's Series A
Preferred Stock) and the right to participate in one demand registration upon a
request by the holders of 20,632,500 of the 82,530,000 shares of Common Stock
originally issued to EKI, some of which shares have been transferred to other
holders. The holders of such shares will be responsible, on a pro-rata basis,
for most of the expenses relating to the exercise of the demand registration
right and a portion of the expenses relating to the exercise of their piggyback
registration rights. See "Certain Transactions."
The holders of an additional 1,746,754 shares of Common Stock, and the
holders of 26,675 shares of Series A Preferred Stock convertible into 6,988,850
shares of Common Stock, have been granted demand and piggyback registration
rights with respect to such shares of Common Stock under various registration
rights agreements. Under their demand registration rights, subject to certain
conditions, the holders of at
56
<PAGE>
least 25% of such registrable securities may require the Company to use
commercially reasonable efforts to register such shares under the Securities
Act. The Company is obligated to complete no more than two demand registrations,
and in no event is the Company required to complete a demand registration within
six months after the effective date of its most recent registration statement.
Under their piggyback registration rights, these persons may elect to
participate and sell their registrable securities in up to a maximum of two
(assuming all securities requested to be registered are so registered)
subsequent public offerings in which the Company issues additional securities
for its own behalf, subject to reduction (with all shares of the Company first
being registered) in the event that the managing underwriter in such offering
advises the Company that the number of securities sought to be registered
exceeds the number of shares of Common Stock which could be sold without having
an adverse effect on the offering.
Holders of an additional 1,048,000 shares of Common Stock have been granted
piggyback registration rights entitling them to sell their registrable
securities in subsequent public offerings in which the Company issues additional
securities for its own behalf.
Except as noted above, the cost of all registrations pursuant to the
foregoing registration rights will be borne by the Company, except for
underwriters' commissions and discounts which will be borne by the sellers of
the registrable securities.
As of December 31, 1997, there were outstanding stock options to purchase an
aggregate of 1,158,040 shares of Common Stock. All outstanding stock options are
held by Directors and officers of the Company and are subject to the lock-up
arrangements described below. Following the Offering, the Company intends to
file a Registration Statement on Form S-8 covering an aggregate of 4,585,000
shares of Common Stock that have been reserved for issuance under the Company's
1995 Stock Incentive Plan and 1994 Stock Option Plan, thus permitting the resale
of such shares in the public market without restriction under the Securities Act
upon the expiration of the lock-up period described below and the exercise of
such options. See "Management--Stock Option Plan."
The Company and all stockholders who are not Selling Stockholders (other
than one stockholder who owns 262 shares of Common Stock), including all
officers, Directors or affiliates have agreed with the Underwriters, subject to
certain exceptions, not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days from the date of this Prospectus without the
prior written consent of Salomon Brothers Inc. All Selling Stockholders of the
Company have agreed, subject to certain exceptions, not to sell or otherwise
dispose of any shares of Common Stock for a period of 270 days from the date of
this Prospectus without the prior written consent of Salomon Brothers Inc.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of certain of the United States federal tax
considerations that may be relevant to the purchase, ownership and disposition
of the Common Stock by investors who hold the Common Stock as a capital asset
and does not purport to be a complete analysis of all the potential tax
consequences thereof. The discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes could be retroactively applied in a manner that adversely affects
holders of such Common Stock. Potential investors should be aware that the
discussion does not address (i) foreign, state and local tax considerations or
(ii) all of the federal tax considerations that may be relevant to particular
investors in light of their individual circumstances or to holders subject to
special treatment under United States federal tax laws, such as dealers in
securities, insurance companies, tax-exempt organizations and financial
institutions.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
UNITED STATES FEDERAL TAX CONSEQUENCES, AS WELL AS ALL APPLICABLE STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
COMMON STOCK.
PERSONAL HOLDING COMPANY TAX
As a corporation, the Company will be subject to federal, state, local and
foreign income taxes on its taxable income. In addition, because more than 50%
of the value of the Company's outstanding stock will be owned directly or
indirectly by five or fewer individuals, and a substantial portion of the
Company's income is expected to be derived from royalties and equipment leasing,
there is a significant risk that the Company will be classified as a "personal
holding company." As a personal holding company, the Company will be subject to
an additional federal tax equal to 39.6% of, in general, its undistributed after
tax earnings for any year in which, generally, the Company's royalty and other
passive type income constitutes 60% or more of its "adjusted ordinary gross
income" (I.E., ordinary gross income, as distinguished from capital gains
income, adjusted to reflect certain statutory exclusions and deductions) for the
year. In the event that the Company is subject to the personal holding company
tax in a taxable year, the Company will only be able to use its net operating
loss, if any, for the immediately preceding year to offset its income subject to
the personal holding company tax for such year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Net Operating Loss
Tax Carryforwards."
The Company intends to minimize its liability for the personal holding
company tax either by deriving more than 40% of its adjusted ordinary gross
income for each year from non-passive sources (such as through joint venture
arrangements with manufacturing or other operating companies), or by
distributing all or part of its personal holding company income for any taxable
year in which that threshold cannot be satisfied. The amount of any such
distribution generally will be treated as a dividend taxable as ordinary income.
There can be no assurance, however, that the Company will be able to eliminate
its liability for the personal holding company tax.
TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of shares of
Common Stock who (for United States Federal income tax purposes): (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate, the income of which is
subject to United States Federal income taxation regardless of its source or
(iv) is a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
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DIVIDENDS
A cash distribution made with respect to the Common Stock will be treated as
a dividend, taxable as ordinary income to the extent of the Company's current or
accumulated earnings and profits for tax purposes. Cash distributions in excess
of the current or accumulated earnings and profits of the Company will be
treated for federal income tax purposes first as a return of the holder's
adjusted tax basis in its shares and then as a gain from the sale or exchange of
such shares. In general, certain distributions of Common Stock and Preferred
Stock and distributions of promissory notes or other property will be taxed as
if they were cash distributions in an amount equal to the fair market value of
such property even though no cash is received.
A distribution treated as a dividend should qualify for the 70%
intercorporate dividends-received deduction subject to the minimum holding
period (generally at least 46 days within a 90 day period beginning 45 days
before the relevant ex-dividend date) and other applicable requirements. Under
certain circumstances, a corporate holder may be subject to the alternative
minimum tax with respect to the amount of its dividends-received deduction.
GAIN OR LOSS ON DISPOSITION OF COMMON STOCK
Upon any sale or other taxable disposition of Common Stock, a United States
Holder will recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received on such sale or other taxable disposition and (ii) the
holder's adjusted tax basis in such shares of Common Stock. Such gain or loss
will be capital gain or loss if the shares have been held by the United States
Holder as a capital asset and, with respect to a non-corporate (I.E., an
individual, trust or estate) United States Holder, will be mid-term or long-term
gain or loss if such shares have been held for more than one year or more than
eighteen months, respectively.
BACKUP WITHHOLDING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on dividends and redemption proceeds received with respect to the Common
Stock. Generally, backup withholding applies only when the taxpayer fails to
furnish or certify a proper Taxpayer Identification Number or when the taxpayer
is notified by the IRS that the taxpayer has failed to report payments of
interest and dividends properly. The Company may require holders of the Common
Stock to establish an exemption from backup withholding or to make arrangements
satisfactory to the Company with respect to the payment of backup withholding. A
Holder who does not provide the Company with a current Taxpayer Identification
Number may be subject to penalties imposed by the IRS. Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining any applicable exemption.
TAXATION OF NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder of Common Stock that, for United States federal tax purposes,
is a Non-United States Holder. For purposes of this discussion, a "Non-United
States Holder" generally is any person who is, for United States federal income
tax purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership or a foreign estate or trust, and for United States federal estate
tax purposes, a non-resident who is not a citizen of the United States (as
specifically defined for United States federal estate tax purposes). This
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-United States Holder and applies only to Non-United States
Holders that hold Common Stock as a capital asset. Prospective investors are
urged to consult their tax advisors regarding the United States federal income
and estate tax consequences of acquiring, holding and disposing of Common Stock
(including such investor's status as a United States
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.
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Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 10,560,000 Shares offered by the U.S. Underwriters, (i) it is not
purchasing any Shares for the account of anyone other than a United States or
Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute this Prospectus to any person
outside of the United States or Canada, or to anyone other than a United States
or Canadian Person and (iii) any dealer to whom it may sell any Shares will
represent that it is not purchasing for the account of anyone other than a
United States or Canadian Person and agree that it will not offer or resell,
directly or indirectly, any Shares outside of the United States or Canada, or to
anyone other than a United States or Canadian Person or to any other dealer who
does not so represent and agree. Each International Underwriter has severally
agreed that, as part of the distribution of the 2,640,000 Shares offered by the
International Underwriters, (i) it is not purchasing any Shares for the account
of any United States or Canadian Person, (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any Shares or distribute any
Prospectus relating to the International Offering to any person in the United
States or Canada, or to any United States or Canadian Person and (iii) any
dealer to whom it may sell any Shares will represent that it is not purchasing
for the account of any United States or Canadian Person and agree that it will
not offer or resell, directly or indirectly, any Shares in the United States or
Canada, or to any United States or Canadian Person or to any other dealer who
does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of its source (other than any non-United
States or non-Canadian branch of any United States or Canadian Person), and
includes any United States or Canadian branch of a person other than a United
States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of Shares as may be mutually agreed.
The price of any Shares so sold shall be the Price to Public, less an amount not
greater than the concession to securities dealers. To the extent that there are
sales between the U.S. Underwriters and the International Underwriters pursuant
to the Agreement Between U.S. Underwriters and International Underwriters, the
number of Shares initially available for sale by the U.S. Underwriters or by the
International Underwriters may be more or less than the amount specified on the
cover page of this Prospectus. Neither the U.S. Underwriters nor the
International Underwriters are obligated to purchase from the other any unsold
shares of Common Stock.
Any offer of the Shares in Canada will be made only pursuant to an exemption
from the prospectus filing requirement and an exemption from the dealer
registration requirement (where such an exemption is not available, offers shall
be made only by a registered dealer) in the relevant Canadian jurisdiction where
such offer is made. Purchasers of the Shares offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
The U.S. Underwriting Agreement provides that the Company and EKI will
jointly and severally indemnify the U.S. Underwriters against certain
liabilities and expenses, including liabilities under the Securities Act, or
contribute to payments the U.S. Underwriters may be required to make in respect
thereof.
The Company and all of the stockholders who are not Selling Stockholders
(other than one stockholder who owns 262 Shares of Common Stock), including EKI
and the Directors and officers of the Company, have agreed, subject to certain
exceptions, not to offer, sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, directly or indirectly, or announce the offering of any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, for 180 days from the
date of this Prospectus, without the prior written consent of Salomon Brothers
Inc. All Selling Stockholders of the Company have agreed, subject to certain
exceptions, to the foregoing restrictions for a period 270 days from the date of
this Prospectus.
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At the Company's request, the U.S. Underwriters have reserved up to
1,100,000 shares of Common Stock (the "Directed Shares") for sale at the Price
to Public to certain manufacturers, licensees and equipment and new material
suppliers and to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase such Shares. The number of Shares of
Common Stock available for sale to the general public will be reduced to the
extent of sales of Directed Shares to any of the persons for whom they have been
reserved. Any Shares not so purchased will be offered by the U.S. Underwriters
on the same basis as all other Shares offered hereby. The Underwriters and
Representatives have informed the Company that they do not expect discretionary
sales by the Underwriters to exceed 8% of the Shares being offered hereby.
During and after the Offerings, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offerings. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offerings
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company
and the Representatives. Among the factors considered in determining the Price
to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general,
certain other financial and operating information of the Company in recent
periods, and other factors deemed relevant. There can be no assurance that the
prices at which the Shares will sell in the public market after the Offerings
will not be lower than the Price to Public.
The Company's Common Stock has been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol "ERTH".
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Latham & Watkins,
Costa Mesa, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, and for
the period from November 1, 1992 (inception) through December 31, 1997 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report contains an emphasis paragraph
relating to the Company's ability to continue as a going concern), and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
The portions of this Prospectus entitled "Risk Factors--Protection of
Proprietary Technology" and "Business--Patents, Proprietary Rights and
Trademarks" have been reviewed and approved by Workman, Nydegger & Seeley, Salt
Lake City, Utah, as experts in patent law.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits and schedules thereto on file
with the Commission pursuant to the Securities Act and the rules and regulations
of the Commission thereunder. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies
may be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. The Commission maintains
a web site that contains reports, proxy and information statements and other
information filed electronically with the Commission at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EARTHSHELL CONTAINER CORPORATION
Independent Auditors' Report.............................................................. F-2
Balance Sheets as of December 31, 1996 and
1997 and (unaudited) pro forma December 31, 1997........................................ F-3
Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the
period from November 1, 1992 (inception)
through December 31, 1997............................................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and
(unaudited) pro forma December 31, 1997................................................. F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the
period from November 1, 1992 (inception)
through December 31, 1997............................................................... F-6
Notes to Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EarthShell Container Corporation:
We have audited the accompanying balance sheets of EarthShell Container
Corporation (a development stage enterprise -- the "Company") as of December 31,
1996 and 1997, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997 and for the period from November 1, 1992 (inception) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 and for the period from inception
through December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company is
a development stage enterprise that has incurred losses in its operations since
inception, currently has a stockholders' deficit and negative working capital,
and continues to rely on its stockholders and borrowings from a financial
institution to provide cash flow to sustain its operations. Although the
Company's operations subsequent to December 31, 1997 have been funded in part by
loans from its majority stockholder, the stockholder is under no obligation to
continue to fund the Company, and without additional funding from its
stockholders or other sources, there is substantial doubt about the Company's
ability to continue as a going concern. Management's plans to procure additional
long-term funding are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Los Angeles, California
February 20, 1998
F-2
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------------- 1997
1996 1997 (NOTE 1)
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 21,179 $ 8,437 $ 8,437
Prepaid insurance.......................... 12,443 9,248 9,248
Other assets............................... 26,877 19,288 19,288
------------ ------------ ---------------
Total current assets....................... 60,499 36,973 36,973
PROPERTY AND EQUIPMENT, NET.................. 2,756,935 3,741,129 3,741,129
------------ ------------ ---------------
TOTAL........................................ $ 2,817,434 $ 3,778,102 $ 3,778,102
------------ ------------ ---------------
------------ ------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Note payable and accrued interest to
majority stockholder..................... $ 22,215,793 $ 32,696,955 $ 32,696,955
Notes payable to banks..................... 6,904,775 11,843,855 11,843,855
Dividends payable.......................... 9,149,890
Payable to majority stockholder............ 752,192 622,090 622,090
Accounts payable and accrued expenses...... 1,676,642 3,182,534 3,182,534
------------ ------------ ---------------
Total current liabilities................ 31,549,402 48,345,434 57,495,324
------------ ------------ ---------------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 100,000
shares authorized; 35,000 Series A shares
designated; 26,675 Series A shares issued
and outstanding as of December 31, 1996
and 1997 (Pro forma, no shares
outstanding)............................. 267 267
Additional paid-in preferred capital....... 24,472,734 24,472,734
Common stock, $.01 par value, 1,000,000
shares authorized; 315,000 issued and
outstanding as of December 31, 1996 and
1997 and (Pro forma 89,518,850 shares
outstanding)............................. 3,150 3,150 895,189
Additional paid-in common capital.......... 2,020,843 5,177,502 28,758,464
Deficit accumulated during the development
stage.................................... (55,228,962) (74,220,985) (83,370,875)
------------ ------------ ---------------
Total stockholders' deficit.............. (28,731,968) (44,567,332) (53,717,222)
------------ ------------ ---------------
TOTAL........................................ $ 2,817,434 $ 3,778,102 $ 3,778,102
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
EXPENSES:
Related party research and
development................. $ 8,427,239 $ 9,060,523 $ 7,454,899 $ 37,724,112
Other research and
development................. 672,992 1,098,787 1,446,141 4,675,996
Related party general and
administrative expenses..... 67,200 67,200 67,200 1,801,600
Other general and
administrative expenses..... 2,294,301 3,338,263 5,618,055 15,577,593
Depreciation and
amortization................ 44,047 310,776 506,546 2,259,377
Related party patent
expenses.................... 1,929,266 1,382,185 652,867 7,200,607
----------- ----------- ----------- -------------
Total expenses.............. 13,435,045 15,257,734 15,745,708 69,239,285
Related party interest
expense....................... 509,926 1,453,966 2,185,177 4,149,069
Other interest (income) expense,
net........................... (31,577) 237,637 1,060,338 828,631
----------- ----------- ----------- -------------
LOSS BEFORE INCOME TAXES........ 13,913,394 16,949,337 18,991,223 74,216,985
INCOME TAXES.................... 800 800 800 4,000
----------- ----------- ----------- -------------
NET LOSS........................ $13,914,194 $16,950,137 $18,992,023 $ 74,220,985
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
BASIC AND DILUTED NET LOSS PER
SHARE (NOTE 1)................ $(40.72) $(49.61) $(55.59)
PRO FORMA NET LOSS PER SHARE
(NOTE 1)...................... $(.31)
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING PRO
FORMA NET LOSS PER SHARE (NOTE
1)............................ 90,760,372
SUPPLEMENTAL PRO FORMA NET LOSS
PER SHARE (NOTE 1)............ $(.27)
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING
SUPPLEMENTAL PRO FORMA NET
LOSS PER SHARE (NOTE 1)....... 93,139,200
</TABLE>
See notes to financial statements.
F-4
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE DEFICIT
PREFERRED STOCK ADDITIONAL ADDITIONAL ACCUMULATED
SERIES A PAID-IN COMMON STOCK PAID-IN DURING
--------------- PREFERRED ---------------------- COMMON DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
------- ------ ------------ --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995...... 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 warrants.... 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)
Compensation related to stock
options and warrants........ 3,156,659
Net loss...................... (18,992,023)
------- ------ ------------ --------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1997.... 26,675 267 24,472,734 315,000 3,150 5,177,502 (74,220,985)
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)....... (9,149,890)
Stock Split 262:1
(unaudited)................. 89,177,175 891,772 (891,772)
------- ------ ------------ --------- ---------- ----------- --------------
PRO FORMA BALANCE, DECEMBER
31, 1997
(unaudited) (Note 1)........ -- $ -- $ -- 89,518,850 $ 895,189 $28,758,464 $ (83,370,875)
------- ------ ------------ --------- ---------- ----------- --------------
------- ------ ------------ --------- ---------- ----------- --------------
<CAPTION>
TOTAL
--------------
<S> <C>
BALANCE, JANUARY 1, 1995...... $ 118,370
Contribution to equity........ 1,117,723
Net loss...................... (13,914,194)
--------------
BALANCE, DECEMBER 31, 1995.... (12,678,101)
Contribution to equity........ 650,000
Issuance of stock warrants.... 246,270
Net loss...................... (16,950,137)
--------------
BALANCE, DECEMBER 31, 1996.... (28,731,968)
Compensation related to stock
options and warrants........ 3,156,659
Net loss...................... (18,992,023)
--------------
BALANCE, DECEMBER 31, 1997.... (44,567,332)
Conversion (on a pro forma
basis) of preferred stock to
common stock (unaudited)....
Accrual of preferred stock
dividends (unaudited)....... (9,149,890)
Stock Split 262:1
(unaudited).................
--------------
PRO FORMA BALANCE, DECEMBER
31, 1997
(unaudited) (Note 1)........ $ (53,717,222)
--------------
--------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31
1995 1996 1997 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................... $(13,914,194) $(16,950,137) $ (18,992,023) $(74,220,985)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 44,047 310,776 506,546 2,259,377
Issuance of stock options to
director and consultant........ 3,096,761 3,096,761
Issuance of stock options to
officer........................ 650,000 -- 650,000
Amortization of debt issue
costs.......................... 41,045 230,232 271,277
Loss on sale or disposal of
property and equipment......... -- 65,639
Net loss on sale of
investments.................... -- 32,496
Accretion of discounts on
investments.................... (410,084)
Changes in operating assets and
liabilities:
Prepaid expenses and other
assets......................... 52,533 31,183 10,784 (28,536)
Accounts payable and accrued
expenses....................... 580,914 330,463 1,505,891 3,182,533
Payable to majority
stockholder.................... 7,866,439 7,346,761 8,996,134 25,476,182
Accrued interest on notes payable
to majority stockholder........ 234,510 196,631 204,927 636,068
------------ ------------ ------------- -------------
Net cash used in operating
activities................. (5,135,751) (8,043,278) (4,440,748) (38,989,272)
------------ ------------ ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments--U.S.
government securities............ -- (36,918,254)
Proceeds from sales and redemptions
of investments................... 2,704,011 -- 37,295,842
Proceeds from sale of property and
equipment........................ 225,000 -- 297,670
Purchase of property and
equipment........................ (1,918,152) (1,176,589) (1,461,994) (7,235,550)
------------ ------------ ------------- -------------
Net cash provided by (used
in) investing activities... 1,010,859 (1,176,589) (1,461,994) (6,560,292)
------------ ------------ ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of notes
payable to stockholders.......... 6,210,000 2,335,000 2,275,000 12,820,000
Proceeds from drawings on line of
credit with bank................. 7,110,000 4,740,000 11,850,000
Proceeds from issuance of common
stock............................ 10,000
Proceeds from issuance of preferred
stock............................ 25,675,000
Preferred stock issuance costs..... (1,201,999)
Repayment of note payable.......... (2,000,000) (470,000) (1,125,000) (3,595,000)
------------ ------------ ------------- -------------
Net cash provided by
financing activities....... 4,210,000 8,975,000 5,890,000 45,558,001
------------ ------------ ------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. 85,108 (244,867) (12,742) $ 8,437
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.............. 180,938 266,046 21,179
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 266,046 $ 21,179 $ 8,437 $ 8,437
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for:
Income taxes..................... $ 800 $ 800 $ 800 $ 4,000
Interest......................... $ 275,415 $ 199,494 $ 829,943 $ 1,305,689
Warrants issued with debt........ $ 246,270 $ 59,898 $ 306,168
Transfer of property from EKI.... $ 28,745 $ 28,745
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash compensation of $650,000 and $3,096,761, was recorded in 1996 and
1997, respectively, representing the difference between fair market value
and exercise price of options on the date of grant.
In consideration of the $9,000,000 line of credit established in 1996, the
Company issued stock warrants to Imperial Bank which entitle the lender to
purchase a total of $750,000 of common stock issuable upon the completion of
the initial public offering, $300,000 at a per share price equal to the
initial public offering price of the Company's common stock and $450,000 at
a price per share equal to 110% of the initial public offering price. These
warrants were valued and recorded at $246,270 based upon the Company's
option pricing model. (See Note 7).
In consideration of the $14,000,000 line of credit established in 1997, the
Company issued stock warrants to Imperial Bank which entitle the lender to
purchase a total of $300,000 of common stock issuable upon the completion of
the initial public offering at a price per share equal to 110% of the
initial public offering price. These warrants were valued and recorded at
$59,898 based upon the Company's option pricing model. (See Note 7).
See notes to financial statements.
F-6
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
EarthShell Container Corporation (the "Company") was incorporated in
Delaware on November 1, 1992 and is a subsidiary of E. Khashoggi Industries, LLC
(together with its predecessor entity, "EKI"). Both the Company and EKI are
development stage enterprises. In connection with the formation of the Company,
the Company entered into a license agreement (see Note 3) for certain technology
developed by EKI, exclusively for use in connection with the manufacture and
sale of selected disposable food and beverage containers for use in the
food-service industry. The accompanying financial statements reflect only the
costs and expenses related to this application of the technology under
development since the Company's formation on November 1, 1992. Expenses incurred
prior to November 1, 1992 by EKI and its predecessor entities have been
excluded, as they related to broader applications of the technology not included
in the license agreement. The accompanying financial statements have been
presented as if the Company commenced operations on January 1, 1993. Expenses
for the two-month period from November 1, 1992 (date of inception) to December
31, 1992 totaled $2,749 and are included in the 1993 financial statements.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, from the date of inception to December 31, 1997, the Company
incurred accumulated losses of $74,220,985, and as of December 31, 1997, the
Company's current liabilities exceeded its current assets by $48,308,461. As a
development stage enterprise, the Company has primarily relied on funding from
its stockholders to sustain its operations. In September 1993, the Company
completed a private placement offering of preferred stock, raising $24,473,001
in net proceeds (see Note 6). During the remainder of 1993 and 1994, the Company
applied substantially all of these proceeds to the furtherance of its research
and development activities and the repayment of stockholder advances. During and
subsequent to December 31, 1995, the Company's operations have been
substantially funded with loans from its majority stockholder and borrowings
from a bank. However, the majority stockholder is under no obligation to loan or
make additional capital contributions to the Company.
Management is currently preparing for a public offering of the Company's
common stock to obtain additional funds so that the Company can meet its
obligations, sustain its development activities, achieve positive cash flow from
operations and repay the stockholder loans and other debt. Management
anticipates that the offering will be initiated upon the completion of certain
product commercialization activities currently in process.
If the Company is unable to successfully complete an offering or obtain
funding from other sources, the Company may not be able to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded on the straight-line
basis over the estimated useful lives of the assets of three years.
F-7
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 and are classified as available for sale.
STATEMENT OF CASH FLOWS
For presentation purposes, cash and cash equivalents include cash and funds
invested in short-term money market accounts with original maturities of three
months or less (see disclosure of noncash activities in Note 3).
UNAUDITED PRO FORMA INFORMATION
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 December 31, 1997, the unaudited pro forma balance sheet and statement
of stockholders' equity (deficit) have been presented assuming the conversion of
the Company's Series A cumulative senior convertible preferred stock. It is
contemplated that all of the outstanding shares of the Company's Series A
cumulative senior convertible preferred stock will be converted to an aggregate
of 6,988,850 shares of the Company's common stock. In addition, upon conversion
at December 31, 1997, the Company would have been required to declare dividends
of $9,149,890 in accordance with the terms of the Series A cumulative senior
convertible preferred stock.
Pro forma loss per common and common equivalent share for the year ended
December 31, 1997 has 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 sale of shares at $19.00 per
share to fund dividends payable (481,573 shares) which will be repaid from
proceeds of the planned offering, plus the net shares issuable related to stock
options using the treasury stock method (759,949 shares). Supplemental pro forma
loss per common and common equivalent share for the year ended December 31, 1997
have been determined by dividing pro forma net loss less interest expense and
loan fee amortization 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 sale of shares at $19.00 per share to fund dividends
payable (481,573 shares) and to repay the $33,319,045 in indebtedness owed to
the majority stockholder and the $11,878,745 notes payable to banks (2,378,829
shares), plus the net shares issuable related to stock options using the
treasury stock method (759,949 shares). 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, 1997 has not been presented as such information is not
indicative of the Company as an on-going entity.
F-8
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amounts expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred income tax assets and liabilities.
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is calculated based on weighted average
shares outstanding of 341,675 as of December 31, 1995, 1996 and 1997,
respectively. Basic and diluted are the same because common stock equivalents
are considered anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded values of the Company's financial instruments approximate their
fair values. The Company's financial instruments are primarily composed of
investments in U.S. government securities and notes payable. The investments are
short term in nature and carry current market rates. Notes payable initially
bear interest at the prime rate in effect at the date of issuance, which is
adjusted to the prime rate in effect on the first day of each calendar quarter.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after
F-9
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be
material in relation to its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years financial statements
to conform to 1996 and 1997 classifications.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
----------- ---------
Furniture and equipment.............................. $1,327,273 $2,349,408
<S> <C> <C>
Deposits on equipment................................ 1,788,592 2,257,197
----------- ---------
3,115,865 4,606,605
Accumulated depreciation and amortization............ (358,930) (865,476)
----------- ---------
Property and equipment, net.......................... $2,756,935 $3,741,129
----------- ---------
----------- ---------
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company's administrative and research offices are located in shared
facilities with EKI. In addition, the conduct of the Company's current
operations requires sharing of technical support and management personnel of
EKI, primarily to assist in furthering the Company's development of the licensed
technology and product applications. To confirm these arrangements, the Company
and EKI entered into certain intercompany agreements. From September 1, 1993
through June 30, 1994, the Company operated under a management, administrative
services and professional services agreement (the "Management Services
Agreement"). Under the terms of the Management Services Agreement, the Company
reimbursed EKI for all direct payroll costs and related expenses incurred on
approved projects, plus an allocation of EKI's overhead and general and
administrative costs. Overhead and general and administrative costs were
allocated to the Company based on payroll costs charged to Company-specific
projects compared to EKI's total payroll cost. The Management Services Agreement
also provided for the payment of monthly administrative fees from September 1,
1993 through the first two quarters of 1994. Administrative fees totaled
$400,000 and $1,200,000 in 1993 and 1994, respectively. Effective July 1, 1994
the Company and EKI entered into a Technical Services and Sublease Agreement
(the "Prior Technical Services Agreement"), which superseded the Management
Services Agreement. Under the terms of the Prior Technical Services Agreement,
the Company paid EKI for all direct project labor hours incurred at specified
hourly billing rates and direct expenses incurred on approved projects. The
specified hourly billing rates, which are subject to revision semiannually, are
fully burdened to include all EKI facility, equipment and overhead costs and
vary according to job classification. The intercompany rates have been compared
to a market rate study prepared by an independent third party provider of
similar services and are within the range of average market rates for each job
classification. The Company also subleased office
F-10
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
space from EKI for $5,600 per month under this agreement. The Prior Technical
Services Agreement terminated on September 30, 1997. The Company entered into an
Amended and Restated Technical Services and Sublease Agreement effective October
1, 1997. For the years ended December 31, 1997, 1996 and 1995, the Company paid
or accrued $7,454,899, $9,060,523, and $8,427,239, respectively, for services
performed under the Prior Technical Services Agreement and $67,200 in sublease
payments for each of the respective periods.
On December 31, 1994, the Company sold substantially all of its equipment
and leasehold improvements to EKI. EKI issued a note to the Company totaling
$2,018,204, representing the Company's original cost of the assets. The
transaction resulted in a gain of $1,117,723, which was offset against the note
receivable from EKI. The net note receivable balance of $900,481 was netted
against the payable to EKI in the accompanying 1994 financial statements. During
1995, the note receivable was offset by notes payable that were issued to EKI.
As a result, the note receivable was eliminated, and the gain was recorded as a
contribution to additional paid-in common capital.
In connection with the formation of the Company, the Company entered into a
license agreement with EKI to manufacture, use, sell and sublicense certain
technology rights and to use certain trademarks owned by EKI in connection with
the products covered under the License Agreement. The license covers the period
of the patents covering the technologies. Under an Agreement for Allocation of
Patent Costs (the "Prior Patent Allocation Agreement"), the Company was required
to reimburse EKI for all costs and expenses associated with filing, prosecuting
and maintaining patents or patent applications or technology which were directly
related to food and beverage containers within the field of use licensed to the
Company under the License Agreement, or which were outside the field of use
under the License Agreement, but which had significant teachings, claims or
applications for such uses. The Company entered into an Amended and Restated
Agreement for Allocation of Patent Costs effective October 1, 1997. Under the
Prior Patent Allocation Agreement, legal fees of $1,929,266, $1,382,185 and
$652,867, were paid to or on behalf of EKI during 1995, 1996 and 1997,
respectively.
At December 31, 1996, the notes payable to the majority stockholder of
$21,784,652 include amounts due to EKI under the Prior Technical Services
Agreement and the Prior Patent Allocation Agreement. During 1996, $13,709,652 of
the payables to EKI were converted to notes payable and several other notes
payable were issued to EKI for cash loans totaling $8,075,000. The notes
initially bear interest at the prime rate in effect at the date of issuance. The
interest rates are adjusted to the prime rate in effect on the first day of each
calendar quarter. At December 31, 1996 and December 31, 1997, all of the notes
accrued interest at 8.25% and 8.50%, respectively, and were payable on demand.
During 1997, $7,145,986 of billings due under the Prior Technical Services
Agreement and Prior Patent Allocation Agreement and $1,980,249 of interest due
to EKI were converted to notes payable. In addition, several other notes were
issued to EKI for cash loans totaling $1,150,000. As a result, total notes
payable to EKI increased from $21,784,652 as of December 31, 1996 to $32,060,887
as of December 31, 1997. These notes payable were combined into one note payable
dated December 31, 1997.
The amount payable to the majority stockholder of $752,192 and $622,090 as
of December 31, 1996 and 1997, respectively, includes amounts due to EKI under
the Prior Technical Services Agreement and the Prior Patent Allocation
Agreement.
F-11
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company borrowed $2,000,000 from a preferred stockholder on December 21,
1994 and executed a demand note payable that accrued interest at the rate of 8%
per annum. The note was fully repaid in February 1995.
4. NOTES PAYABLE
As of December 31, 1997, notes payable include a $32,060,887 note payable
due to EKI, the majority stockholder, as described in Note 3, and $11,850,000
outstanding on a line of credit less an unamortized original issue discount of
$34,890 related to the stock warrants described in Note 8. In addition, the
Company is obligated to another bank for a property loan of $28,745.
In 1996, the Company established a $9,000,000 line of credit with a bank
which originally expired on May 30, 1997 and was extended to March 21, 1998 and
increased to $14,000,000. The extension of credit has been guaranteed by EKI,
Mr. Essam Khashoggi, the Chairman of the Board and indirect controlling
stockholder of the Company, and a trust controlled by Mr. Khashoggi. In
addition, the Company executed a general security agreement that grants the bank
a security interest in the license agreement entered into by the Company with
EKI. Interest is payable monthly at an annual rate of 1% in excess of the bank's
announced prime lending rate. At December 31, 1996 the bank's prime lending rate
was 8.25% and the outstanding principal was $7,110,000 and is shown net of the
$205,225 unamortized portion of an original issue discount related to the stock
warrants described in Note 8. The discount is amortized on a straight-line basis
over the term of the line of credit. At December 31, 1997 the bank's prime
lending rate was 8.50% and the outstanding principal was $11,850,000.
The weighted average interest rate on the notes payable agreements for the
years ended December 31, 1996 and 1997 was 8.94% and 8.76%, respectively.
5. COMMITMENTS
At December 31, 1996 and 1997, the unpaid balances due to vendors for
equipment purchases totaled $186,798 and $2,493,043, respectively.
On February 16, 1998, EKI entered into a patent purchase agreement with a
third party for the purchase of certain technology that may be applicable to
starch-based disposable packaging. Pursuant to the terms of the Patent
Allocation Agreement, EKI will license such technology to the Company. In
connection with this purchase, the Company entered an agreement to pay to EKI
$3.5 million on or about December 31, 2003. The Company's obligation will be
reduced by 5% of the purchase price of any equipment purchased by EKI, the
Company or its licensees or joint ventures from the company which previously
owned the technology. In addition, the Company is required to pay $3 million
over the five year period commencing January 1, 2004 if EKI, the Company or the
Company's licensees or joint ventures have not purchased, by December 31, 2003,
at least $35 million of equipment from the company which previously owned the
technology and EKI, the Company or the Company's licensees or joint ventures use
the purchased technology.
6. CUMULATIVE CONVERTIBLE PREFERRED STOCK
On September 17, 1993, the Company completed a private placement of
preferred stock totaling $26,675,000, with net proceeds to the Company totaling
$24,473,001. Under the Series A Cumulative
F-12
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 December 31, 1997 cumulative undeclared
dividends totaled $7,016,000 and $9,149,890, respectively. Each share of
preferred stock is convertible into one share of common stock. Subject to the
right of the holders of the preferred stock to convert their shares into common
stock, the Company has the right to redeem the preferred stock at a price of
$1,015 per share 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 1997,
options for 540 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 360 shares were granted at an exercise price of $3,982 per share vesting on
the day immediately prior to the next stockholders' meeting held subsequent to
the date of grant.
F-13
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
In October 1997, options to purchase 1,000 shares of common stock were
regranted as a result of an extension of the terms of the option agreement to a
director with an exercise price of $1,000 per share. The fair value of the
common stock at the date of grant was $3,982 per share. Compensation expense was
recorded during 1997 in the amount of $2,982,000 related to the regrant of these
options.
In October 1997, options to purchase 100 shares of common stock were
regranted as a result of an extension of the terms of the option agreement to a
consultant with an exercise price of $2,000 per share. The fair value of the
common stock at the date of grant was $3,982 per share. Compensation expense was
recorded during 1997 in the amount of $114,761 related to the regrant of these
options.
In November 1997, options to purchase 100 shares of common stock were
granted to a director at an exercise price of $3,982 per share vesting
immediately.
At December 31, 1997, options for 4,420 shares were outstanding, of which
3,534 were exercisable.
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
--------- --------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1995.................................... 2,945 $1,000 $ 1,000
Options granted................................................... 160 $2,000 $ 2,000
Options canceled.................................................. (400) $1,000 $ 1,000
---------
Outstanding at December 31, 1995.................................. 2,705 $ 1,059
Options granted................................................... 1,575 $2,000 $ 2,000
Options canceled.................................................. (500) $2,000 $ 2,000
---------
Outstanding at December 31, 1996.................................. 3,780 $ 1,327
Options granted................................................... 1,740 $1,000-$3,982 $ 2,154
Options canceled.................................................. (1,100) $1,000-$2,000 $ 1,091
---------
Outstanding at December 31, 1997.................................. 4,420 $ 1,711
---------
---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31,1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- --------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------- ------------- --------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$1,000 2,545 6 $ 1,000 2,245 $ 1,000
$2,000 1,235 7.4 $ 2,000 829 $ 2,000
$3,982 640 5.2 $ 3,982 460 $ 3,982
</TABLE>
F-14
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
Had compensation cost of the Company's stock option plan been determined
based on the fair value at the grant dates of awards under the plans (without
giving effect to the pro forma adjustments as described in Note 1), the
Company's net loss for the years ended December 31, 1996 and 1997 would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED, YEAR ENDED,
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Net loss:
As reported.................................................. $ 16,950,137 $ 18,992,023
Pro forma.................................................... $ 17,277,664 $ 20,542,181
Net loss per share:
As reported.................................................. $ 49.61 $ 55.59
Pro forma.................................................... $ 50.57 $ 60.12
</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 1997 would have been $20,542,181.
The fair value of stock options granted during 1996 was $1,552,361. The fair
value of stock options was estimated on the grant date using the Black Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 6.8%; expected life of 6.4 years; and expected volatility of
20.0%.
The fair value of stock options granted during 1997 was $3,868,135 of which
$3,096,761 was recorded as compensation expense as of December 31, 1997. The
fair value of stock options was estimated on the grant date using the Black
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 6.0%; expected life of 3.4 years; and expected
volatility of 20.0%.
The fair value of stock options granted during 1995 was not material.
8. STOCK WARRANTS
On June 7, 1996, in consideration of a $3,000,000 line of credit financing
arrangement, the Company issued a warrant which entitles the lender to purchase
common stock shares equal to $150,000 divided by the price per share of the
Company's common stock in the initial public offering. The warrant exercise
price is equal to the initial public offering price and can be exercised at any
time following six months after the initial public offering by the Company and
prior to its expiration date of June 7, 2001.
On July 2, 1996, the line of credit was increased to $4,500,000 and an
additional warrant was issued which entitles the lender to purchase another
$150,000 in common stock on terms similar to those in the previously issued
warrant of June 7, 1996.
On November 15, 1996, the line of credit was increased to $9,000,000 and an
additional warrant was issued which entitles the lender to purchase $450,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on November 15, 2003.
F-15
<PAGE>
EARTHSHELL CONTAINER CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK WARRANTS (CONTINUED)
The foregoing warrants were valued and recorded at $246,270 based upon the
Company's option pricing model (see Note 7).
On October 6, 1997, the line of credit was increased to $13,000,000 and an
additional warrant was issued which entitles the lender to purchase $250,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on October 6, 2004.
On December 31, 1997, the line of credit was increased to $14,000,000 and an
additional warrant was issued which entitles the lender to purchase $50,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on December 31, 2004.
The warrants issued in 1997 were valued at $59,898 based upon the Company's
option pricing model (see Note 7).
9. INCOME TAXES
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial and tax reporting purposes. At December
31, deferred tax assets were composed primarily of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Federal:
Depreciation.................................................... $ 88,176 $ 107,742
Capitalized operating expenses.................................. 3,952,663 5,921,976
Capitalized research and development............................ 2,744,130 2,966,105
Accrued interest to related party............................... 146,588 --
Deferred contributions.......................................... 359,721 359,721
Net operating loss carryforward................................. 11,671,200 16,060,992
------------- -------------
18,962,478 25,416,536
------------- -------------
State:
Depreciation.................................................... 3,747 30,557
Capitalized operating expenses.................................. 1,081,170 1,619,834
Capitalized research and development............................ 3,617,279 4,278,956
Accrued interest to related party............................... 40,096 --
Deferred contributions.......................................... 93,981 93,981
Net operating loss carryforward................................. 105,953 395,112
------------- -------------
4,942,226 6,418,440
------------- -------------
Deferred tax asset................................................ 23,904,704 31,834,976
Valuation allowance............................................... (23,904,704) (31,834,976)
------------- -------------
Net deferred tax asset.......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The increase in the valuation allowance of $7,930,272 at December 31, 1997
as compared to December 31, 1996 and $7,557,914 at December 31, 1996 as compared
to December 31, 1995 was the result of changes in the components of the deferred
tax items.
For federal income tax purposes, the Company has net operating loss
carryforwards of $47,239,000 as of December 31, 1997 that expire through 2012.
For state income tax purposes, the Company has net operating loss carryforwards
of $4,249,000 as of December 31, 1997 that expire through 2012.
Income tax expense for 1997, 1996 and 1995 consists of the minimum state
franchise tax expense.
F-16
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 25
Management................................................................ 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>
[Alternate Cover Page of International Prospectus]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[ALTERNATE COVER PAGE OF INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 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 certain stockholders. None of
the officers or directors of the Company is selling any Shares of Common Stock
in the offering. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Shares of Common Stock by the
Selling Stockholders.
Of the Shares being offered, 10,560,000 Shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,640,000 Shares are being
offered in a concurrent International Offering outside the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offering"), subject to transfers between the U.S. Underwriters and the
International Managers. The Price to Public and Underwriting Discount per Share
will be identical for the U.S. Offering and the International Offering. See
"Subscription and Sale." The closing of the U.S. Offering and International
Offering are conditioned upon each other.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $17.00 and $21.00 per share. See "Subscription and Sale"
for information relating to the factors considered in determining the initial
public offering price. The Company's Common Stock has been approved for
quotation on The Nasdaq Stock Market's National Market under the symbol "ERTH."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Subscription and Sale."
(2) Before deducting expenses payable by the Company, estimated at $1,620,000.
(3) The Company and certain of the Selling Stockholders have granted to the
U.S. Underwriters and the International Managers 30-day options to purchase
up to an aggregate of 1,980,000 additional Shares of Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. See "Subscription and Sale." If such options are
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively, and total Proceeds to Selling Stockholders will be $ .
--------------------
The Shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the Shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
---------------
JOINT BOOK-RUNNING MANAGERS
Salomon Smith Barney International Credit Suisse First Boston
, 1998.
<PAGE>
[ALTERNATE COVER PAGE OF INTERNATIONAL PROSPECTUS]
[EarthShell packaging logo and picture of
EARTHSHELL cups, bowls, hinged-lid container,
tray, breakfast platter and plate with quotes as
follows, "'Finally, fast food packaging that
Mother Earth can love!' Essam Khashoggi,
Chairman of the Board and "From the earth, back to the earth . . ."]
--------------
In this Prospectus, references to "dollars" and "$" are to United States
dollars.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "SUBSCRIPTION AND SALE."
EARTHSHELL-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY.
ALI-ITE-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF E. KHASHOGGI
INDUSTRIES, LLC. BIG MAC-REGISTERED TRADEMARK- AND QUARTER POUNDER-REGISTERED
TRADEMARK- ARE REGISTERED TRADEMARKS OF MCDONALD'S CORPORATION.
<PAGE>
[Alternate Underwriting Section of International Prospectus]
SUBSCRIPTION AND SALE
The institutions named below (the "Managers") have, subject to the terms and
conditions set forth in a Subscription Agreement dated , 1998 (the
"Subscription Agreement"), severally and not jointly, agreed with the Company
and the Selling Stockholders to subscribe and pay for the following respective
numbers of International Shares as set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
MANAGER SHARES
- --------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc. ...............................................................
Credit Suisse First Boston 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 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.
62
<PAGE>
[ALTERNATE UNDERWRITING SECTION OF INTERNATIONAL PROSPECTUS]
The offering price and the aggregate underwriting discounts and commissions
per share and per share commission and re-allowance to dealers for the
International Offering and the concurrent U.S. Offering will be identical.
Pursuant to an Agreement between the U.S. Underwriters and Managers (the
"Intersyndicate Agreement") relating to the Common Stock Offering, changes in
the offering price, the aggregate underwriting discounts and commissions per
share and per share commission and reallowance to dealers will be made only by
Smith Barney Inc., on behalf of the Managers and as representative of the U.S.
Underwriters.
Pursuant to the Intersyndicate Agreement, each of the Managers has agreed
that, as part of the distribution of International Shares and subject to certain
exceptions, it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares of Common Stock or distribute any prospectus relating to
the Common Stock in the United States or Canada or to any other dealer who does
not so agree. Each of the U.S. Underwriters has agreed that, as part of the
distribution of the U.S. Shares and subject to certain exceptions, it has not
offered or sold and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute any prospectus relating to the Common Stock to any
person outside the United States and Canada or to any other dealer who does not
so agree. The foregoing limitations do not apply to stabilization transactions
or to transactions between the Managers and the U.S. Underwriters pursuant to
the Intersyndicate Agreement. As used herein, "United States" means the United
States of America (including the States and the District of Columbia), its
territories, possessions and other areas subject to its jurisdiction, "Canada"
means Canada, its provinces, territories, possessions and other areas subject to
its jurisdiction, and an offer or sale shall be in the United States or Canada
if it is made to (i) any individual resident in the United States or Canada or
(ii) any corporation, partnership, pension, profit-sharing or other trust or
other entity (including any such entity acting as an investment adviser with
discretionary authority) whose office most directly involved with the purchase
is located in the United States or Canada.
Pursuant to the Intersyndicate Agreement, sales may be made between the
Managers and the U.S. Underwriters of such number of shares of Common Stock as
may be mutually agreed upon. The price of any shares so sold will be the public
offering price less such amount agreed upon by Smith Barney Inc., on behalf of
the Managers and as representative of the U.S. Underwriters, but not exceeding
the selling concession applicable to such shares. To the extent there are sales
between the Managers and the U.S. Underwriters pursuant to the Intersyndicate
Agreement, the number of shares of Common Stock initially available for sale by
the Managers or by the U.S. Underwriters may be more or less than the amount
appearing on the cover page of this Prospectus. Neither the Managers nor the
U.S. Underwriters are obligated to purchase from the other any unsold shares of
Common Stock.
Each of the Managers and the U.S. Underwriters severally represents and
agrees that: (i) it has not offered or sold and prior to the date six months
after the date of issue of the Common Stock will not offer or sell any Common
Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of the Class A Common Stock to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
The Company and all of the stockholders who are not Selling Stockholders
(other than one stockholder who owns 262 shares of Common Stock), including EKI
and directors and officers of the Company, have agreed, subject to certain
exceptions, not to offer, sell, contract to sell, grant any option or warrant
for the sale of, register, loan, pledge, grant any rights with respect to or
otherwise dispose of, directly or indirectly, or
63
<PAGE>
[ALTERNATE UNDERWRITING SECTION OF INTERNATIONAL PROSPECTUS]
announce the offering of any shares of Common Stock, including any such shares
beneficially owned or controlled by the Company, or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for 180 days
from the date of this Prospectus without the prior written consent of Salomon
Brothers Inc. All Selling Stockholders of the Company have agreed to the
foregoing restrictions, subject to certain exceptions, for a period of 270 days
from the date of this Prospectus.
The Company and EKI, jointly and severally, have agreed to indemnify the
Managers and the U.S. Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to payments that the
Managers and the U.S. Underwriters may be required to make in respect thereof.
During and after the Offerings, the U.S. Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
overallotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. The U.S. Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members of other broker-dealers in respect of the shares of Common Stock sold in
the Offerings for their account may be reclaimed by the syndicate if such shares
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company,
the U.S. Underwriters and the Managers. Among the factors considered in
determining the Price to Public were prevailing market conditions, the market
values of publicly traded companies that the U.S. Underwriters believed to be
somewhat comparable to the Company, the demand for the shares and for similar
securities of publicly traded companies that the U.S. Underwriters believed to
be somewhat comparable to the Company, the future prospects of the Company and
its industry in general, certain other financial and operating information of
the Company in recent periods, and other factors deemed relevant. There can be
no assurance that the prices at which the shares will sell in the public market
after the Offerings will not be lower than the Price to Public.
The U.S. Underwriters and Managers have informed the Company that they do
not expect discretionary sales by the Underwriters to exceed 8% of the Shares
being offered hereby.
The Company's Common Stock has been approved for quotation on the Nasdaq
Stock Market's National market under the symbol "ERTH."
All references to "Underwriting" in this Prospectus shall be deemed to be
references to this section-- "Subscription and Sale."
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Latham & Watkins,
Costa Mesa, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, and for
the period from November 1, 1992 (inception) through December 31, 1997 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report contains an emphasis paragraph
relating to the Company's ability to continue as a going concern), and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
The portions of this Prospectus entitled "Risk Factors--Protection of
Proprietary Technology" and "Business--Patents, Proprietary Rights and
Trademarks" have been reviewed and approved by Workman, Nydegger & Seeley, Salt
Lake City, Utah, as experts in patent law.
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 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 December 31, 1997 in the principal amount of $32,060,887 made by
the Company in favor of EKI.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.28 Letters dated August 22, 1997 from Shelby Yastrow to Simon K. Hodson and Simon K. Hodson
to Shelby Yastrow.+
10.29 First Amendment to Credit Agreement dated October 6, 1997 by and between the Company and
Imperial Bank.+
10.30 Warrant to Purchase Stock issued October 6, 1997 by the Company to Imperial Bank.+
10.31 Sublicense Agreement dated October 16, 1997 by and between the Company and Sweetheart
Cup Company Inc.+
10.32 Operating Agreement for the Production of Hinged Sandwich Containers for McDonald's
Corporation between Sweetheart Cup Company Inc. and the Company dated as of October
16, 1997.+
10.33 Lease Agreement--Commercial Building dated February 1, 1997 between the Company and PDG,
Ltd.+
10.34 Second Amendment to Credit Agreement dated December 31, 1997 by and between the Company
and Imperial Bank.+
10.35 Warrant to Purchase Stock dated December 31, 1997 by the Company to Imperial Bank.+
10.36 Letter Agreement dated January 14, 1998 by and between the Company and Prairie
Packaging, Inc.
10.37 Letter Agreement re Haas/BIOPAC Technology dated February 17, 1998 by and between the
Company and EKI.
10.38 Second Amendment to 1995 Stock Incentive Plan of the Company.
10.39 Amendment No. 2 to Registration Rights Agreement dated as of September 16, 1993.
10.40 Amendment No. 2 to Registration Rights Agreement dated February 28, 1995.
10.41 Promissory Note dated October 31, 1997 in the principal amount of $29,832.61 made by the
Company in favor of Montecito Bank & Trust.
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.+
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 24, 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 24, 1998
Essam Khashoggi
Vice Chairman of the
/s/ SIMON K. HODSON Board, Chief Executive
- ------------------------------ Officer and President February 24, 1998
Simon K. Hodson (Principal Executive
Officer)
* Chief Financial Officer
- ------------------------------ (Principal Financial and February 24, 1998
D. Scott Houston Accounting Officer)
*
- ------------------------------ Secretary and Director February 24, 1998
John Daoud
- ------------------------------ Director February 24, 1998
James P. Argyropoulos
*
- ------------------------------ Director February 24, 1998
Ellis Jones
*
- ------------------------------ Director February 24, 1998
Layla Khashoggi
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director February 24, 1998
Graham H. Phillips
*
- ------------------------------ Director February 24, 1998
William A. Marquard
*
- ------------------------------ Director February 24, 1998
Jerold H. Rubinstein
</TABLE>
*By: /s/ SIMON K. HODSON
-------------------------
Simon K. Hodson February 24, 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 December 31, 1997 in the principal amount of $32,060,887 made by
the Company in favor of EKI.
10.28 Letters dated August 22, 1997 from Shelby Yastrow to Simon K. Hodson and Simon K. Hodson
to Shelby Yastrow.+
10.29 First Amendment to Credit Agreement dated October 6, 1997 by and between the Company and
Imperial Bank.+
10.30 Warrant to Purchase Stock issued October 6, 1997 by the Company to Imperial Bank.+
10.31 Sublicense Agreement dated October 16, 1997 by and between the Company and Sweetheart
Cup Company Inc.+
10.32 Operating Agreement for the Production of Hinged Sandwich Containers for McDonald's
Corporation between Sweetheart Cup Company Inc. and the Company dated as of October
16, 1997.+
10.33 Lease Agreement--Commercial Building dated February 1, 1997 between the Company and PDG,
Ltd.+
10.34 Second Amendment to Credit Agreement dated December 31, 1997 by and between the Company
and Imperial Bank.+
10.35 Warrant to Purchase Stock dated December 31, 1997 by the Company to Imperial Bank.+
10.36 Letter Agreement dated January 14, 1998 by and between the Company and Prairie
Packaging, Inc.
10.37 Letter Agreement re Haas/BIOPAC Technology dated February 17, 1998 by and between the
Company and EKI.
10.38 Second Amendment to 1995 Stock Incentive Plan of the Company.
10.39 Amendment No. 2 to Registration Rights Agreement dated as of September 16, 1993.
10.40 Amendment No. 2 to Registration Rights Agreement dated February 28, 1995.
10.41 Promissory Note dated October 31, 1997 in the principal amount of $29,832.61 made by the
Company in favor of Montecito Bank & Trust.
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.+
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 10.27
DEMAND PROMISSORY NOTE
$32,060,887 December 31, 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 Thirty-two Million Sixty
Thousand Eight Hundred Eighty-seven Dollars ($32,060,887), 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 January 1, 1998. 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 December 31, 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 December
31, 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 10.36
[LETTERHEAD]
January 14, 1998
Mr. Earl W. Shapiro
President
Prairie Packaging, Inc.
7207 S. Mason Avenue
Bedford Park, IL 60638
Re: DEVELOPMENT OF MANUFACTURING PLANT
----------------------------------
Dear Earl:
With reference to our letter agreement date November 13, 1996 (the
"Letter of Intent"), this will confirm that we have agreed to amend Paragraph
12 of the Letter of Intent to read in its entirety as follows:
"12. TERMINATION. This letter shall terminate if the Definitive
Agreements have not been entered into by June 30, 1998, unless the
parties mutually agree to an extension of this letter. Such termination
shall not affect the rights and obligations of the parties under any
existing agreement between them as of the date of termination, including
any confidentiality restrictions or other obligations of non-disclosure."
Except as set forth above, the terms and provisions of the Letter of
Intent shall remain unmodified and shall continue in full force and effect.
If the foregoing accurately reflects our agreement, please so indicate
by executing this letter in the space provided below and returning one
executed copy to me. Thank you in advance for your attention to this matter.
EARTHSHELL CONTAINER CORPORATION
By: /s/ Simon K. Hodson
-----------------------------------
Simon K. Hodson, Chief Executive
Officer
Accepted and Agreed to this
15th day of January 1998
PRAIRIE PACKAGING, INC.
By: /s/ Earl W. Shapiro
---------------------------------
Earl W. Shapiro, President
<PAGE>
EXHIBIT 10.37
E. KHASHOGGI INDUSTRIES, LLC
800 Miramonte Drive
Santa Barbara, California 93109
February 17, 1998
EarthShell Corporation
800 Miramonte Drive
Santa Barbara, California 93109
Attention: Simon K. Hodson, Chief Executive Officer
Re: HAAS/BIOPAC TECHNOLOGY
----------------------
Dear Mr. Hodson:
Reference is made to those certain Patent Purchase Agreements (the
"Agreements"), dated February 11, 1998, between E. Khashoggi Industries, LLC
("EKI") and Franz Haas Waffelmaschinen Industrie Aktiengesellschaft ("Haas
Austria"), pursuant to which EKI has agreed to purchase certain patents,
patent applications and know-how owned by Haas Austria or its affiliates and
which relate to biodegradable, non-edible packaging composed primarily of raw
materials which have a high starch content, as well as their methods of
production (the "BIOPAC Technology"). Pursuant to the Agreements, EKI is
required to pay or deliver the following consideration:
a. $3 million in cash payable at the closing (the "Closing") of EKI's
purchase of the BIOPAC Technology (the "$3 Million Cash Consideration");
b. A $500,000 letter of credit to be delivered by EKI no later than
the Closing and which is payable to Haas Austria upon the termination of the
license agreement and representative agreement between Haas Austria's
predecessor and Sumitomo Corporation (the "$500,000 LC");
c. A $3.5 million letter of credit to be delivered by EKI at the
Closing and which is payable to Haas Austria on or about December 31, 2003
(the "Payment Date"), subject, however, to reduction in an amount equal to 5%
of the purchase price of the equipment and machinery purchased by EKI,
EarthShell Corporation ("EC") and their respective sublicencees from Haas
Austria or its affiliates prior to the Payment Date (the "$3.5 Million LC");
and
d. $3 million in cash payable by EKI to Haas Austria over a five-year
period following the Payment Date if EKI, EC or their sublicensees make
active use of the BIOPAC
<PAGE>
EarthShell Corporation
February 17, 1998
Page 2
Technology and EC and/or EKI fail to purchase at least $3.5 million of Haas
Austria equipment by the Payment Date, (the "$3 Million Obligation"). The $3
Million Obligation is subject to reduction in an amount equal to 5% of the
purchase price of Haas Austria equipment or machinery ordered by EKI, EC or
their sublicensees during such extended five-year period.
This letter will confirm our mutual agreement with respect to the
following:
1. Immediately following the Closing, EKI will license the BIOPAC
Technology to EC, without additional cost, pursuant to the terms and
conditions of that certain Amended and Restated License Agreement, dated
February 28, 1995, between EKI and EC.
2. EKI will pay, and be solely responsible for, the $3 Million Cash
Consideration, the $500,000 LC and any related costs (e.g., the cost of the
$500,000 LC).
3. EC will pay, and be solely responsible for, the $3.5 Million LC,
the $3 Million Obligation and any related costs (e.g., the cost of the $3.5
Million LC). In that connection, EC shall be entitled to receive any credits
or offsets available for the purchase of equipment or machinery from Haas
Austria or its affiliates, including purchases by EKI and its licensees.
4. EKI shall pay, and be solely responsible for, all other costs and
expenses incurred by EKI in connection with the negotiation and execution of
the Agreements and the performance of EKI's obligations thereunder.
5. EKI shall indemnify EC, and hold it harmless against, any portion
of the $3 Million Obligation which is payable by EC solely as a result of
EKI's or its licensees' active use of the BIOPAC Technology (other than use
by EC or its sublicensees).
6. Pursuant to the Agreements, EC shall enter into a royalty-free,
irrevocable license agreement with Haas Austria pursuant to which EC shall
license to Haas Austria all proprietary technology necessary to optionize the
performance of Haas Austria's equipment and machinery.
<PAGE>
EarthShell Corporation
February 17, 1998
Page 3
Please confirm your acceptance of the foregoing terms and conditions by
executing the bottom portion of this letter and returning it to the
undersigned.
Very truly yours,
/s/ Essam Khashoggi
------------------------------------
Essam Khashoggi
Chairman and Chief Executive Officer
Accepted and Agreed this 17th day of February, 1998.
By: /s/ Scott Houston
-----------------------
Scott Houston
Chief Financial Officer
<PAGE>
EXHIBIT 10.38
SECOND AMENDMENT TO 1995 STOCK INCENTIVE PLAN OF
EARTHSHELL CONTAINER CORPORATION
The 1995 Stock Incentive Plan, as amended (the "Plan") of EarthShell
Container Corporation, a Delaware corporation (the "Company"), is hereby
amended as of November 3, 1997 as follows:
1. Section 4(b) of the Plan is amended and restated in its entirety and
the following new Section 4(b) is substituted therefor:
(b) Each director who has been elected to serve as a director at
an annual meeting of the stockholders of the Company held on or after
January 1, 1996 shall, on the day following the date of such meeting,
automatically be granted a Director Option to purchase 20 Common Shares
for service as a director for the forthcoming year. Such Director Option
shall vest, and become exercisable with respect to all of such Common
Shares, on the day immediately prior to the date of the next annual
meeting of the stockholders of the Company, assuming such director
continues to serve as a director of the Company through the day
immediately prior to the date of such next annual meeting.
2. Except as modified by this Second Amendment, the Plan shall remain
unchanged and shall remain in full force and effect.
3. This Amendment shall be governed by and construed in accordance with
the internal laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be
duly executed as of the date first written above.
EARTHSHELL CONTAINER CORPORATION
By: /s/ Scott Houston
-----------------------------------
Name: Scott Houston
---------------------------------
Title: CFO
--------------------------------
<PAGE>
EXHIBIT 10.39
AMENDMENT NO. 2 TO
REGISTRATION RIGHTS AGREEMENT (SERIES A)
This Amendment No. 2 to Registration Rights Agreement (the "Amendment")
is made and entered into as of November 3, 1997 by and among EarthShell
Container Corporation, a Delaware corporation (the "Company"), and the other
persons whose names appear on Schedule 1 hereto (collectively, the
"Purchasers").
WHEREAS, the parties hereto previously entered into that certain
Registration Rights Agreement dated as of September 16, 1993, as amended (the
"Registration Rights Agreement"), providing certain registration rights to
the Purchasers for shares of Common Stock of the Company to be issued to the
Purchasers; and
WHEREAS, in connection with the proposed initial public offering of
shares of common stock of the Company (the "IPO"), the managing underwriters
in the IPO have advised the Company that in order to effect the successful
and orderly distribution of shares of common stock in the IPO, it is in the
best interests of the Company and its stockholders that all stockholders, if
participating in the IPO, agree not to sell any equity securities of the
Company for a period of 270 days following the consummation of the IPO and
all stockholders, if not participating in the IPO, agree not to sell any
equity securities of the Company for a period of 180 days following the
consummation of the IPO; and
WHEREAS, the Registration Rights Agreement, as currently in effect, only
provides for a lock-up period of 180 days from stockholders selling in the
offering and no lock-up whatsoever from stockholders not selling in the
offering; and
WHEREAS, in order to extend the lock-up period as described above days
and extend the lock-up to all stockholders party to the Registration Rights
Agreement, the parties hereto desire to amend the Registration Rights
Agreement as provided below. Capitalized terms used herein and not otherwise
defined shall have the meaning ascribed to them in the Registration Rights
Agreement.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Section 4(a) of the Registration Rights Agreement is deleted in its
entirety and the following new Section 4(a) is substituted therefor:
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE
SECURITIES. Each holder of Registrable Securities whose Registrable
Securities are covered by a Registration Statement filed pursuant to
Section 3 hereof agrees, if requested by the managing underwriters in an
Underwritten Offering, not to effect any sale or other distribution of
equity securities of the Company, including any sale pursuant to Rule
144 under the Securities Act (except as part of such Underwritten
Registration), during the 10-day period prior to, and during the 180-day
period beginning with, the effectiveness of such Registration Statement,
to the extent timely notified in writing by the Company or the managing
underwriters. Notwithstanding the provisions of the preceding sentence,
in the case of the first public offering of Common Stock pursuant to an
effective Registration Statement under the Securities Act for the
account of
<PAGE>
the Company at the aggregate offering price in excess of $35,000,000,
each holder of Registrable Securities agrees, if requested by the
managing underwriters in such an Underwritten Offering, not to effect
any sale or other distribution of equity securities of the Company,
including any sale pursuant to Rule 144 under the Securities Act (except
as part of such Underwritten Registration), during the 10-day period
prior to, and if purchasing or selling shares of Common Stock in such
offering during the 270-day period beginning with, or if neither
purchasing nor selling shares of Common Stock in such offering during
the 180-day period beginning with, the effectiveness of the Registration
Statement relating to such Underwritten Registration, to the extent
timely notified in writing by the Company or the managing underwriters.
2. Except as modified by this Amendment, the Registration Rights
Agreement shall remain unchanged and shall remain in full force and effect.
3. Pursuant to Section 10(b) of the Registration Rights Agreement, this
Amendment shall become effective upon the receipt by the Company of executed
consents to this Amendment from the holders of at least a majority of the
Registrable Securities.
4. This Amendment may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
5. This Amendment shall be governed by and construed in accordance with
the internal laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
EARTHSHELL CONTAINER CORPORATION
By: /s/ Simon K. Hodson
-----------------------------------
Name: Simon K. Hodson
---------------------------------
Title: CEO
--------------------------------
By its execution below, the Company certifies that it has received
consents to this Amendment from the holders of a majority of the Registrable
Securities, as provided in Section 10(b) of the Registration Rights
Agreement, and pursuant thereto this Amendment has become effective.
EARTHSHELL CONTAINER CORPORATION
By: /s/ D. Scott Houston
-----------------------------------
Name: D. Scott Houston
---------------------------------
Title: CFO
--------------------------------
2
<PAGE>
EXHIBIT 10.40
AMENDMENT NO. 2 TO
REGISTRATION RIGHTS AGREEMENT (EKI)
This Amendment No. 2 to Registration Rights Agreement (the "Amendment")
is made and entered into as of November 3, 1997 by and among EarthShell
Container Corporation, a Delaware corporation (the "Company"), E. Khashoggi
Industries, LLC, a Delaware limited liability company ("EKI").
WHEREAS, the parties hereto or their successors in interest previously
entered into that certain Registration Rights Agreement dated as of February
28, 1995, as amended (the "Registration Rights Agreement"), providing certain
registration rights to EKI for shares of Common Stock of the Company issued to
EKI; and
WHEREAS, in connection with the proposed initial public offering of
shares of common stock of the Company (the "IPO"), the managing underwriters
in the IPO have advised the Company that in order to effect the successful
and orderly distribution of shares of common stock in the IPO, it is in the
best interests of the Company and its stockholders that all stockholders, if
participating in the IPO, agree not to sell any equity securities of the
Company for a period of 270 days following the consummation of the IPO and
all stockholders, if not participating in the IPO, agree not to sell any
equity securities of the Company for a period of 180 days following the
consummation of the IPO; and
WHEREAS, the Registration Rights Agreement, as currently in effect, only
provides for a lock-up period of 180 days from stockholders selling in the
offering and no lock-up whatsoever from stockholders not selling in the
offering; and
WHEREAS, in order to extend the lock-up period as described above days
and extend the lock-up to all stockholders party to the Registration Rights
Agreement, the parties hereto desire to amend the Registration Rights
Agreement as provided below. Capitalized terms used herein and not otherwise
defined shall have the meaning ascribed to them in the Registration Rights
Agreement.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Section 4(a) of the Registration Rights Agreement is deleted in
its entirety and the following new Section 4(a) is substituted therefor:
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE
SECURITIES. Each holder of Registrable Securities whose Registrable
Securities are covered by a Registration Statement filed pursuant to
Section 3 hereof agrees, if requested by the managing underwriters in an
Underwritten Offering, not to effect any sale or other distribution of
equity securities of the Company, including any sale pursuant to Rule
144 under the Securities Act (except as part of such Underwritten
Registration), during the 10-day period prior to, and during the 180-day
period beginning with, the effectiveness of such Registration Statement,
to the extent timely notified in writing by the Company or the managing
underwriters. Notwithstanding the provisions of the preceding sentence,
in the case of the first public offering of Common Stock pursuant to an
effective Registration Statement under the Securities Act for the
account of the Company at the aggregate offering price in excess of
$35,000,000, each
<PAGE>
holder of Registrable Securities agrees, if requested by the managing
underwriters in such an Underwritten Offering, not to effect any sale or
other distribution of equity securities of the Company, including any
sale pursuant to Rule 144 under the Securities Act (except as part of
such Underwritten Registration), during the 10-day period prior to, and
if purchasing or selling shares of Common Stock in such offering during
the 270-day period beginning with, or if neither purchasing nor selling
shares of Common Stock in such offering during the 180-day period
beginning with, the effectiveness of the Registration Statement relating
to such Underwritten Registration, to the extent timely notified in
writing by the Company or the managing underwriters.
2. Except as modified by this Amendment, the Registration Rights
Agreement shall remain unchanged and shall remain in full force and effect.
3. Pursuant to Section 10(b) of the Registration Rights Agreement,
this Amendment shall become effective upon the receipt by the Company of
executed consents to this Amendment from the holders of at least a majority
of the Registrable Securities.
4. This Amendment may be executed in any number of counterparts and
by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
5. This Amendment shall be governed by and construed in accordance
with the internal laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
EARTHSHELL CONTAINER CORPORATION
By:/s/ Simon K. Hodson
-----------------------------------
Name: Simon K. Hodson
---------------------------------
Title: CEO
--------------------------------
E. KHASHOGGI INDUSTRIES, LLC, a
Delaware limited liability company
By: E. Khashoggi Industries, Inc.,
its General Partner
By: /s/ Essam Khashoggi
-----------------------------
Name: Essam Khashoggi
---------------------------
Title:
--------------------------
By: Concrete Technology Corporation,
its Member
By: /s/ Simon K. Hodson
-----------------------------
Name: Simon K. Hodson
---------------------------
Title: CEO
--------------------------
2
<PAGE>
By its execution below, the Company certifies that it has received
consents to this Amendment from the holders of a majority of the Registrable
Securities, as provided in Section 10(b) of the Registration Rights
Agreement, and pursuant thereto this Amendment has become effective.
EARTHSHELL CONTAINER CORPORATION
By:/s/ D. Scott Houston
-----------------------------------
Name: D. Scott Houston
---------------------------------
Title: CFO
--------------------------------
3
<PAGE>
EXHIBIT 10.41
PROMISSORY NOTE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE
APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN OR ITEM.
- --------------------------------------------------------------------------------
BORROWER: EARTHSHELL CONTAINER CORP., A DELAWARE CORPORATION
(TIN: 77-0322379)
800 MIRAMONTE DR.
SANTA BARBARA, CA 93109
LENDER: MONTECITO BANK & TRUST
1010 STATE STREET
SANTA BARBARA, CA 90101
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT: $29,832.61
INTEREST RATE: 8.000%
DATE OF NOTE: OCTOBER 31, 1997
PROMISE TO PAY. EarthShell Container Corp., a Delaware Corporation
("Borrower") promises to pay to Montecito Bank & Trust ("Lender"), or order,
in lawful money of the United States of America, the principal amount of
Twenty Nine Thousand Eight Hundred Thirty Two & 61/100 Dollars ($29,832.61),
together with interest at the rate of 8.000% on the unpaid principal balance
from October 31, 1997, until paid in full.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
53 payments of $657.51 each payment and an irregular test payment estimated
at $657.49. Borrower's first payment is due November 5, 1997, and all
subsequent payments are due on the same day of each month after that.
Borrower's final payment will be due on April 5, 2002, and will be for all
principal and all accrued interest not yet paid. Payments include principal
and interest. The annual interest rate for this Note is computed on a 365/360
basis: that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing. Unless otherwise agreed or required by applicable
law, payments will be applied first to accrued unpaid interest, then to
principal, and any remaining amount to any unpaid collection costs and late
charges.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments under the payment schedule. Rather, they will reduce the
principal balance due and may result in Borrower making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
9.000% of the unpaid portion of the regularly scheduled payment or $9.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or
misleading in any material respect either now or at the time made or
furnished. (d) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to
take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with
Lender. (f) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (g) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is
impaired.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon Borrower's
failure to pay all amounts declared due pursuant to this section, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the interest rate on this Note 5.000
percentage points. Lender may hire or pay someone else to help collect this
Note if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Santa
Barbara County, the State of California. Subject to the provisions on
arbitration, this Note shall be governed by and construed in accordance with
the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $18.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's
accounts with Lender (whether checking, savings, or some other account),
including without limitation all accounts held jointly with someone else and
all accounts Borrower may open in the future, excluding however all IRA and
Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the
extent permitted by applicable law, to charge or setoff all sums owing on
this Note against any and all such accounts.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint or class in nature,
arising from this Note or otherwise, including without limitation contract
and tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of
this arbitration agreement or be prohibited by this arbitration agreement.
This includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any collateral securing this Note,
including any claim to rescind, reform, or otherwise modify any agreement
relating to the collateral securing this Note, shall also be arbitrated,
provided however that no arbitrator shall have the right or the power to
enjoin or restrain any act of any party. Lender and Borrower agree that in
the event of an action for judicial foreclosure pursuant to California Code
of Civil Procedure Section 726, or any similar provision in any other state,
the commencement of such an action will not constitute a waiver of the right
to arbitrate and the court shall refer to arbitration as much of such action,
including counterclaims, as lawfully may be referred to arbitration. Judgment
upon any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable
in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes.
The Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
<PAGE>
10-31-97 PROMISSORY NOTE Page 2
LOAN NO 004-2-16415 (CONTINUED)
- --------------------------------------------------------------------------------
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT
OF A COMPLETED COPY OF THE NOTE.
BORROWER:
EarthShell Container Corp., a Delaware Corporation
By: /s/ Scott Houston
---------------------------------------
Scott Houston, Chief Financial Officer
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PRO FORMA LOSS PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year
Ended
31-Dec-97
-----------
<S> <C> <C>
Actual Net Loss......................................... $ 18,992
Add: Preferred Dividends................................ 9,150
-----------
Pro Forma Net Loss...................................... $ 28,142
-----------
-----------
Pro Forma Shares Outstanding:
Common Stock, issued and outstanding.................... 82,530,000
Shares assumed issuable related to
conversion of Series A Preferred Stock................ 6,988,850
Shares to be issued the proceeds from
which will be used to pay accrued dividends
at $19.00 per share................................... 481,573
Stock options:
Shares issuable related to stock options.............. 1,158,040
Less: Shares assumed repurchased at
$19.00 per share.................................... (398,091)
----------
Shares to be issued related to stock options............ 759,949
-----------
Pro Forma Shares Outstanding............................ 90,760,372
-----------
-----------
Pro Forma Net Loss Per Share............................ $0.31
-----------
-----------
Pro Forma Net Loss...................................... $ 28,142
Less: Amortization of Loan Discount..................... (35)
Less: Interest Expense.................................. (3,246)
-----------
Supplemental Pro Forma Net Loss......................... $ 24,861
-----------
-----------
Supplemental Pro Forma Shares Outstanding:
Pro Forma Shares Outstanding............................ 90,760,372
Shares to be issued the proceeds from
which will be used to pay notes payable,
account payable and accrued interest
at $19.00 per share................................... 2,378,829
-----------
Supplemental Pro Forma Shares Outstanding............... 93,139,201
-----------
-----------
Supplemental Pro Forma Net Loss Per Share............... $0.27
-----------
-----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement,
Registration No. 333-13287, of EarthShell Container Corporation on Form S-1
of our report (which report contains an explanatory paragraph related to the
Company's ability to continue as a going concern) dated February 20, 1998
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 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,437
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,973
<PP&E> 4,606,605
<DEPRECIATION> (865,476)
<TOTAL-ASSETS> 3,778,102
<CURRENT-LIABILITIES> 48,345,434
<BONDS> 0
24,473,001
0
<COMMON> 5,180,652
<OTHER-SE> (74,220,985)
<TOTAL-LIABILITY-AND-EQUITY> 3,778,102
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,745,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,245,515
<INCOME-PRETAX> (18,991,223)
<INCOME-TAX> 800
<INCOME-CONTINUING> (18,992,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,992,023)
<EPS-PRIMARY> ($55.59)
<EPS-DILUTED> ($55.59)
</TABLE>
