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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ______to_________
Commission File Number 333-13287
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EARTHSHELL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0322379
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 S. CALVERT STREET SUITE 1950, BALTIMORE, MARYLAND 21202
(Address of principal executive office) (Zip Code)
(410) 949-1300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $.01 par value
(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 4, 1999 was $240,286,023.
The number of shares outstanding of the Registrant's Common Stock as of March 4,
1999 was 100,045,166.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 14, 1999 are incorporated by reference in Part
III of this Annual Report on Form 10-K.
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As used herein, the terms "EarthShell" and the "Company" shall mean EarthShell
Corporation unless the context otherwise indicates and the term "Proxy
Statement" shall mean the Proxy Statement for the Company's 1999 Annual Meeting
of Stockholders to be held on May 14, 1999.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PART I
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ITEM 1. BUSINESS..................................................................... 1
ITEM 2. PROPERTIES................................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 10
ITEM 6. SELECTED FINANCIAL DATA...................................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................... 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................... 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 20
ITEM 11. EXECUTIVE COMPENSATION....................................................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AN MANAGEMENT................ 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K............ 20
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PART I
ITEM 1. BUSINESS
GENERAL
EarthShell Corporation (the "Company") was organized in November 1992 as a
Delaware corporation and remains a development stage company engaged in the
licensing and commercialization of a proprietary composite material for the
manufacture of disposable packaging for the foodservice industry, such as
hinged-lid containers, cups, plates, trays, and bowls.
Since the Company's inception it has not generated any revenues from operations
and, as of December 31, 1998, had incurred aggregate net losses of approximately
$101 million. The Company has an exclusive, worldwide, royalty-free license
pursuant to an Amended and Restated License Agreement (the "License Agreement")
between the Company and the Company's principal stockholders, E. Khashoggi
Industries, LLC and its predecessors ("EKI"), 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 other purposes.
The new composite material is made from commonly available raw materials such as
limestone, natural potato, corn and other starch binders, natural fibers and
functional coatings. The Company believes that foodservice disposables made of
this material ("EARTHSHELL Products") will have comparable or superior
performance characteristics, such as greater strength and rigidity, and will be
capable of being commercially produced at a cost that is competitive with
comparable paper and polystyrene and other plastic foodservice disposables. The
Company has produced prototype hinged-lid containers, plates, trays, bowls and
cups. To date, however, these prototypes have not been produced on fully
integrated, commercial production lines and therefore their actual cost of
manufacture is unproven. Importantly, the Company also believes that the raw
materials, as well as the manufacturer's process, provide an environmentally
benign alternative to foodservice disposables made from competitive packaging
materials.
The Company's objective is to establish EARTHSHELL Products as the preferred
disposable packaging material for the foodservice industry. The Company's
strategy for obtaining this objective is to enter into joint ventures with
existing manufacturers of disposable packaging to market, produce and distribute
EARTHSHELL Products. The Company believes that utilizing joint ventures better
aligns key market segments with select industry partners, minimizes direct
competition among these partners, enables effective brand management, captures
the value of manufacturing process improvements, offers a better return than the
original business licensing model and creates income streams beyond the life of
the patents.
As the first step in its strategy, the Company worked closely with McDonald's
Corporation ("McDonald's") in developing and testing prototype sandwich
containers. As a result of this work, McDonald's approved the EarthShell Big
Mac-Registered Trademark- sandwich container for use in McDonald's
restaurants in the United States. McDonald's primary packaging purchaser,
Perseco, entered into a supply agreement with the Company's licensee,
Sweetheart Cup Company Inc. ("Sweetheart"), pursuant to which Perseco
committed to purchase not less than 1.8 billion EarthShell Big Mac-Registered
Trademark- sandwich containers over a three-year period, subject to certain
conditions. The Company has constructed three manufacturing lines at
Sweetheart's facility in Owings Mills, Maryland for the production of
containers in support of these agreements, and is currently in the final
phases of debugging. The development and installation of a manufacturing
system to produce hinged-lid containers for McDonald's that would demonstrate
that
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commercial quality EARTHSHELL Products can be produced in mass quantities has
been the major focus of the Company during 1998. This has also provided an
initial basis for the design and manufacturing of systems for other EARTHSHELL
Products.
In addition, during 1998, the Company signed a non-binding letter of intent to
establish a joint venture to commercialize EARTHSHELL Products throughout
Europe, Australia, New Zealand, and Asia (except Japan) as determined on a
country by country basis, with Huhtamaki Oyj ("Huhtamaki"), a leading
international food and food packaging firm headquartered in Finland which
commands leading market shares in Europe and Australia, and significant
positions in several of the Asian markets. The Company also signed a non-binding
letter of intent with Prairie Packaging, Inc. ("Prairie") to establish a joint
venture to produce an array of products. The proposed arrangement with Prairie
encompasses the production of plates, hinged-lid containers and cups, initially
to be sold to Sysco Corporation, the leading foodservice distributor in North
America.
The development of the composite material used to make EARTHSHELL Products is
the result of more than 10 years of basic materials science research by EKI. As
of March 2, 1999, EKI had obtained 70 U.S. and 56 foreign patents and had 9 U.S.
and 173 foreign patent applications pending which are applicable to EARTHSHELL
Products utilizing the EKI technology. The Company believes that these patents
and patent applications provide a strategic web of protection broadly covering
EARTHSHELL Products, their material composition and the manufacturing processes
used to make them.
PRODUCTS
Foodservice disposables are currently manufactured from a variety of materials,
including paper, plastic and polystyrene. The Company believes that none of
these materials fully addresses all three principal challenges of the
foodservice industry - performance, cost and environmental impact. The Company
believes that EARTHSHELL Products will best address the combination of these
challenges and therefore will be able to achieve significant penetration of the
foodservice disposables market. The Company further believes that foodservice
disposables made of the new composite material can be designed to have certain
superior performance characteristics, such as greater strength and rigidity and
will be capable of being commercially produced at a cost that is competitive
with comparable paper and polystyrene and other plastic foodservice disposables.
The Company has produced prototype hinged-lid containers, plates, trays, bowls
and cups. To date, however, these prototypes have not been produced on fully
integrated, commercial production lines and therefore their actual cost of
manufacture is unproven.
PERFORMANCE CHARACTERISTICS. The Company has produced prototype hinged-lid
containers, plates, bowls, trays, and cups that the Company believes meet the
critical performance requirements of the marketplace, including rigidity,
graphic capabilities, insulation, shipping, handling and stacking
performance. For example, the EarthShell Big Mac-Registered Trademark-
Sandwich container has been designed to have greater strength and rigidity
than conventional foodservice 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.
In addition, EARTHSHELL Products are microwaveable.
COST COMPETITIVE. The Company believes that EARTHSHELL Products can be
manufactured at costs which are competitive with comparable existing foodservice
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 sandwich containers, plates, bowls and cups will be approximately
equal to or less than the cost of comparable foodservice disposable 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.
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ENVIRONMENTAL IMPACT. EARTHSHELL Products offer a number of attractive
environmental features that 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 Products 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, 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 foodservice disposables
and may help mitigate the litter concern created by their improper disposal. In
addition, EARTHSHELL Products can be compostable and, as a result, they can
offer a disposal alternative not available with polystyrene packaging.
FOODSERVICE DISPOSABLES MARKETS
According to industry studies, about $9.0 billion was spent in the United States
during 1997 on the types of foodservice disposables that the Company believes
can be manufactured using the new composite material. In addition, according to
an industry study, approximately $4.0 billion was spent in the Europe and Japan
on such products in 1997. The Company believes that the remaining unquantified
international markets are both large and rapidly developing and therefore
present significant opportunities for EARTHSHELL Products.
The following data indicates the key product segments comprising the
approximately $9.0 billion of U.S. sales of those foodservice disposables
targeted for replacement by EARTHSHELL Products:
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EARTHSHELL TARGET MARKET
1997 U.S. PURCHASES
(DOLLARS IN MILLIONS) AMOUNT OF
PRODUCT TYPE PURCHASES PERCENT
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Cold cups....................................................................... $1,800 20.2%
Hot cups........................................................................ 1,000 11.2
Straws.......................................................................... 300 3.4
Plates and bowls................................................................ 1,400 15.7
Containers, trays and carriers.................................................. 1,225 13.8
Pizza boxes..................................................................... 700 7.9
Beverage lids................................................................... 700 7.9
Cutlery......................................................................... 600 6.8
Hinged-lid containers........................................................... 550 6.2
Wrap replacements............................................................... 610 6.9
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Total..................................................................... $8,885 100.0%
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According to industry studies on the U.S. market, approximately 56% of the total
foodservice disposables purchased in 1997 were purchased by quick-serve
restaurants, 44% by other institutions, such as hospitals, stadiums, airlines,
schools and restaurants (other than quick-serve restaurants), as well as retail
stores. Of the foodservice disposables purchased in the United States by
quick-serve restaurants and other institutions, approximately 40% were made of
paper and 60% were made of plastic, polystyrene or foil.
AVAILABILITY OF RAW MATERIALS
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The new composite material used to manufacture EARTHSHELL Products is made from
commonly available raw materials such as limestone, natural potato, corn and
other starch binders, natural fibers and functional coatings. While the Company
believes that sufficient quantities of these raw materials 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.
THE TECHNOLOGY
The new composite material used to make EARTHSHELL Products 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 very low water content. EKI
also modified the composite material formulation of the EARTHSHELL Products to
enable them to be manufactured using established 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 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. The EarthShell sandwich container
and the Company's current prototype products are made of this formulation. There
is also a paper-like application of EKI's technology that the Company believes
can be formulated into EARTHSHELL Products in the future.
Although the initial development of EARTHSHELL Products was conducted and paid
for by EKI prior to November 1992, the Company has incurred substantial expenses
in connection with the commercial application of this technology for the
foodservice packaging market since the Company's formation in 1992. The
Company's research and development expenses related to the continued development
of EARTHSHELL Products by EKI and the Company were approximately $20.0 million,
$8.9 million and $10.2 million in the years ended December 31, 1998, 1997 and
1996, 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. During 1999, the Company expects to incur
approximately $10 - $15 million in research and development costs.
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The technology that the Company licenses from EKI 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 provide a strategic
web of patent protection broadly covering the EARTHSHELL
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Products, their material composition and the manufacturing processes used to
make them. As of March 2, 1999, EKI had obtained the rights to 70 U.S. and 56
foreign patents, and had 9 U.S. and 173 foreign pending patent applications
relating to the compositions, products and manufacturing processes used to
produce EarthShell food and beverage containers. The patents currently issued
in the United States and internationally expire between 2012 and 2015.
Pending patents, if granted, would give the Company additional patent
protection through 2016. Twenty-three of the issued U.S. patents relate
specifically to molded food and beverage containers manufactured from the new
composite material, the formulation of the new composite material used in the
EarthShell Big Mac-Registered Trademark- sandwich container and substantially
all of the EARTHSHELL Products currently under development. While the Company
and EKI intend to continue to seek broad patent protection, there can be no
assurance that the pending patents relating to the Company's products or
other additional patents will be issued or that the Company or EKI will
develop new technology that is patentable. Moreover, there can be no
assurance that patents and patent applications licensed to the Company are
sufficient to protect the Company's technology or that any patent issued to
EKI and licensed to the Company will not be held invalid, circumvented or
infringed by others. Patent and patent applications on formulations of the
new composite material are based in part on specific proportional mixtures of
the components of the material. The Company continues to test and modify 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.
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. All of this proprietary information is licensed from
EKI. To protect its rights in proprietary know-how and trade secrets, both the
Company and EKI sometimes require licensees, joint venture partners, employees,
consultants, advisors and collaborators to enter into confidentiality
agreements. These confidentiality agreements, however, have limited terms, 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 Aliite-Registered Trademark-
for the new composite material.
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RELIANCE ON FEW CUSTOMERS
McDonald's will be the first foodservice 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. Further, McDonald's could 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.
During 1998, the Company signed a non-binding letter of intent to establish a
joint venture to commercialize EARTHSHELL Products throughout Europe, Australia,
New Zealand, and Asia (except Japan) as determined on a country by country
basis, with Huhtamaki, a leading international food and food packaging firm
headquartered in Finland which commands leading market shares in Europe and
Australia, and significant positions in several of the Asian markets. The
Company also signed a non-binding letter of intent with Prairie to establish a
joint venture to produce an array of products. The proposed arrangement with
Prairie encompasses the production of plates, hinged-lid containers and cups,
initially to be sold to Sysco Corporation, the leading foodservice distributor
in North America. Based on these non-binding letters of intent, the Company has
initiated engineering design work for the next commercial installations that
will manufacture a broadened commercial product set. Although discussions
leading to definitive agreements have begun, no assurances can be given that
these non-binding letters of intent will culminate in definitive agreements with
either Huhtamaki or Prairie.
RELATIONSHIP WITH AND RELIANCE ON EKI
The Company does not own the technology necessary for the manufacture of
EARTHSHELL Products and, pursuant to its License Agreement with EKI, the Company
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 foodservice disposables for use in the
foodservice 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 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 continues to share certain key management personnel with EKI, relies
on EKI and EKI's scientific and technical personnel for substantially all of its
scientific, and a portion of its technical and product development needs and
leases a small office space from EKI. Scientific and technical services are
provided and the office space is leased 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. The Company is also
dependent on EKI for further development and refinement of the basic technology
used in EARTHSHELL Products. EKI is not obligated to complete any further
development or refinement under the terms of the License Agreement, however EKI
agreed to give the Company first priority rights to certain EKI technical
personnel pursuant to the Technical Services 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.
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The Company and EKI are also parties to an Amended and Restated Agreement for
Allocation of Patent Costs (the "Patent Agreement"), effective October 1, 1997.
Until September 30, 1999, the Company will pay all costs associated with
prosecuting, filing, maintaining or acquiring patents and patent applications in
connection with patents and patent applications that are directly related to
foodservice 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
foodservice disposable applications licensed to the Company (as compared with
applications of such patents outside the foodservice disposables field of use).
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 EARTHSHELL Products 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.
POTENTIAL CONFLICTS WITH EKI
The Company and EKI are both controlled by a common indirect, majority equity
owner, Mr. Essam Khashoggi, and they share certain directors and officers,
including Mr. Khashoggi, who is also the Chairman of the Board of the Company,
and Mr. Simon Hodson, the Vice Chairman of the Board and Chief Executive Officer
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 EARTHSHELL Products, 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 Patent Agreement. Under the
Patent 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 would 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 in the foodservice disposables
field of use.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Essam Khashoggi, the Chairman of the Board of the Company, is the beneficial
owner of approximately 73% of the outstanding shares of common stock directly or
indirectly through various entities that he controls, including EKI. Thus, Mr.
Khashoggi has 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 has 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.
COMPETITION
Competition among existing food and beverage container manufacturers in the
foodservice 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. In addition, some of the Company's licensees
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and joint venture partners manufacture paper, plastic and foil packaging
which will compete with 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
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 Company
believes its patents uniquely position it to incorporate a significant
proportion of low cost, inorganic fill with its material, which, relative to
other starch-based or specialty polymers, allows it to have a more competitive
material cost. The development of competitive, environmentally attractive,
disposable foodservice containers 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.
GOVERNMENT 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: (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 Big Mac-Registered Trademark-
sandwich container and all other current prototype EARTHSHELL 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-Registered Trademark-
sandwich container are suitable 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-Registered Trademark- sandwich container and other current prototype
products of the Company 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 Big Mac-Registered Trademark- 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.
Other EARTHSHELL Products that may be developed in the future 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
8
<PAGE>
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 1995 to September 1996, the
average time for FDA review and approval of a food additive petition was 32
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 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.
PERSONNEL
As of December 31, 1998, the Company had 31 employees. In addition, pursuant to
the terms of the Technical Services Agreement, the Company has a priority right
to the services of 36 technical personnel serving as employees of EKI as of
December 31, 1998. None of the Company's employees is represented by a labor
union and the Company believes that its relationship with its employees is good.
RECENT DEVELOPMENT
Consistent with the Company's initial plans and pursuant to a resolution
adopted by the Board of Directors, Simon K. Hodson, Vice Chairman of
the Board and Chief Executive Officer will pass on his responsibilities as Chief
Executive Officer to William F. McLaughlin at this year's annual shareholders'
meeting on May 14, 1999. Mr. Hodson will remain actively involved on the Board
of Directors and will continue to play a key leadership role in ensuring the
successful ramp-up of the Company's first production facility at Sweetheart and
in supporting the commercial development of the next tier of EARTHSHELL Products
and manufacturing technology.
ITEM 2. PROPERTIES
The Company leases 8,066 square feet of executive office space in Baltimore,
Maryland. This lease expires on July 31, 2006. The Company's monthly lease
payment with respect to this space is $17,476. The Company subleases 1,600
square feet of office and research and development space from EKI in Santa
Barbara, California. This sublease expires upon the earlier of March 31, 2001 or
30 days after notice by the Company. The Company's monthly lease payment with
respect to this space is $5,600. The Company leases 54,800 square feet of space
for its product development center in Goleta, California. This lease expires on
June 30, 2003. The Company's monthly lease payment with respect to this space is
$43,840.
ITEM 3. LEGAL PROCEEDINGS
There is no pending legal proceeding to which the Company is a party or to which
any of its properties is subject.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is quoted on The National Association of Securities
Dealers Automated Quotation System National Market under the symbol: ERTH. The
high and low sale closing prices for the Company's common stock for each quarter
of 1998 as reported by The Nasdaq Stock Market are contained in the Financial
Notes entitled "Quarterly Financial Information" on page F-16 of this Annual
Report on Form 10-K.
The number of stockholders of record of the Company's common stock at March 4,
1999 was 384. At March 4, 1999, Mr. Essam Khashoggi, directly or indirectly,
owned approximately 73% of the outstanding common stock of the Company.
The Company is a developmental stage company and does not intend to declare or
pay cash dividends on its common stock in the foreseeable future.
USE OF PROCEEDS
In connection with the Company's initial public offering, the Company issued
10,526,316 shares of its common stock, $.01 par value (the "IPO Shares"), on
March 27, 1998. The offering terminated on April 23, 1998 upon the underwriters'
election not to exercise their overallotment option. The IPO Shares were issued
in a registered offering pursuant to a Registration Statement on Form S-1
(Commission File No. 333-13287; effective March 23, 1998) through a syndicate of
underwriters, the representatives of which were Salomon Smith Barney Inc. and
Credit Suisse First Boston Corporation. The IPO Shares were offered and sold by
the underwriters at an initial public offering price of $21.00 per share,
resulting in aggregate offering proceeds of $221,052,636. In addition, selling
stockholders sold 2,673,684 shares of common stock.
The Company incurred expenses in connection with its initial public offering as
follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions............ $13,815,790
Other expenses ................................... 1,362,851
-----------
Total expenses ................................... $15,178,641
-----------
-----------
</TABLE>
None of the above expenses was paid either directly or indirectly to directors,
officers, general partners of the Company or its associates, or to persons
owning more than 10% of any class of equity security of the Company or to
affiliates of the Company.
Through December 31, 1998, the Company applied $114,605,282 of the $205,873,995
in net offering proceeds as follows:
<TABLE>
<S> <C>
Repayment of indebtedness owed to principal stockholder ...... $ 36,630,548
Repayment of indebtedness owed to bank ....................... 14,000,000
Purchases of manufacturing equipment ......................... 18,148,339
Construction and engineering costs for manufacturing plants... 16,006,641
10
<PAGE>
Demonstration and prototype facility ...................... 3,337,851
Payment of cash dividend to preferred stockholders ........ 9,926,703
Payment of legal fees ..................................... 1,669,658
Other operating expenses .................................. 14,885,542
------------
Total proceeds applied ........................... $114,605,282
------------
------------
</TABLE>
The cost of designing, installing and debugging the Company's first
manufacturing lines at Sweetheart will exceed the Company's initial estimates as
discussed in "Management's Discussion and Analysis of Financial Conditions and
Results of Operations." Based partially on this, the Company has been refining
its business strategy and intends to utilize joint ventures in which the joint
venture partner generally will share equally the cost of turnkey equipment lines
and will assume equally risks associated with failures of the equipment lines to
meet targeted throughput efficiencies. The Company believes using joint ventures
in which both venturers generally assume equal responsibility and risk, as well
as share equally any upside opportunities, will enable the Company to share the
product introduction and capital risk with its partners while maintaining or
exceeding the original expected return to the Company. As a result of this
business model change and other changed circumstances, the actual use of initial
public offering proceeds will vary from the anticipated use of proceeds
described in the Company's Prospectus. For example, the Company plans now to use
some of the $7.4 million initial public offering proceeds that were shown in the
Company's Prospectus as anticipated to be used for patent enforcement and
protection in the development of its joint ventures and to fund operations.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been audited by Deloitte &
Touche LLP, independent auditors, and should be read in conjunction with the
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 1,
1992 (INCEPTION)
THROUGH
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Research and development expenses .... $ 19,982 $ 8,901 $ 10,159 $ 9,100 $ 10,930 $ 62,382
General and administrative expenses .. 9,296 5,685 3,405 2,362 3,428 26,676
Interest (income) expenses, net ...... (4,026) 3,246 1,692 478 (290) 952
Patent expenses ...................... 486 653 1,382 1,929 1,717 7,686
Net loss ............................. 26,620 18,992 16,950 13,914 16,582 100,841
Preferred dividends .................. 777 2,134 2,134 2,134 2,134 9,927
Net loss available to common
stockholders ......................... $ 27,397 $ 21,126 $ 19,084 $ 16,048 $ 18,716 $ 110,768
Average shares outstanding ........... 95,707 82,530 82,530 82,530 82,530
BALANCE SHEET DATA
Cash and cash equivalents ............ $ 86,590 $ 8 $ 21 $ 266 $ 2,885
11
<PAGE>
Short-term investments ............... 6,531 -- -- -- --
Working capital (deficit) ............ 87,054 (48,308) (31,489) (14,569) (124)
Total assets ......................... 135,638 3,778 2,817 2,228 3,250
Notes payable, payables to majority
stockholder, accrued interest and
accrued dividends .................. 1,181 45,163 29,873 13,560 3,267
Deficit accumulated during development
stage .............................. 100,841 74,221 55,229 38,279 24,365
Stockholders' equity (deficit) ....... $ 124,875 $ (44,567) $ (28,732) $ (12,678) $ 118
Shares outstanding ................... 100,045 82,530 82,530 82,530 82,530
PER COMMON SHARE
Basic and diluted loss per share ..... $ 0.29 $ 0.26 $ 0.23 $ 0.19 $ 0.23
Closing market price
High ....................... $ 23 7/8 -- -- -- --
Low ........................ $ 5 5/16 -- -- -- --
Close ...................... $11 15/16 -- -- -- --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Company's Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K. Such financial statements and
information have been prepared to reflect the historical operations, assets and
liabilities of the Company from the date of the Company's organization on
November 1, 1992 through December 31, 1998.
Information contained in this Annual Report on Form 10-K including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended. These
statements may be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate," or "continue," or the
negative thereof or other comparable terminology. Any one factor or
combination of factors could cause the Company's actual operating performance
or financial results to differ substantially from those anticipated by
management that are described herein. Factors influencing the Company's
operating performance and financial results include, but are not limited to,
changes in the general economy, the availability of financing, governmental
regulations concerning, but not limited to, environmental issues, and other
risks and unforeseen circumstances affecting the Company's business which may
be discussed elsewhere in this Annual Report on Form 10-K.
OVERVIEW
The Company was organized in November 1992 as a Delaware corporation and remains
a development stage enterprise. E. Khashoggi Industries LLC, the Company's
principal stockholder, or its predecessors ("EKI"), has been involved since July
1985 in the development of various new material technologies including the new
composite material. The Company was formed to develop, license and commercialize
foodservice disposables made of EarthShell composite material ("EARTHSHELL
Products"). The
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<PAGE>
Company has an exclusive, worldwide, royalty-free license from EKI to use
certain technology for this purpose. The Company intends to continue to
license or joint venture with existing manufacturers of foodservice
disposables for the manufacture and distribution of EARTHSHELL Products. The
Company expects to derive revenues primarily from license royalties and
distributions from joint ventures that are licensed to manufacture EARTHSHELL
Products.
The Company has experienced aggregate net losses of approximately $101 million
from its inception on November 1, 1992 through December 31, 1998. The Company
has been unprofitable to date and expects to continue to incur operating losses
until its products are commercially introduced and achieve broader market
acceptance and 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. Prior to the Company's initial
public offering in March 1998, in which the Company raised net proceeds of $206
million, the Company financed its operations from inception primarily through
the private placement of preferred stock and loans from its principal
stockholder, EKI, and Imperial Bank. Since inception, the Company has relied on
EKI to provide extensive management and technical support. The Company and EKI
entered into an Amended and Restated Technical Services and Sublease Agreement
(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 EKI technical personnel and direct
expenses incurred on approved projects. In addition, under an Amended and
Restated Agreement for the Allocation of Patent Costs (the "Patent 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 an Amended and Restated License
Agreement (the "License Agreement").
DEVELOPMENT OF FIRST COMMERCIAL MANUFACTURING FACILITY.
One of the Company's licensees, Sweetheart Cup Company Inc. ("Sweetheart"),
has secured a contract with Perseco (McDonald's Corporation's primary
packaging purchasing agent), to supply McDonald's US restaurants with a
minimum of 1.8 billion Big Mac-Registered Trademark- sandwich containers made
from EARTHSHELL Products over a three-year period, representing the initial
commercial application of EARTHSHELL Products. To support this initial
commercial EarthShell application, EarthShell agreed with Sweetheart to
provide manufacturing equipment to Sweetheart with adequate capacity to
fulfill the Perseco/McDonald's order.
In cooperation with Sweetheart, the Company engaged The Food Group, a
division of CH2M Hill, to provide detailed engineering, procurement and
construction management services relating to the installation of three
commercial sandwich container production lines at Sweetheart's Owings Mills,
Maryland facility. These lines have been designed to enable Sweetheart to
produce Big Mac-Registered Trademark-sandwich containers in sufficient
quantities to fulfill Sweetheart's supply agreement with Perseco. The
development and installation of equipment lines at this facility has been the
Company's major focus since Sweetheart secured the Perseco supply agreement
relating to Big Mac-Registered Trademark- sandwich containers in October
1997. As of December 31, 1998, the Company had begun start-up and debugging
of its lines.
As the Owings Mills facility is the first commercial implementation of the
EarthShell technology, the Company believes that the cost incurred on these
first lines is significantly higher than the cost of subsequent lines. At the
time of the initial public offering, the Company estimated that the cost
associated with the initial installation at Sweetheart, including approximately
$19 million in costs estimated for initial development and engineering of
commercial production capability, would be between $25 million and $30 million.
13
<PAGE>
Management now estimates that the capitalized cost of the first three lines will
be approximately $38.5 million upon completion. In addition, the Company expects
to expense approximately $8.2 million of process development, design and
engineering costs related to these lines. The Company also anticipates incurring
approximately $3.5 million of capitalized costs associated with future lines at
Owings Mills. In addition, the Company expects to incur approximately $3.5
million in start-up and debugging expense associated with preparing the
manufacturing lines for full-scale production.
The Company believes a significant portion of the incremental capitalized cost
of the Sweetheart installation is non-recurring. These non-recurring costs
include portions of plant engineering and design costs, oversizing of system
components to allow for margins of safety or capacity, installation of
instrumentation and monitoring equipment to provide input for future value
engineering, and premiums paid on component equipment for first time, single
item purchases. The Company believes these factors largely account for the
higher than anticipated capital cost of its first commercial manufacturing
lines. The Company also believes manufacturing process design and development
expenses will be reduced in future sites. Based on internal analysis, which has
been supported by external engineering studies, the Company believes that the
relationship between capital cost and the level of revenue dollars that are
generated by its licensees or joint venture partners will meet and potentially
be more favorable than industry norms. The Company intends to prove this through
the development of pilot lines on a commercial scale prior to making its next
tier plant investments. Based on its initial results during the debugging of the
first manufacturing lines, the Company believes that the first three commercial
lines will meet the total throughput specified in the original four line design
basis, and will meet the requirements of its first customer, McDonald's.
The Company is confident that an agreement can be reached with Sweetheart to
build additional lines at the Owings Mills site, should the Company desire to do
so.
OTHER CUSTOMERS AND LICENSEES.
In addition to its agreement with Sweetheart, the Company is engaged in
discussions with additional converters for the creation of new licensing or
joint venture agreements to further commercialize its technology. In October
1998, the Company announced that it had signed a non-binding letter of intent to
establish a joint venture to commercialize EARTHSHELL Products throughout
Europe, Australia, New Zealand, and Asia (except Japan) as determined on a
country by country basis, with Huhtamaki Oyj ("Huhtamaki"), a leading
international food and food packaging firm headquartered in Finland which
commands leading market shares in Europe, Australia, and significant positions
in several Asian markets. The Company also announced in November 1998 that it
had signed a non-binding letter of intent with Prairie Packaging, Inc.
("Prairie)" to produce an array of products. The proposed arrangement
encompasses the production of plates, hinged-lid containers and cups, initially
to be sold to Sysco Corporation, the leading foodservice distributor in North
America. Based on these letters of intent, the Company has initiated engineering
design work for the next commercial installations that will manufacture a
broadened commercial product set. Although discussions leading to definitive
agreements have begun, no assurances can be given that these non-binding letters
of intent will result in definitive agreements with either Huhtamaki or Prairie.
TRANSITION ACTIVITIES IN PREPARATION FOR MANUFACTURING RAMP-UP.
The Company is transitioning from being a development stage company primarily
engaged in product development to a company engaged in licensing and supporting
the commercial implementation of its technology. Concurrent with the development
of the first commercial EarthShell production facility and in response to
anticipated market demand, the Company is planning and preparing for rapid
growth.
14
<PAGE>
During 1998, the Company hired several senior executives to expand core
competencies and fill critical ongoing positions, including: William F.
McLaughlin, President and Chief Operating Officer; William F. Spengler, Senior
Vice President and Chief Financial Officer; Vincent J. Truant, Vice President of
Marketing, Environmental Affairs and Public Relations; and Michael M. Hagerty,
Vice President and Chief Technology Officer. These hirings reflect the Company's
intensified efforts to build a highly experienced management team to execute the
Company's strategy and enhance the creation of shareholder value.
To better address and service the geographical concentration of the Company's
initial and anticipated commercial activities and to minimize projected
operating costs, the Company's corporate headquarters has been relocated from
Santa Barbara, California to Baltimore, Maryland. Accordingly, the Company has
entered into a long-term lease for office space in downtown Baltimore where the
Company's senior management team is located. The Company has also decided to
move its product development center to the Baltimore region to be closer to the
Company's headquarters. Basic research activities, which will continue to be
supported by the EKI technical staff, will remain in the Santa Barbara,
California area.
During 1998, the Company also concluded a strategic business plan review with
the Boston Consulting Group and further developed its strategy to exploit its
foodservice disposable technology on a global basis.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
The Company's net loss increased $7.6 million from $19.0 million for the year
ended December 31, 1997 to $26.6 million for the year ended December 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenditures
for the development of EARTHSHELL Products increased $11.1 million from $8.9
million for the year ended December 31, 1997 to $20.0 million for the year ended
December 31, 1998. The increase was anticipated as part of the Company's first
commercialization activities, and was due primarily to $4.4 million in
additional design and engineering fees for the Sweetheart facility, $2.4 million
in abandoned early generation prototype equipment related to the development of
the Company's first commercial manufacturing lines and $1.2 million in start-up
cost reimbursed to Sweetheart related to the first commercial manufacturing
lines. The Company was billed by EKI for research and development services
totaling $8.9 million for the year ended December 31, 1998 and $7.4 million for
the year ended December 31, 1997, respectively.
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $3.6 million from $5.7 million for the year ended December
31, 1997 to $9.3 million for the year ended December 31, 1998. The increase was
due to approximately $4.0 million related to the executive staffing additions
and start-up of the new Baltimore headquarters, $1.5 million for strategic
business planning efforts with the Boston Consulting Group and $0.3 million for
increases in various insurance coverages. Included in general and administrative
expense for the year ended December 31, 1997 was $3.1 million resulting from the
extension of the terms of certain option agreements in October 1997 that had
been deemed re-grants and, therefore, have been treated as stock options granted
at prices below market.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $0.4 million from $0.5 million for the year ended December 31, 1997 to
$0.9 million for the year ended December 31, 1998. The increase in depreciation
expense was primarily the result of the purchase of pilot manufacturing
equipment for the Company's product development center. As the commercial
manufacturing equipment is installed and placed in service at Sweetheart's
Owings Mills facility, it is anticipated that depreciation and amortization will
increase significantly.
RELATED PARTY PATENT EXPENSES. Legal fees reimbursed to EKI under the prior
patent cost allocation agreement with EKI, which terminated September 30, 1997
(the "Prior Patent Agreement"), and the
15
<PAGE>
current Patent Agreement with EKI, decreased $0.2 million from $0.7 million
for the year ended December 31, 1997 to $0.5 million for the year ended
December 31, 1998. The decrease was primarily a result of filing fewer new
patent applications during the year ended December 31, 1998.
INTEREST INCOME. Interest income was $5.1 million for the year ended December
31, 1998 and minimal for the year ended December 31, 1997, reflecting
investment earnings on the net proceeds of the Company's initial public
offering completed during March 1998.
INTEREST EXPENSE. Interest expense decreased by $2.1 million from $3.2
million for the year ended December 31, 1997 to $1.1 million for the year
ended December 31, 1998. The decrease was due primarily to the repayment of
outstanding debt from the proceeds of the Company's initial public offering
in March 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE 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.
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 $1.7 million from $9.1 million for the year ended
December 31, 1996 to $7.4 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.
TOTAL 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 $0.7 million related to executive
stock options.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$0.2 million from $0.3 million for the year ended December 31, 1996 to $0.5
million 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.
RELATED PARTY PATENT EXPENSES. Legal fees under the Prior Patent Agreement and
the Patent Agreement with EKI decreased $0.7 million from $1.4 million for the
year ended December 31, 1996 to $0.7 million 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.
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<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
The Company's net loss increased $3.1 million from $13.9 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. In
addition, in preparation for the Company's initial public offering, the Company
increased its efforts in the environmental science and marketing areas related
to the EarthShell sandwich container resulting in increased expenses from $0.5
million to $0.9 million 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.
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $1.0 million from $2.4 million for the year ended December
31, 1995 to $3.4 million for the year ended December 31, 1996. This increase was
primarily due to the recognition of compensation expense of $0.7 million related
to one executive's stock options that vested during 1996, a severance payment of
$0.1 million and legal and filing fees related to the Company's initial public
offering of $0.4 million.
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 that
totaled $1.2 million in 1996.
RELATED PARTY PATENT EXPENSES. Legal fees under the Prior Patent Agreement with
EKI decreased $0.5 million 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 $0.5 million 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.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 1998
As part of the Company's initial public offering on March 27, 1998, the Company
issued 10,526,316 shares of its common stock, $.01 par value, for which the
Company received net proceeds of $206 million. The Company has used $114.6
million of the net proceeds through December 31, 1998. A portion of the proceeds
was used to repay indebtedness to the majority stockholder of $36.6 million,
bank debt of $14.0 million and to pay accrued dividends on the Company's Series
A preferred stock of $9.9 million. The remaining proceeds are anticipated to be
used to: (i) facilitate the development of manufacturing capacity for the
Company's products by engineering, developing and constructing manufacturing
lines for licensees or joint ventures; (ii) expand the EarthShell product
development center; (iii) launch an initial public relations and advertising
campaign; and (iv) for general corporate purposes, including the employment of
additional personnel, the continued design and development of EARTHSHELL
Products and anticipated operating losses. As of December 31, 1998 the Company
had cash and short-term investments totaling $96.6 million.
17
<PAGE>
Net cash used in operations was $15.0 million for the year ended December 31,
1998 and $4.4 million for the year ended December 31, 1997. Net cash used in
investing activities was $48.4 million and $1.5 million for the years ended
December 31, 1998 and 1997, respectively. In addition to the repayment of
indebtedness, the Company used the initial public offering proceeds to repay
outstanding payables and purchase equipment to facilitate the development of
manufacturing capacity for EARTHSHELL Products.
Subsequent to December 31, 1997, and prior to the public offering in March 1998,
the Company borrowed an additional $1.5 million and $2.2 million from its
majority stockholder and its credit line bank, respectively. These additional
borrowings were repaid from the proceeds of the initial public offering.
The Company believes that it is not dependent on third party financing to meet
its operating and working capital needs through December 31, 1999, exclusive of
plant manufacturing activities.
The Company intends to use third party financing in the development of its next
commercial manufacturing plants. The Company intends to prove its manufacturing
economics using pilot lines before soliciting such third party financing and
prior to making its next plant investments. Based on the anticipated results of
the pilot line activity, the Company plans to commence construction of its next
two plants in the second half of 1999. The Company believes, contingent on
securing third party financing, that it has sufficient capital resources to meet
its operating and working capital needs and to fully construct its next two
facilities in 1999.
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 after
demonstrating the commercial viability of its manufacturing process, the Company
may be required to reduce the scope of its anticipated manufacturing ramp-up and
product introductions, which could have an adverse effect on the Company's
business, financial condition, results of operations and cash flows.
YEAR 2000 COMPLIANCE
The Company is currently reviewing its business operations to minimize the risk
of potential disruption from the Year 2000 issue. This problem is a result of
computer programs having been written using two digits, rather than four, to
define the applicable year. Any information systems that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations and system failures. The problem
also extends to many non-information technology systems; that is, operating and
control systems that rely on embedded chips systems. For the purposes of this
discussion, "Year 2000 compatible " means that the computer hardware, software
or device in question will function in 2000 without modification or adjustment
or will function in 2000 with a one-time manual adjustment. However, there can
be no assurance that any such Year 2000 compatible hardware, software or device
will function properly when interacting with any Year 2000 non-compatible
hardware, software or device.
The Company does not rely on any internally developed software to run its
systems. The Company has received documentation from its major vendors asserting
that equipment and software in use for its Sweetheart operations, accounting,
payroll and phone systems is Year 2000 compliant. Additionally, the Company
contractually requires that manufacturing equipment suppliers deliver equipment
that is Year 2000 compliant.
Based on documented vendor assertions and Company contractual requirements, the
Company believes that the cost of completing any internal modifications
necessary to become Year 2000 compliant will not be material. The Company has
spent minimal amounts to date to become Year 2000 compliant since major
purchases for hardware, software and devices were deemed to be Year 2000
compliant by the Company's vendors. The Company has not formally tested each
vendor's assertion and plans to do this
18
<PAGE>
testing for its major systems before the end of 1999. There can be no
assurances that each vendor's claim to be Year 2000 compliant will ultimately
be true and the Company is unable to estimate the cost to become Year 2000
compliant, if a vendor's assertion proves to be incorrect.
The failure to correct a material Year 2000 problem could result in an
interruption in or failure of certain normal business activities or operations
of the Company including the ability to produce EARTHSHELL Products. Such
failures could have a material adverse effect on the Company. The Company
believes that both its major information technology systems and non-information
technology systems are Year 2000 compliant.
The Company believes that the areas that present the greatest risk to the
Company are (i) disruption of the Company's business due to Year 2000
non-compatibility of one of its critical business systems and (ii) disruption of
the business of certain of its significant customers and vendors due to their
non-compliance. Whether disruption of a customer's or vendor's business due to
non-compliance will have a material adverse effect on the Company will depend on
several factors including the nature and duration of the disruption, the
significance of the customer or vendor and, in the case of vendors, the
availability of alternate sources for the vendor's products.
The Company does not currently have a contingency plan, but is considering the
development of such a plan to address Year 2000 non-compliance issues.
Readers are cautioned that the preceding discussion contains forward-looking
statements and should be read in conjunction with the "Forward-Looking Statement
Notice" appearing at the beginning of "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Expectations about future Year
2000-related costs and the progress of the Company's Year 2000 efforts are
subject to various uncertainties that could cause the actual results to differ
materially from the Company's expectations, including: (i) the success of the
Company in identifying hardware, software and devices that are not Year 2000
compatible; (ii) the nature and amount of remediation required to make them
compatible; (iii) the availability, rate and amount or related labor and
consulting costs and (iv) the success of the Company's significant vendors and
customers in addressing their Year 2000 issues.
NET OPERATING LOSS TAX CARRYFORWARDS
The Company has sustained net operating losses ("NOLs") for federal income tax
purposes in the aggregate amount of approximately $64.1 million from its
inception on November 1, 1992 through December 31, 1998. Under the Internal
Revenue Code of 1986, as amended, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
19
<PAGE>
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the Company's Proxy
Statement for its 1999 annual meeting of stockholders which will be filed on or
before April 16, 1999 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Company's Proxy
Statement for its 1999 annual meeting of stockholders which will be filed on or
before April 16, 1999 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained in the Company's Proxy
Statement for its 1999 annual meeting of stockholders which will be filed on or
before April 16, 1999 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's Proxy
Statement for its 1999 annual meeting of stockholders which will be filed on or
before April 16, 1999 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FROM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS:
Independent Auditors' Report .................................... F-2
Balance Sheets as of December 31, 1998, and 1997 ................ F-3
Statements of Operations for the years ended December 31, 1998,
1997, 1996 and for the period from November 1, 1992 (inception)
to December 31, 1998 ............................................ F-4
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998, 1997, 1996, 1995, 1994 and 1993 .............. F-5
Statements of Cash Flows for the years ended December 31, 1998,
1997, 1996 and the period from November 1, 1992 (inception) to
December 31, 1998 ............................................... F-6
Notes to the Financial Statements ............................... F-8
2. FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because they are not required,
not applicable, or the
20
<PAGE>
information required to be set forth therein is included in the
Company's Financial Statements or the Notes therein.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
*3.1 Certificate of Incorporation of the Company.
*3.2 Bylaws of EarthShell the Company 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.
*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 March 18, 1998.
*10.16 Warrant to Purchase Stock issued July 2, 1996 by the Company to Imperial Bank.
*10.17 Credit Agreement dated June 7, 1996 by and between the Company and Imperial Bank.
*10.18 Warrant to Purchase Stock issued June 7, 1996 by the Company to Imperial Bank.
*10.19 Employment Agreement dated October 1, 1997 by and between the Company and Simon K. Hodson.
*10.20 Amended and Restated Technical Services and Sublease Agreement
dated October 1, 1997 by and between the Company and EKI.
*10.21 Amended and Restated Agreement for Allocation of Patent Costs dated October 1, 1997 by and between
the Company and EKI.
21
<PAGE>
*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.
*10.42 Employment Agreement dated February 16, 1998 by and between the Company and David H. Kennedy.
*10.43 Employment Agreement dated March 23, 1998 by and between the Company and William F. McLaughlin.
*10.44 Employment Agreement dated March 23, 1998 by and between the Company and William F. Spengler.
*10.45 Employment Agreement dated April 15, 1998 by and between the Company and Vincent J. Truant.
*10.46 Employment Agreement dated July 22, 1998 by and between the Company and Michael M. Hagerty.
*10.47 Lease Agreement dated June 4, 1998 by and between the Company and
Baltimore Center Associates Limited Partnership.
*10.48 Lease Agreement dated May 1, 1998 by and between the Company and ORIX SBAP Goleta Venture, a
general partnership.
*10.49 Design, Procurement and Construction Management Services Agreement dated May 13, 1998 by and among
the Company, Sweetheart Cup Company Inc., CH2M Hill Industrial
22
<PAGE>
Design Corporation, and IDC Construction Management, Inc.
*10.50 First Amendment, dated June 2, 1998 to the Amended and Restated License Agreement by and between
the Company and E. Khashoggi Industries ("EKI").
10.51 First Amendment to 1995 Stock Incentive Plan of the Company.
27 Financial Data Schedule.
</TABLE>
* Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1 and amendments thereto, File no. 333-13287, and incorporated herein
by reference.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 16, 1999.
EARTHSHELL CORPORATION
By: /s/ Simon K. Hodson
----------------------------------
Simon K. Hodson
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Essam Khashoggi
- ----------------------------------------------
Essam Khashoggi Chairman of the Board March 16, 1999
/s/ Simon K. Hodson
- ----------------------------------------------
Simon K. Hodson Vice Chairman of the Board and Chief March 16, 1999
Executive Officer
(Principal Executive Officer)
/s/ William F. McLaughlin
- ----------------------------------------------
William F. McLaughlin Director, President and Chief Operating March 16, 1999
Officer
/s/ William F. Spengler
- ----------------------------------------------
William F. Spengler Chief Financial Officer March 16, 1999
(Principal Financial and
Accounting Officer)
/s/ John Daoud
- ----------------------------------------------
John Daoud Secretary and Director March 16, 1999
/s/ Ellis Jones
- ----------------------------------------------
Ellis Jones Director March 16, 1999
/s/ Layla Khashoggi
- ----------------------------------------------
Layla Khashoggi Director March 16, 1999
/s/ William A. Marquard
- ----------------------------------------------
William A. Marquard Director March 16, 1999
/s/ Jerold H. Rubinstein
- ----------------------------------------------
Jerold H. Rubinstein Director March 16, 1999
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements:
<TABLE>
<S> <C>
Index to Financial Statements and Schedules .............................. F-1
Independent Auditors' Report ............................................. F-2
Balance Sheets as of December 31, 1998 and 1997 .......................... F-3
Statements of Operations for the years ended December 31,
1998, 1997 and 1996, and for the period from November 1, 1992
(inception) through December 31, 1998..................................... F-4
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998, 1997, 1996, 1995, 1994 and 1993 ...................... F-5
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996, and for the period from November 1,
1992 (inception) through December 31, 1998 .............................. F-6
Notes to Financial Statements ........................................... F-8
</TABLE>
Financial Statement Schedules:
None.
All schedules have been omitted because they are not required, not
applicable, or the information required to be set forth therein is
included in the Company's Financial Statements or the Notes therein.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EarthShell Corporation:
We have audited the accompanying balance sheets of EarthShell Corporation (a
development stage enterprise) (the "Company") as of December 31, 1998 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, 1998 and
for the period from November 1, 1992 (inception) through December 31, 1998.
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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 and for the period from November 1,
1992 (inception) through December 31, 1998 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Baltimore, Maryland
March 5, 1999
F-2
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 86,590,163 $ 8,437
Restricted cash .................................................................... 3,500,000 --
Short-term investments ............................................................. 6,530,928 --
Prepaid insurance .................................................................. 58,503 9,248
Other assets ....................................................................... 1,137,870 19,288
------------- -------------
Total current assets ........................................................... 97,817,464 36,973
PROPERTY AND EQUIPMENT, NET .............................................................. 37,820,917 3,741,129
------------- -------------
TOTAL .................................................................................... $ 135,638,381 $ 3,778,102
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............................................. $ 9,559,437 $ 3,182,534
Trade payable to majority stockholder ............................................. 1,181,300 622,090
Notes payable to banks ............................................................ 22,975 11,843,855
Note payable to majority stockholder .............................................. -- 32,060,887
Accrued interest to majority stockholder .......................................... -- 636,068
------------- -------------
Total current liabilities ...................................................... 10,763,712 48,345,434
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares authorized; 9,170,000
Series A shares designated; 0 and 6,988,850 Series A shares issued and
outstanding as of December 31, 1998 and 1997, respectively....................... -- 69,888
Additional paid-in preferred capital .............................................. -- 24,403,113
Common stock, $.01 par value, 200,000,000 shares authorized; 100,045,166
and 82,530,000 issued and outstanding as of December 31,1998 and 1997,
respectively .................................................................... 1,000,451 825,300
Additional paid-in common capital ................................................. 224,715,255 4,355,352
Deficit accumulated during the development stage .................................. (100,841,037) (74,220,985)
------------- -------------
Total stockholders' equity (deficit) ........................................... 124,874,669 (44,567,332)
------------- -------------
TOTAL .................................................................................... $ 135,638,381 $ 3,778,102
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
DECEMBER 31,
------------- ------------- ------------- --------------
1998 1997 1996 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
EXPENSES:
Related party research and development .. $ 8,883,365 $ 7,413,736 $ 9,060,523 $ 46,607,477
Other research and development .......... 11,098,769 1,487,304 1,098,787 15,774,765
Related party general and administrative
expenses ............................. 67,200 67,200 67,200 1,868,800
Other general and administrative expenses 9,229,267 5,618,055 3,338,263 24,806,860
Depreciation and amortization ........... 880,677 506,546 310,776 3,140,054
Related party patent expenses ........... 485,670 652,867 1,382,185 7,686,277
------------- ------------- ------------- --------------
Total expenses ....................... 30,644,948 15,745,708 15,257,734 99,884,233
Interest income ............................ (5,112,126) (66) -- (5,607,465)
Related party interest expense ............. 651,586 2,185,177 1,453,966 4,770,731
Other interest expense ..................... 434,844 1,060,404 237,637 1,788,738
------------- ------------- ------------- --------------
Loss Before Income Taxes ................... 26,619,252 18,991,223 16,949,337 100,836,237
Income Taxes ............................... 800 800 800 4,800
------------- ------------- ------------- --------------
Net Loss ................................... 26,620,052 18,992,023 16,950,137 100,841,037
Preferred Dividends ........................ 776,813 2,134,000 2,134,000 9,926,703
Net Loss Available To Common Stockholders .. $ 27,396,865 $ 21,126,023 $ 19,084,137 $ 110,767,740
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Basic And Diluted Loss Per Common Share .... $ 0.29 $ 0.26 $ 0.23 $ 1.30
Weighted Average Number Of Common Shares ... 95,706,942 82,530,000 82,530,000
</TABLE>
See notes to financial statements.
F-4
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE
PREFERRED STOCK ADDITIONAL ADDITIONAL
SERIES A PAID-IN COMMON STOCK PAID-IN
-------- PREFERRED ------------ COMMON
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK AT
INCEPTION ................ -- -- -- 82,530,000 $ 3,150 $ 6,850
Sale of preferred stock, net 6,988,850 $ 267 $24,472,734 -- -- --
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1993 .. 6,988,850 267 24,472,734 82,530,000 3,150 6,850
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1994 .. 6,988,850 267 24,472,734 82,530,000 3,150 6,850
Contribution to equity ...... -- -- -- -- -- 1,117,723
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1995 .. 6,988,850 267 24,472,734 82,530,000 3,150 1,124,573
Contribution to equity ...... -- -- -- -- -- 650,000
Issuance of stock warrants .. -- -- -- -- -- 246,270
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1996 .. 6,988,850 267 24,472,734 82,530,000 3,150 2,020,843
Compensation related to stock
options and warrants ..... -- -- -- -- -- 3,156,659
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1997 .. 6,988,850 267 24,472,734 82,530,000 3,150 5,177,502
262 to 1 stock split ........ -- 69,621 (69,621) -- 822,150 (822,150)
Conversion of preferred stock
to common stock .......... (6,988,850) (69,888) (24,403,113) 6,988,850 69,888 24,403,113
Issuance of common stock .... -- -- -- 10,526,316 105,263 205,883,493
Preferred stock dividends ... -- -- -- -- -- (9,926,703)
Net loss .................... -- -- -- -- -- --
--------- --------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1998 .. -- $ -- $ -- 100,045,166 $ 1,000,451 $ 224,715,255
--------- --------- ----------- ---------- ----------- -------------
--------- --------- ----------- ---------- ----------- -------------
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
----- -----
<S> <C> <C>
ISSUANCE OF COMMON STOCK AT
INCEPTION ................ -- $ 10,000
Sale of preferred stock, net -- 24,473,001
Net loss .................... $ (7,782,551) (7,782,551)
------------- -------------
BALANCE, DECEMBER 31, 1993 .. (7,782,551) 16,700,450
Net loss .................... (16,582,080) (16,582,080)
------------- -------------
BALANCE, DECEMBER 31, 1994 .. (24,364,631) 118,370
Contribution to equity ...... -- 1,117,723
Net loss .................... (13,914,194) (13,914,194)
------------- -------------
BALANCE, DECEMBER 31, 1995 .. (38,278,825) (12,678,101)
Contribution to equity ...... -- 650,000
Issuance of stock warrants .. -- 246,270
Net loss .................... (16,950,137) (16,950,137)
------------- -------------
BALANCE, DECEMBER 31, 1996 .. (55,228,962) (28,731,968)
Compensation related to stock
options and warrants ..... -- 3,156,659
Net loss .................... (18,992,023) (18,992,023)
------------- -------------
BALANCE, DECEMBER 31, 1997 .. (74,220,985) (44,567,332)
262 to 1 stock split ........ -- --
Conversion of preferred stock
to common stock .......... --
Issuance of common stock .... -- 205,988,756
Preferred stock dividends ... -- (9,926,703)
Net loss .................... (26,620,052) (26,620,052)
------------- -------------
BALANCE, DECEMBER 31, 1998 .. $(100,841,037) $ 124,874,669
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
NOVEMBER 1, 1992
(INCEPTION)
THROUGH
1998 1997 1996 DECEMBER 31 1998
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (26,620,052) $ (18,992,023) $ (16,950,137) $(100,841,037)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 880,677 506,546 310,776 3,140,054
Issuance of stock options to director and consultant........... 114,761 3,096,761 -- 3,211,522
Issuance of stock options to officer .......................... -- -- 650,000 650,000
Amortization of debt issue costs .............................. -- 230,232 41,045 271,277
Loss on sale or disposal of property and equipment............. 3,436,837 -- -- 3,502,476
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 ............................. (1,167,837) 10,784 31,183 (1,196,373)
Accounts payable and accrued expenses ......................... 6,376,902 1,505,891 330,463 9,559,435
Payable to majority stockholder ............................... 2,588,331 8,996,134 7,346,761 28,064,513
Accrued interest on notes payable to majority stockholder...... (636,068) 204,927 196,631 --
------------- ------------- ------------- ------------
Net cash used in operating activities ..................... (15,026,449) (4,440,748) (8,043,278) (54,015,721)
------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments U.S. government securities................ (6,530,928) -- -- (43,449,182)
Purchase of restricted time deposit ............................. (3,500,000) (3,500,000)
Proceeds from sales and redemptions of investments................ -- -- -- 37,295,842
Proceeds from sale of property and equipment ..................... -- -- -- 297,670
Purchase of property and equipment ............................... (38,397,302) (1,461,994) (1,176,589) (45,632,052)
------------- ------------- ------------- ------------
Net cash used in investing activities ..................... (48,428,230) (1,461,994) (1,176,589) (54,988,522)
------------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to stockholders........... 1,450,000 2,275,000 2,335,000 14,270,000
Proceeds from drawings on line of credit with bank................ 2,150,000 4,740,000 7,110,000 14,000,000
Proceeds from issuance of common stock ........................... 221,052,636 -- -- 221,062,636
Common stock issuance costs ...................................... (15,178,641) -- -- (15,178,641)
Preferred dividends paid ......................................... (9,926,703) -- -- (9,926,703)
Proceeds from issuance of preferred stock ........................ -- -- -- 25,675,000
Preferred stock issuance costs ................................... -- -- -- (1,201,999)
Repayment of line of credit with bank ............................ (14,000,000) -- -- (14,000,000)
Repayment of note payable ........................................ (35,510,887) (1,125,000) (470,000) (39,105,887)
------------- ------------- ------------- ------------
Net cash provided by financing activities.................. 150,036,405 5,890,000 8,975,000 195,594,406
------------- ------------- ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 86,581,726 (12,742) (244,867) $ 86,590,163
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 8,437 21,179 266,046 --
------------- ------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 86,590,163 $ 8,437 $ 21,179 $ 86,590,163
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
F-6
<PAGE>
Cash paid for:
Income taxes ................................................ $ 800 $ 800 $ 800 $ 4,800
Interest .................................................... $ 1,722,551 $ 829,943 $ 199,494 $ 3,028,240
Warrants issued with debt ........................................ -- $ 59,898 $ 246,270 $ 306,168
Transfer of property from EKI .................................... -- $ 28,745 -- $ 28,745
Conversion of preferred stock to common stock .................... $ 69,888 -- -- $ 69,888
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1998, all outstanding preferred stock was converted to common stock
resulting in an increase of $69,888 in the par value of common stock.
Non-cash compensation of $650,000, $3,096,761, and 114,761 was recorded
in 1996, 1997 and 1998, respectively, representing the difference
between fair market value and exercise price of options on the date of
grant.
In consideration of the $14,000,000 line of credit established in 1997,
the Company issued stock warrants to Imperial Bank which entitled 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.
In consideration of the $9,000,000 line of credit established in 1996,
the Company issued stock warrants to Imperial Bank which entitled 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 notes to financial statements.
F-7
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION AND NATURE OF OPERATIONS
EarthShell Corporation (the "Company") was incorporated in Delaware on November
1, 1992 and is a majority-owned subsidiary of E. Khashoggi Industries, LLC
(together with its predecessor entities, "EKI"). Both the Company and EKI are
development stage enterprises. In connection with the formation of the Company,
the Company entered into an Amended and Restated License Agreement (the "License
Agreement") 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 foodservice industry. Certain
reclassifications have been made to prior years financial statements to conform
to the 1998 presentation. The accompanying financial statements reflect only the
costs and expenses related to the application of the technology under
development since the Company's formation on November 1, 1992. Expenses prior to
November 1, 1992 by EKI have been excluded, as they relate to broader
applications of the technology not included in the License Agreement.
Management has made estimates and assumptions in the preparation of these
financial statements that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, funds invested in money market funds and
cash invested temporarily in various instruments with maturities of three months
or less at the time of purchase. The carrying value of cash equivalents
approximates fair value. The money market fund deposits have an investment
objective to provide high current income to the extent consistent with the
preservation of capital and the maintenance of liquidity and, therefore, are
subject to minimal risk.
RESTRICTED CASH
At March 30, 1998, a certificate of deposit for $3,500,000 was opened as
collateral on the letter of credit related to the Company's obligation under a
letter agreement between the Company's majority stockholder, EKI, and the
Company relating to a patent purchase agreement between EKI and a third party as
discussed in the COMMITMENTS note and is classified as restricted cash on the
balance sheet at December 31, 1998.
SHORT-TERM INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 and are classified as available for sale.
This standard requires that certain debt and equity securities be adjusted to
market value at the end of each accounting period. At December 31, 1998, the
market value of short-term investments approximated cost.
LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted loss per common share is computed by dividing net loss
available to common shareholders by the weighted-average number of common shares
outstanding plus an assumed increase in common shares outstanding for
F-8
<PAGE>
dilutive securities. Net loss as reported is adjusted for preferred
dividends. Dilutive securities consist entirely of stock options and warrants
to acquire common stock for a specified price and their dilutive effect is
measured using the treasury method. Basic and diluted loss per common share
is the same because the impact of dilutive securities is anti-dilutive.
NEW ACCOUNTING STANDARD
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for fiscal years beginning after
December 15, 1999. The Company is evaluating the effect that implementation of
SFAS No. 133 will have on its financial statements.
EVALUATION OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard No. 121 ("SFAS No.
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the Company evaluates the potential impairment of
long-lived assets based on projections of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying value amount of an
asset may not be fully recoverable. Management believes no material impairment
of these assets exists at December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization is
provided by the straight-line method for financial reporting purposes based upon
the estimated useful lives of the assets which range from three to eight years.
The cost of assets sold or retired and the related amounts of accumulated
depreciation are eliminated from the accounts and the resulting gain or loss is
included in income. Renewals and betterments are capitalized. Repairs and
maintenance are charged to expense when incurred and were $24,146 in 1998,
$152,022 in 1997 and $87,281 in 1996. During 1998, the Company abandoned $2.4
million of prototype equipment related to commercializing technology for its
first manufacturing plant.
The cost and accumulated depreciation of property and equipment at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial Manufacturing Property: Construction in
progress Sweetheart Cup Company ................... $ 32,896,842 --
Product Development Center
Equipment ......................................... 3,432,686 $ 3,431,892
Construction in progress .......................... 808,190 1,081,320
Leasehold improvements ............................ 521,253 --
------------- -------------
4,762,129 4,513,212
Office leasehold improvements .............................. 803,908 --
Office equipment & furniture ............................... 337,318 93,393
------------- -------------
F-9
<PAGE>
Total cost ................................................. 38,800,197 4,606,605
Less: accumulated depreciation ............................ (979,280) (865,476)
------------- -------------
Property and equipment - net ............................... $ 37,820,917 $ 3,741,129
------------- -------------
------------- -------------
</TABLE>
RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, the Company entered into an
Amended and Restated License Agreement (the "License Agreement"), which was
amended in 1998, with EKI to manufacture, use, sell and sublicense certain
foodservice disposable products and to use certain trademarks owned by EKI in
connection with the products covered under the License Agreement. The license
continues in effect during the life of the patents licensed under the License
Agreement covering the technologies.
The Company's product and manufacturing process development offices and some
administrative 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 a Technical
Services and Sublease Agreement (the "Prior Technical Services Agreement"),
effective July 1, 1994. Under the terms of the Prior Technical Services
Agreement, the Company paid EKI for all direct project labor hours incurred at
specified hourly billing rates and direct expenses incurred on approved
projects. The specified hourly billing rates, which are subject to revision
semiannually, are fully burdened to include all EKI facility, equipment and
overhead costs and vary according to job classification. The intercompany rates
have been compared to a market rate study prepared by an independent third party
provider of similar services and are within the range of average market rates
for each job classification. The Company also subleased office space from EKI
for $5,600 per month under this agreement. The Prior Technical Services
Agreement terminated on September 30, 1997. Effective October 1, 1997, the
Company entered into an Amended and Restated Technical Services and Sublease
Agreement (the "Technical Services Agreement") that expires on December 31,
2002. For the years ended December 31, 1998, 1997 and 1996, the Company paid or
accrued $8,883,365, $7,413,736, and $9,060,523, respectively, for services
performed under these agreements and $67,200 in sublease payments for each of
the respective periods.
The Company and EKI entered into the Amended and Restated Agreement for
Allocation of Patent Costs (the "Patent Agreement"), effective October 1, 1997.
Until September 30, 1999, the Company will pay all costs associated with
prosecuting, filing, maintaining or acquiring patents and patent applications in
connection with patents and patent applications that are directly related to
foodservice 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
foodservice disposables applications licensed to the Company (as compared with
applications of such patents and patent applications outside of the foodservice
disposables field of use). 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 EARTHSHELL
Products 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.
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 between the Company and EKI (the "Prior Patent Agreement") which
expired September 30, 1997. 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
F-10
<PAGE>
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 Agreement, the patents and patent applications are 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
Agreement. Under these agreements, legal fees of $485,670, $652,867, and
$1,382,185 were paid to or on behalf of EKI during 1998, 1997 and 1996,
respectively.
During 1997, $7,145,986 of billings due under the Prior Technical Services
Agreement and Prior Patent 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 note bears interest at the prime rate in effect at the date of
issuance. The interest rate is adjusted to the prime rate in effect on the first
day of each calendar quarter. At December 31, 1997, the note accrued interest at
8.5% and was payable upon demand. The note payable and accrued interest was
repaid during 1998.
The amount payable to the majority stockholder of $1,181,300 and $622,090 as of
December 31, 1998 and 1997, respectively, includes amounts due to EKI under the
Prior Technical Services Agreement and the Technical Services Agreement and the
Prior Patent Agreement and the Patent Agreement.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Trade payables and accrued expenses... $6,241,610 $3,094,654
Salaries, wages and benefits ......... 1,483,122 87,880
Deferred payments on purchases ....... 1,834,705 --
----------- -----------
$9,559,437 $3,182,534
----------- -----------
----------- -----------
</TABLE>
NOTES PAYABLE
In 1996, the Company established a $9,000,000 line of credit with a bank that
originally expired on May 30, 1997 and was extended to April 15, 1998 and
increased to $14,000,000. The extension of credit was 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 granted the bank a security
interest in the License Agreement entered into by the Company with EKI. Interest
was payable monthly at an annual rate of 1% in excess of the bank's announced
prime lending rate.
As of December 31, 1997, notes payable included a $32,060,887 note payable due
to EKI, the majority stockholder, and $11,850,000 outstanding on a line of
credit less an unamortized original issue discount of $34,890 related to stock
warrants. The weighted average interest rate on the notes payable agreements for
the year ended December 31, 1997 was 8.76%.
During 1998, the Company repaid the balance and accrued interest on the
outstanding line of credit and received a release for the guarantee and security
interest held by the bank. The Company also repaid the notes payable due to EKI
during 1998.
F-11
<PAGE>
At December 31, 1998, the Company is obligated to the bank for a property loan
of $22,975, bearing interest at 8.00% and due April 2002.
COMMITMENTS
The Company has committed to capital equipment expenditures mostly for the
Sweetheart installation of $7.1 million and infrastructure improvement and
installation costs of $3.7 million as of December 31, 1998.
Effective July 1, 1998 and August 1, 1998, the Company entered into
non-cancelable operating leases for development facilities and headquarter
office space in California and Maryland, respectively, which expire over the
next eight years. Both leases provide the Company with options to renew the
leases for five years subject to certain conditions.
Future minimum lease payments required under these leases as of December 31,
1998 were as follows:
<TABLE>
<S> <C>
1999 ........ $ 806,357
2000 ........ 811,062
2001 ........ 764,023
2002 ........ 751,928
2003 ........ 448,409
Thereafter... 628,476
----------
Total... .... $4,210,255
----------
----------
</TABLE>
During 1998, EKI entered into certain agreements with an equipment manufacturer
providing for the purchase by EKI of certain technology applicable to
starch-based disposable packaging. EKI licenses such technology to the Company
on a royalty-free basis pursuant to the License Agreement. In connection with
the purchase, and pursuant to the terms of a letter agreement with EKI, the
Company agreed to pay the seller of the technology $3,500,000 on or about
December 31, 2003, which obligation is secured by a letter of credit.
The Company's obligation to the seller of the technology will be reduced by 5%
of the purchase price of any equipment purchased by EKI, the Company or its
licensees or joint venture partners from the seller of the technology. In
addition, the Company is required to pay $3,000,000 over the five year period
commencing January 1, 2004 if EKI, the Company or the Company's licensees or
joint venture partners have not purchased, by December 31, 2003, at least
$35,000,000 of equipment from the seller of the technology and EKI, the Company
or the Company's licensees or joint venture partners make active use of the
purchased technology. EKI has agreed to indemnify the Company to the extent the
Company is required to pay any portion of this $3,000,000 obligation solely as a
result of EKI's or its licensees' active use of such patents and related
technology (other than use by the Company or its sublicensees).
RETIREMENT BENEFITS
The Company established a qualified 401(k) plan for all of its employees in
1998. The 401(k) plan allows employees to contribute, on a tax-deferred basis,
up to fifteen percent of their annual base compensation subject to certain
regulatory and plan limitations. The Company uses a discretionary matching
formula that matches one half of the employee's 401(k) deferral up to a maximum
of three percent of annual base compensation. The 401(k) employer match was
$9,929 in 1998.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
During 1993, the Company completed a private placement of preferred stock
totaling $26,675,000, with
F-12
<PAGE>
net proceeds to the Company totaling $24,473,001. Under the Series A
Cumulative Senior Convertible Preferred Stock Purchase Agreement, the Company
issued 6,988,850 shares of Series A cumulative senior convertible preferred
stock at $3.82 per share. Dividends, when declared, are payable on a
quarterly basis at 8% per annum. At December 31, 1996, and December 31, 1997
cumulative undeclared dividends totaled $7,016,000 and $9,149,890,
respectively. Each share of preferred stock was 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 had the right to redeem
the preferred stock at a price of $3.87 per share between September 30, 1997
and September 30, 1998 and at a price of $3.82 per share after September 30,
1998. After three years from the issuance, registration rights enabled 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 had the right to vote with the common
stock as if the preferred stock had converted to common stock of the Company.
Preferred stockholders had the right to elect one member to the Board of
Directors.
To facilitate the sale by stockholders of Series A preferred stock in the
Company's March 1998 initial public offering of common stock, 3,993,404
shares of the 6,988,850 shares of outstanding Series A preferred stock were
converted to 3,993,404 shares of common stock. A portion of the converted
shares was sold in the initial public offering by stockholders. In April
1998, the Board of Directors declared a cash dividend to preferred
stockholders of $1.40 per share based on the dividend rate of 8% per annum on
the liquidation preference of the shares. The total dividends paid were
$9,725,201. By notice dated May 13, 1998, the Company called for redemption,
effective July 14, 1998, of the remaining 2,995,446 shares of Series A
preferred stock. In August 1998, the Board of Directors declared a cash
dividend to former preferred stockholders of $.0033 per share based on the
dividend rate of 8% per annum of the liquidation preference pursuant to the
Certificate of Designation, Preferences Relative, Participating, Optional and
Other Special Rights for Series A Cumulative Senior Convertible Preferred
Stock, which provided for dividends to accrue until the time of conversion,
together with interest thereon at the rate of 8% per annum from the date of
conversion until the date of payment. Total dividends and interest paid to
the remaining Series A preferred stockholders was $201,502. As of September
30, 1998, all outstanding shares of Series A preferred stock had been
converted to common stock.
STOCK OPTIONS
The Company established the EarthShell Container Corporation 1994 Stock
Option Plan in 1994 (the "1994 Plan"). The Company subsequently established
the EarthShell Container Corporation 1995 Stock Incentive Plan in 1995 (the
"1995 Plan") which effectively supersedes the 1994 Plan for options issued on
or after the date of the 1995 Plan's adoption. The 1994 and 1995 Plans
provide that the Company may grant an aggregate number of options for up to
4,585,000 shares of common stock to employees and 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. In January 1996, options for 412,650 shares
were granted under the 1995 Plan at an exercise price of $7.63 per share
vesting over two years. Of these options, 262,000 shares were granted whereby
the individual will be reimbursed $4.96 per share by EKI upon exercise.
Accordingly, compensation expense of $650,000, representing the portion of
the exercise price to be reimbursed by EKI for options that were considered
to be vested in 1996, was recognized during the year ended December 31, 1996,
as a contribution to capital. During 1997, options for 141,480 shares were
granted to directors under the 1995 Plan of which 47,160 shares were granted
at an exercise price equal to 80% of the initial public offering price and
vested immediately. The modest discount from the initial offering price was
determined to represent the fair market value of the underlying shares at the
time of option grant based on such objective criteria as the restricted
nature of the securities, the absence of a public trading market, and the
anticipated length of time to consummate the initial public offering. The
remaining options for 94,320 shares were granted at an exercise price of
$15.20 per share vesting on the day immediately prior to the next
stockholders' meeting held subsequent to the date of grant.
F-13
<PAGE>
In October 1997, options to purchase 262,000 shares of common stock were
re-granted as a result of an extension of the terms of the option agreement to a
director with an exercise price of $3.82 per share. The fair value of the common
stock at the date of grant was $15.20 per share. Compensation expense was
recorded during 1997 in the amount of $2,982,000 related to the re-grant of
these options.
In October 1997, options to purchase 26,200 shares of common stock were
re-granted as a result of an extension of the terms of the option agreement to a
consultant with an exercise price of $7.63 per share. The fair value of the
common stock at the date of grant was $15.20 per share. Compensation expense in
the amount of $114,761 was recorded during 1997 and an additional expense of
$114,761 was recorded in 1998 related to the re-grant of these options.
In November 1997, options to purchase 26,200 shares of common stock were granted
to a director at an exercise price of $15.20 per share vesting immediately.
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, 1996 .... 708,710 -- $ 4.04
Options granted ................... 412,650 $7.63 $ 7.63
Options canceled or expired ....... (131,000) $7.63 $ 7.63
---------
Outstanding at December 31, 1996... 990,360 -- $ 5.06
Options granted ................... 455,880 $3.82-$16.80 $ 8.39
Options canceled or expired ....... (288,200) $3.82-$7.63 $ 4.16
---------
Outstanding at December 31, 1997... 1,158,040 -- $ 6.60
Options granted ................... 670,000 $21.00 $ 21.00
Options canceled or expired ....... (91,920) $7.63-$21.00 $ 17.67
---------
Outstanding at December 31, 1998... 1,736,120 -- $ 11.57
---------
---------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTION OUTSTANDING OPTION EXERCISABLE
------------------------------------------------------ --------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
-------- ------------------------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.82 666,790 5.00 $3.82 666,790 $3.82
$ 7.63 313,090 6.53 $7.63 250,996 $7.63
$15.20 99,560 4.87 $15.20 62,880 $15.20
$16.80 36,680 3.02 $16.80 36,680 $16.80
$21.00 620,000 9.47 $21.00 - $21.00
--------- ---------
1,736,120 1,017,346
--------- ---------
--------- ---------
</TABLE>
The Company accounts for its 1994 and 1995 Plans in accordance with
Accounting Principles Board Opinion No. 25. To measure stock-based
compensation in accordance with SFAS No. 123, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value of each option grant will be amortized
as pro forma compensation expense over the vesting
F-14
<PAGE>
period of the options. The following table sets forth the assumptions used
and the pro forma net loss and loss per share resulting from applying SFAS
No. 123.
<TABLE>
<CAPTION>
YEAR ENDED, YEAR ENDED, YEAR ENDED,
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported ............................... $ 27,396,865 $ 21,126,023 $ 19,084,137
Pro forma ................................. $ 28,374,937 $ 22,676,181 $ 19,411,664
Net loss per common share:
As reported ............................... $ .29 $ .26 $ .23
Pro forma ................................. $ .30 $ .27 $ .24
Risk-free interest rate ...................... 5.5% 6.0% 6.8%
Expected life in years ....................... 4.0 3.4 6.4
Volatility ................................... 60% 20% 20%
Weighted average fair value of options granted
during the year .............................. $ 3.81 $ 8.48 $ 3.76
</TABLE>
STOCK WARRANTS
On June 7, 1996, in consideration of a $3,000,000 line of credit financing
arrangement, the Company issued a warrant which entitled 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 was equal to the initial public offering price and could 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 entitled 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 entitled the lender to purchase $450,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on November 15, 2003.
The foregoing warrants were valued and recorded at $246,270 based upon the
Company's option pricing model (See STOCK OPTIONS).
On October 6, 1997, the line of credit was increased to $13,000,000 and an
additional warrant was issued which entitled 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 entitled 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 STOCK OPTIONS).
INCOME TAXES
F-15
<PAGE>
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.
Deferred income taxes result from temporary differences in the recognition of
revenues and expenses for financial and tax reporting purposes. At December 31
1998 and 1997, deferred tax assets were comprised primarily of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal:
Depreciation ....................... $ (14,933) $ 107,742
Capitalized operating expenses ..... 11,543,264 5,921,976
Capitalized research and development 344,700 2,966,105
Deferred compensation .............. 1,091,917 --
Deferred contributions ............. 359,721 359,721
Net operating loss carryforward .... 21,790,822 16,060,992
------------ -----------
35,115,491 25,416,536
------------ -----------
------------ -----------
State:
Depreciation ....................... (4,085) 30,557
Capitalized operating expenses ..... 3,157,423 1,619,834
Capitalized research and development 5,470,053 4,278,956
Deferred compensation .............. 298,672 --
Deferred contributions ............. 98,394 93,981
Net operating loss carryforward .... 137,968 395,112
------------ -----------
9,158,425 6,418,440
------------ -----------
Deferred tax asset .................... 44,273,916 31,834,976
Valuation allowance ................... (44,273,916) (31,834,976)
------------ -----------
Net deferred tax asset ............. $ -- $ --
------------ -----------
------------ -----------
</TABLE>
The increase in the valuation allowance of $ 12,438,940 at December 31, 1998 as
compared to December 31, 1997, and $7,930,272 at December 31, 1997 as compared
to December 31, 1996, 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 $64,090,154 as of December 31, 1998 that expire in 2018. For
state income tax purposes, the Company has California net operating loss
carryforwards of $1,483,527 as of December 31, 1998 that expire in 2003.
Maryland net operating loss carryforwards follow the federal treatment and
expire in 2018.
Income tax expense for 1998, 1997 and 1996 consists of the minimum state
franchise tax.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Total
1998: First Second Third Fourth Year
----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Related party research and development $ 1,759,666 $ 2,044,706 $ 2,492,976 $ 2,586,017 $ 8,883,365
F-16
<PAGE>
Related party patent expense .......... 58,389 26,712 33,024 367,545 485,670
General and administrative ............ 420,227 1,646,351 4,201,497 3,028,392 9,296,467
Net loss common shareholders .......... 4,701,982 5,915,746 7,413,275 9,365,862 27,396,865
Basic and diluted loss per common share $ 0.06 $ 0.06 $ 0.07 $ 0.09 $ 0.29
Weighted average common shares
outstanding: .......................... 83,820,642 98,831,320 99,883,320 100,045,166 95,706,942
Market price per common share (1):
High .............................. $23 7/8 $ 18 $101 5/32 $163 1/32 $23 7/8
Low ............................... $16 5/8 $9 3/4 $5 5/16 $5 1/2 $5 5/16
Close ............................. $17 7/8 $9 3/4 $7 3/16 $111 5/16 $111 5/16
1997:
Related party research and development $ 1,920,220 $ 1,955,957 $ 1,685,966 $ 1,851,593 $ 7,413,736
Related party patent expense .......... 380,266 100,107 70,997 101,497 652,867
General and administrative ............ 403,449 479,177 525,389 4,277,240 5,685,255
Net loss common shareholders .......... 4,223,814 4,309,996 4,059,302 8,532,911 21,126,023
Basic and diluted loss per common share $ 0.05 $ 0.05 $ 0.05 $ 0.10 $ 0.26
Weighted average common shares
Outstanding: .......................... 82,530,000 82,530,000 82,530,000 82,530,000 82,530,000
</TABLE>
(1) The Company's common stock commenced trading on The Nasdaq Stock Market on
March 24, 1998.
F-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
*3.1 Certificate of Incorporation of the Company.
*3.2 Bylaws of EarthShell the Company 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.
*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 March 18, 1998.
*10.16 Warrant to Purchase Stock issued July 2, 1996 by the Company to Imperial Bank.
*10.17 Credit Agreement dated June 7, 1996 by and between the Company and Imperial Bank.
*10.18 Warrant to Purchase Stock issued June 7, 1996 by the Company to Imperial Bank.
*10.19 Employment Agreement dated October 1, 1997 by and between the Company and Simon K. Hodson.
*10.20 Amended and Restated Technical Services and Sublease Agreement
dated October 1, 1997 by and between the Company and EKI.
*10.21 Amended and Restated Agreement for Allocation of Patent Costs dated October 1, 1997 by and between
the Company and EKI.
<PAGE>
*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.
*10.42 Employment Agreement dated February 16, 1998 by and between the Company and David H. Kennedy.
*10.43 Employment Agreement dated March 23, 1998 by and between the Company and William F. McLaughlin.
*10.44 Employment Agreement dated March 23, 1998 by and between the Company and William F. Spengler.
*10.45 Employment Agreement dated April 15, 1998 by and between the Company and Vincent J. Truant.
*10.46 Employment Agreement dated July 22, 1998 by and between the Company and Michael M. Hagerty.
*10.47 Lease Agreement dated June 4, 1998 by and between the Company and
Baltimore Center Associates Limited Partnership.
*10.48 Lease Agreement dated May 1, 1998 by and between the Company and ORIX SBAP Goleta Venture, a
general partnership.
*10.49 Design, Procurement and Construction Management Services Agreement dated May 13, 1998 by and among
the Company, Sweetheart Cup Company Inc., CH2M Hill Industrial
<PAGE>
Design Corporation, and IDC Construction Management, Inc.
*10.50 First Amendment, dated June 2, 1998 to the Amended and Restated License Agreement by and between
the Company and E. Khashoggi Industries ("EKI").
10.51 First Amendment to 1995 Stock Incentive Plan of the Company.
27 Financial Data Schedule.
</TABLE>
* Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1 and amendments thereto, File no. 333-13287, and incorporated herein
by reference.
<PAGE>
EXHIBIT 10.51
EARTHSHELL CONTAINER CORPORATION
FIRST AMENDMENT
TO
1995 STOCK INCENTIVE PLAN
OF
EARTHSHELL CONTAINER CORPORATION
The 1995 Stock Incentive Plan (the "Plan") of EarthShell Container
Corporation, a Delaware corporation (the "Company"), is hereby amended by
adding to Section 4(e) of the Plan the following sentence:
"Notwithstanding the foregoing, each Director Option granted for the
1996 fiscal year shall have an exercise price equal to 80% of the price per
share at which the Company's Common Shares are first sold to the public
pursuant to the initial public offering of the Company."
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
duly executed as of this 1st day of May, 1997 and is effective as of January
8, 1997.
EARTHSHELL CONTAINER CORPORATION, a
Delaware corporation
By: /s/ SIMON K. HODSON
------------------------------------
Simon K. Hodson,
Vice Chairman of the Board and Chief
Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOUND ON PAGES F3 AND F4 OF THE COMPANY'S 10K
FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<CIK> 0000911801
<NAME> EARTHSHELL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 90,090,163
<SECURITIES> 6,530,928
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,817,464
<PP&E> 38,800,197
<DEPRECIATION> 979,280
<TOTAL-ASSETS> 135,638,381
<CURRENT-LIABILITIES> 10,763,712
<BONDS> 0
0
0
<COMMON> 1,000,451
<OTHER-SE> 123,874,218
<TOTAL-LIABILITY-AND-EQUITY> 135,638,381
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,644,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,086,430
<INCOME-PRETAX> (26,619,252)
<INCOME-TAX> 800
<INCOME-CONTINUING> (26,620,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,396,865)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
