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Previous: ULTIMATE ELECTRONICS INC, 4, 2000-10-10 |
Next: ECONNECT, S-8, 2000-10-10 |
Filing pursuant to Rule 424(b)(2)
Registration Statement No. 333-33752
You should read this prospectus supplement along with the accompanying prospectus. These documents contain information you should consider when making your investment decision. You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone else to provide you with different or additional information.
This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered hereby. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy our common stock in any circumstances in which an offer or solicitation is unlawful.
Information in this prospectus supplement and the accompanying prospectus may change after the date on the front of the applicable document. You should not interpret the delivery of this prospectus supplement or the accompanying prospectus or the sale of the common stock as an indication that there has been no change in our affairs since that date.
Our principal executive offices are located at 800 Miramonte Drive, Santa Barbara, California 93109. Our telephone number is (805) 897-2299.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 1 of the prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus Supplement is October 10, 2000
The net proceeds to us from this offering will be $500,000. We will use the net proceeds of this offering of our common stock as described in the prospectus. See "Use of Proceeds" beginning on page 11 of the prospectus.
We have entered into a common stock purchase agreement with Acqua Wellington North American Equities Fund, Ltd. pursuant to which EarthShell may, from time to time and in its sole discretion during the 12 months following the date of the agreement, present Acqua Wellington with draw-down notices requiring Acqua Wellington to purchase up to $2,500,000 of EarthShell common stock in respect of each draw-down notice. EarthShell will issue and sell the shares to Acqua Wellington at a per share price equal to the average price of EarthShell common stock over a period of time after the draw-down notice less a discount of 5%. EarthShell may present Acqua Wellington with up to 12 draw-down notices during the term of the agreement. Pursuant to the agreement, EarthShell will issue and sell shares of its common stock to Acqua Wellington immediately following each of four consecutive weekly periods in respect of each draw-down notice so presented. Although the common stock purchase agreement with Acqua Wellington provides that EarthShell generally may not draw down unless EarthShell's common stock is trading at $3.00 per share or more, Acqua Wellington has agreed to accept a draw-down notice from EarthShell with a $1.00 per share minimum trading price which applies only to the current draw-down period, which will end on October 26, 2000. The issuance and sale of EarthShell common stock pursuant to this prospectus supplement is in respect of the first of four weekly periods during such draw-down period. EarthShell has also agreed to issue to Acqua Wellington a warrant to purchase 50% of the number of shares of common stock issued and sold in respect of each such weekly period during the current draw-down period ending October 26, 2000 at a price per share of 115% of the purchase price per share of the common stock issued and sold in respect of such weekly period.
To date, and before the issuance of shares pursuant to this prospectus supplement and the receipt of the net proceeds in consideration for those shares, we have issued and sold an aggregate of 1,328,293 shares of our common stock to Acqua Wellington North American Equities Fund, Ltd. for aggregate net proceeds of $4,396,913 pursuant to the common stock purchase agreement.
We are offering and selling 398,190 shares of our common stock to Acqua Wellington North American Equities Fund, Ltd. pursuant to this prospectus supplement. The common stock will be purchased at a negotiated purchase price of $1.2557 per share. We will not pay any other compensation in conjunction with the sale of our common stock.
Acqua Wellington and its pledgees, donees, transferees and other subsequent owners, may offer their shares at various times in the over-the-counter market, in privately negotiated transactions, at prevailing market prices at the time of sale, at prices related to those prevailing market prices, at negotiated or at fixed prices.
The transactions in the shares may be effected by ordinary brokerage transactions and transactions in which the broker solicits purchasers, purchases by a broker or dealer as principal, and the resale by that broker or dealer for its account under this prospectus, including resale to another broker or dealer, block trades in which the broker or dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal in order to facilitate the transaction, or negotiated transactions between selling stockholders and purchasers without a broker or dealer.
In the common stock purchase agreement with Acqua Wellington, we have agreed to indemnify and hold harmless Acqua Wellington and each person who controls Acqua Wellington against certain liabilities, including liabilities under the Securities Act of 1933, as amended, which may be based upon, among other things, any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission of a material fact, unless made or omitted in reliance upon written information provided to us by Acqua Wellington.
Our common stock is listed on the NASDAQ National Market under the symbol "ERTH." On October 9, 2000, the closing price of one share of our common stock was $1.16. The common stock sold under this prospectus supplement will be listed on the NASDAQ National Market after we notify the NASDAQ National Market that the shares have been issued. As of October 9, 2000 and before the issuance of shares pursuant to this prospectus supplement, we had 101,373,459 shares of common stock outstanding.
The information in this prospectus is not complete and may be changed without notice. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 18, 2000
This is a public offering of shares of common stock of EarthShell Corporation. We may offer for sale and sell shares in varying amounts and at prices and on terms to be determined at the time of sale. We will receive all of the proceeds from our sale of our common stock.
Our common stock is listed on the NASDAQ National Market under the symbol “ERTH.” On April 17 , 2000, the closing price of one share of our common stock was $3.03.
Our principal executive offices are located at 9020 Junction Drive, Annapolis Junction, Maryland 20701. Our telephone number is (301) 957-1300.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 1.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is April , 2000
Before you invest in our common stock, you should be aware of various risks associated with such an investment, including those described below. You should consider carefully these risk factors together with all of the other information included in this prospectus and in the documents incorporated by reference before you decide to purchase our common stock.
EarthShell® is a registered trademark of EarthShell Corporation. Aliite® is a registered trademark of E. Khashoggi Industries, LLC. Big Mac® is a registered trademark of the McDonald's Corporation.
Because we are a development stage company subject to the inherent risks of establishing a new business, we cannot assure you that our operations will ultimately be successful and generate a profit in the future.
To date, we have primarily focused on developing products. Because we are a development stage company with no commercial operating history, we are subject to the inherent risks of establishing a new business enterprise. Although we have built our first plant to produce Big Mac® sandwich containers for sale to Perseco, the primary packaging purchaser for the McDonald’s Corporation, under a supply agreement between our licensee, Sweetheart Cup Company, Inc. (“Sweetheart”), and Perseco, it has not yet achieved full-scale commercial operations. In addition, although we have developed a number of prototype products, including bowls, plates, cups and other hinged-lid containers in addition to the Big Mac® container, these products remain subject to further development and customer-specific modification. Among other things, we must:
o fully develop these prototype and additional products;
o develop commercially viable manufacturing processes and capacity;
o attract, retain and motivate qualified personnel;
o achieve market acceptance of our products;
o respond to competitive developments; and
o develop systems to manage our growth effectively.
At this stage in our development, we cannot assure you that we will achieve these goals and that our operations will be successful and generate a profit in the future. As of March 31, 2000, we had not yet reported any operating revenues.
We expect to continue to experience operating losses until we are able to commercially produce and sell our products in quantities necessary to generate a profit.
Sweetheart has entered into a supply agreement with Perseco. We are currently in the midst of a product validation process with Perseco with respect to the EarthShell Big Mac® sandwich container made of the new composite material (“EarthShell Products”) which is typical for all new product introductions into the McDonald’s system. We expect to continue to incur substantial operating losses until this product validation process is complete and until we can commercially produce our products in quantities necessary to generate a profit and our products achieve broad market acceptance and penetration. We experienced aggregate net losses of approximately $145 million from our inception on November 1, 1992 through December 31, 1999. The success of our future operations depends upon our ability and the ability of our licensees and joint venture partners to commercialize various types of EarthShell Products. Due to the uncertainties inherent in product development, market acceptance of newly-developed products and our need to rely on our licensees and joint venture partners to manufacture, distribute and sell EarthShell Products, we are unable to predict when our products will be introduced nationally or when we will receive significant revenues from any EarthShell Product other than the EarthShell Big Mac® sandwich container, which we currently expect to be able to distribute nationally during the year 2000.
We may need to obtain additional financing in order to fund our operations until EarthShell Products achieve commercial viability and generate significant revenues, which could potentially be dilutive to existing stockholders.
Although we believe the proceeds we anticipate receiving from this offering will provide EarthShell with the capital it needs for the foreseeable future, we may need to seek additional third party financing in the future to meet our operating and working capital needs and to fund the further expansion of our business. We may not be able to obtain that capital or that capital may not be available on terms satisfactory to us. If additional funds are raised through the issuance of stock, dilution to existing stockholders may result. If additional funds are raised through the incurrence of debt, these debt instruments will likely contain restrictive financial, maintenance and security covenants, which could restrict our ability to conduct our business as we would prefer in the absence of those covenants.
We may continue to incur financial losses as a result of funding obligations under our agreements with some of our licensees and joint venture partners, one of which requires us to fund negative cash flows until our manufacturing facilities meet efficiency criteria set forth in that agreement.
We have refined our business strategy and are currently using a joint venture structure in which our joint venture partners will generally share equally in the cost of manufacturing facilities and will assume equally the risks of any failure of the manufacturing facilities to meet targeted efficiencies. The joint venture agreements we entered into with Finland-based Huhtamaki Van Leer Oyj and with Prairie Packaging, Inc. contain this type of risk-sharing arrangement. By contrast, our earlier agreement with Sweetheart is structured so that we license or contribute manufacturing equipment to Sweetheart and guarantee the performance of the equipment. This was done in an effort to induce Sweetheart to begin to produce EarthShell Products during their initial commercial introduction. In addition, under our operating agreement with Sweetheart, we are obligated to fund negative operating cash flow until the date upon which the turnkey manufacturing lines first meet specified efficiency criteria. We are also obligated to fund additional costs incurred if the equipment does not continue to satisfy these criteria for a two-year period following that date. Our obligations to guarantee performance of these manufacturing lines and to fund negative operating cash flows under this agreement, and the possibility that we might ultimately fail to receive a return on our investment in the equipment, may cause us to continue to incur losses for a period of time and significantly impair our profitability.
Though we are producing a limited amount of our products on an integrated production line on a commercial scale, we are not yet sure that they can be produced at a competitive cost. Our failure to do so would adversely affect our ability to compete with conventional disposable foodservice packagers.
Our success depends, in substantial part, on our ability to produce EarthShell Products at a competitive cost. While we have been successful at producing the EarthShell Big Mac® sandwich container on commercial scale equipment, production volumes to date have been low relative to our purchase order commitment. Until production volumes approach design capacity levels, actual costs and profitability will not be certain. Further, all our other products are currently in various stages of development and we have not yet produced them on a fully integrated production line or on a commercial scale. We have not, therefore, proven the actual cost of manufacturing EarthShell Products, and we cannot assure you that we will be able to manufacture them at a competitive cost. As licensees and joint ventures begin to commercially produce EarthShell Products, they may encounter difficulties that cause costs of production to exceed what we currently anticipate. Our failure to manufacture EarthShell Products at commercially competitive costs would make it difficult to compete with other foodservice disposables manufacturers.
Because we are not yet producing our products on a commercial scale, we do not know whether we will be able to construct sufficient manufacturing capacity that will permit a timely roll-out and market acceptance of our products.
Because of our inexperience in manufacturing, we cannot assure you that we will be successful in producing quantities of EarthShell Products sufficient to permit a timely commercial roll-out of EarthShell Products. Moreover, it may require greater time and effort than we anticipate to achieve the production volumes and efficiencies required. We cannot assure you that we will be successful in building sufficient manufacturing capacity on a timely basis or that we will have adequate manufacturing equipment available when necessary to permit a timely roll-out of EarthShell Products. Our failure to produce sufficient quantities of EarthShell Products or construct adequate manufacturing equipment that is properly working in an integrated manner when necessary to permit a timely roll-out of EarthShell Products could adversely affect market acceptance of EarthShell Products.
Consumers may not perceive EarthShell Products as being better for the environment than conventional disposable foodservice containers, which would adversely affect market acceptance of our products.
Our success depends substantially on our ability to design, develop and manufacture foodservice disposables that are not as harmful to the environment as conventional disposable foodservice containers made from paper, plastic and polystyrene. EarthShell has used a life cycle inventory methodology in its environmental assessment of EarthShell Products and in the development of associated environmental claims and we have received support for the EarthShell concept from a number of environmental groups. Although we believe that EarthShell Products offer a number of environmental advantages over conventional packaging products, our products may also possess characteristics that consumers or some environmental groups could perceive as negative for the environment. In particular, EarthShell Products may result in more solid waste by weight and, in a dry environment, by volume, and manufacturing and distributing them may release greater amounts of some pollutants, and lesser amounts of other pollutants, than occurs with conventional packaging. Whether, on balance, EarthShell Products are better for the environment than conventional packaging products is a somewhat subjective judgment and we believe that we have addressed the major concerns of environmental groups with respect to the EarthShell Big Mac® sandwich container and have goals in place to:
o reduce the weight of the container;
o use reclaimed starch from sources not currently being reclaimed for
commercial uses; and
o continue our efforts to reduce the environmental impact of the
EarthShell Big Mac® sandwich container.
Additionally, we prefer to use, whenever possible, recycled or reclaimed raw materials that meet our processing and product performance criteria. For example, we are currently seeking commercial sources of recycled, FDA-compliant, post consumer waste (“PCW”) fiber. Should FDA-compliant PCW fiber not be available, we will use the next most suitable, environmental fiber source and adjust any relevant environmental claims accordingly. We cannot assure you that environmental groups, regulators, customers or consumers will agree that EarthShell Products have an environmental advantage over conventional packaging. Nor can we assure you that all future EarthShell Products, some of which may require unique material formulations and coatings, will have, or that the market will recognize them as having, a reduced environmental impact. If EarthShell Products do not have, or are not recognized by others as having, a reduced environmental impact, this could adversely affect market acceptance of these products.
We have not yet fully evaluated all of the EarthShell Products and it is possible that some of the products may not perform as well as conventional packaging products, which would adversely affect market acceptance of these products.
Although we believe that we can engineer EarthShell Products to meet many of the critical performance requirements for specific applications, individual products may not perform as well as conventional foodservice disposables; for example, some consumers may prefer clear cups and clear lids on take-home containers, which are not available with our foam technology. We are still developing many of our EarthShell Products and we have not yet evaluated the performance of all of them. If we fail to develop EarthShell Products that perform comparably with conventional foodservice disposables, this could cause consumers to prefer our competitors’ products.
We are exposed to risks of delay that could delay the introduction or market acceptance of one or more of our products and obligate us financially under one of our operating agreements.
There are substantial risks of delay, some of which are beyond our control, associated with:
o developing our products and related manufacturing processes;
o market acceptance of and demand for our products; and
o developing sufficient production capacity to produce our products.
For example, we have experienced significant delays in the initial commercial production of the EarthShell Big Mac® sandwich container for McDonald’s. These delays resulted from, among other things, difficulties in integrating manufacturing equipment and persistent, but typical, problems debugging our manufacturing lines at Sweetheart’s Owings Mills, Maryland facility. The manufacturing process includes various stages of operation, such as mixing, forming, trimming, sanding, coating, printing and stacking, all of which are integrated and computer controlled along an assembly line. We believe we will be successful in the debugging process going forward as we ramp up production lines to produce at higher levels, but we cannot assure you that this process will not result in further delays.
Future delays will obligate us financially under our operating agreement with Sweetheart. In addition, we cannot assure you that we or our licensees or joint venture partners will not experience similar or other problems in start-up or ongoing operations. Delays in the introduction or market acceptance of one or more EarthShell Products would delay our ability to realize any revenues from sales of those products.
If McDonald’s or any other of our anticipated initial purchasers of our products do not purchase significant quantities of our products, it could delay the introduction and market acceptance of our products.
We intend McDonald’s to be the first foodservice operator to use EarthShell Products. If McDonald’s or any other anticipated initial purchasers of our products do not ultimately purchase significant quantities of our products, it could delay the introduction and market acceptance of one or more of our products and delay our ability to realize any revenues from sales of those products. Our ongoing product validation process with respect to EarthShell Products being developed for use in McDonald’s restaurants does not represent a binding development obligation on the part of McDonald’s, and McDonald’s is therefore under no obligation to initiate or continue any development relationship with us.
An unexpected unavailability of raw materials used to manufacture our products, increases in the price of the raw materials, or the necessity of finding alternative raw materials to use in our products could delay the introduction and market acceptance of our products.
Although we believe that sufficient quantities of all raw materials used in EarthShell Products are generally available, if any raw materials become unavailable it could delay the commercial introduction and hinder market acceptance of EarthShell Products. In addition, we and our 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 material prices may increase which in turn may increase the cost of EarthShell Products and impair our profitability. In addition, we may need to seek alternative sources of raw materials or modify our product formulations if the cost or availability of the raw materials that we currently use become prohibitive.
We cannot assure you that our licensees and joint venture partners will devote sufficient resources to our products or successfully manufacture, distribute or market our products because many of them have products that will compete with our products and our licensee manufacturers are not obligated to achieve minimum sales quotas.
We have no experience in commercially manufacturing, distributing and marketing foodservice disposables. We will depend on our licensees and joint venture partners to manufacture and distribute EarthShell Products. We have entered into agreements with Sweetheart, Finland-based Huhtamaki Van Leer Oyj and Prairie Packaging, Inc., but these agreements permit those licensees to manufacture and sell other foodservice disposable packaging products that are not based on the EarthShell material. We intend to enter into additional license agreements and joint venture relationships in the future. Although we have produced EarthShell Products at a low volume level at Sweetheart’s facilities, none of our other licensees has commercially produced or distributed any EarthShell Products. Our licensee manufacturers are not obligated to achieve minimum sales quotas. Our licensees and joint venture partners also manufacture paper or polystyrene packaging which will compete with EarthShell Products. We cannot assure you that our licensees and joint venture partners will devote sufficient resources or otherwise be able successfully to manufacture, distribute or market EarthShell Products. Their failure to do so would inhibit our ability to distribute our products into the marketplace.
Our dependence on E. Khashoggi Industries, LLC (“EKI”) for the technology necessary to manufacture EarthShell Products and for certain technical personnel means that a disruption in the operations or financial condition of EKI exposes us to risks that EKI may not be able to perform services that we require.
We do not own the technology necessary to manufacture EarthShell Products and we are dependent upon our world-wide, royalty-free, exclusive license pursuant to an Amended and Restated License Agreement with EKI (the “License Agreement”) to use that technology. We can only use the technology to develop, manufacture and sell specified foodservice disposables for use in the foodservice industry and we have no right to exploit opportunities to apply this technology or improve it outside this field of use. EKI may cancel the license if we are in breach of any material obligations under the License Agreement and do not cure the breach within a specified period. If EKI were to file for or be declared bankrupt, we would likely be able to retain our rights under the License Agreement with respect to U.S. patents. However, it is possible that EKI could take steps to terminate our rights under the License Agreement with respect to international patents.
We share one key executive with EKI (Simon Hodson). EKI also provides significant scientific and technical services to us pursuant to an Amended and Restated Technical Services and Sublease Agreement (the “Technical Services Agreement”), which runs through December 31, 2002, to support the continued design and development of EarthShell Products. We also depend on EKI to further develop and refine the basic technology used in EarthShell Products, although EKI is not obligated to complete any further development or refinement under the terms of the License Agreement. If anything disrupted the operations or financial condition of EKI, it would expose us to the risk that EKI might fail to perform services that we require.
Because one majority shareholder controls both EKI and EarthShell, conflicts may arise between the companies with respect to corporate opportunities and we cannot assure you that these conflicts will always be resolved in EarthShell’s favor.
Mr. Essam Khashoggi is the indirect majority equity owner of and therefore controls both EarthShell and EKI, which means that Mr. Khashoggi owns a majority interest in both EarthShell and EKI through other entities which he controls. Mr. Khashoggi is the beneficial owner of approximately 70% of the outstanding shares of EarthShell’s common stock directly or indirectly through various entities that he controls, including EKI. As a result, Mr. Khashoggi is able to:
o elect all of the directors of EarthShell;
o control the direction and policies of EarthShell;
o determine the outcome of corporate transactions requiring the approval
of EarthShell’s stockholders, including mergers, consolidations
and the sale of all or substantially all of the assets of
EarthShell; and
o prevent or cause a change in control of EarthShell.
Mr. Khashoggi also has the power to control our relationship with EKI, which he also controls, and upon which we depend for, among other things, research and development. We cannot assure you that we will always agree with Mr. Khashoggi’s decisions regarding our business.
Conflicts may arise between EKI and EarthShell, particularly with respect to corporate opportunities, including:
o developing new markets and uses for products based on the EarthShell
Products;
o allocating research and development resources;
o the time that the common directors and officers devote to EarthShell
and EKI; and
o how each of EKI and EarthShell performs its obligations under the
License Agreement, the Technical Services Agreement and the Amended and
Restated Agreement for the Allocation of Patent Costs (the “Patent
Allocation Agreement”).
Under the Patent Allocation Agreement, we are obligated to pay or reimburse EKI for all costs and expenses associated with filing, prosecuting, acquiring and maintaining some patents or patent applications. EKI will control the costs and expenses incurred in connection with these patents and patent applications. Any patents granted will be the property of EKI, and EKI may obtain a benefit from those patents other than under the License Agreement, including using and/or licensing the patents and related technology in a manner or for uses unrelated to the license which EKI granted to EarthShell in the foodservice disposables field of use. We cannot assure that conflicts of interest that arise between EKI and EarthShell will always be resolved in EarthShell’s favor.
Despite our attempts to protect our patented technology, it is possible that third parties will infringe our patents, that new products that we develop will not be covered by our existing patents or that we could suffer an adverse determination in a patent infringement proceeding, any and all of which could allow our competitors to duplicate our products without having had to incur the research and development costs we have incurred and therefore allow them to produce and market those products more profitably than EarthShell.
Our ability to compete effectively with conventional packaging will depend, in part, on our ability to protect our proprietary rights to the licensed technology. Although EKI and EarthShell endeavor to protect the licensed technology through, among other things, U.S. and foreign patents, the duration of these patents is limited and we cannot assure you that the patents and patent applications licensed to us are sufficient to protect our technology. We also cannot assure you that any patent that EKI obtains and licenses to us will be held valid, or that others will not circumvent or infringe those patents. We also rely on trade secrets and proprietary know-how that we try to protect in part by confidentiality agreements with our licensee manufacturers, proposed joint venture partners, employees and consultants. These agreements have limited terms and we cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that our competitors will not learn our trade secrets or independently develop them.
It is necessary for us to litigate from time to time to enforce patents issued or licensed to us, to protect our trade secrets or know-how and to determine the enforceability, scope and validity of the proprietary rights of others. As an example of this type of litigation, on August 2, 1999, Novamont S.p.A., an Italian company specializing in the manufacture of a biodegradable plastic resin and products, filed a complaint in the United States District Court for the Northern District of Illinois alleging infringement of three patents. We have analyzed all three patents and believe we have strong meritorious defenses and have been vigorously defending the lawsuit. Although we know of no other alleged or actual infringement by EarthShell or EKI of third party patents, it is always possible that a third party could assert infringement. 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. We continue to test and modify the components and their proportional mixtures to balance environmental, economic and performance concerns. We cannot assure you that the mixture that we ultimately determine to be optimal will be protected under our patents or that it will not be subject to a patent held by others. If our patents do not protect the optimal mixture, or if the mixture is subject to a patent held by a third party and the third party asserts patent infringement, this would restrict our ability to produce and market our products.
We believe that we own or have the rights to use all of the technology that we expect to incorporate into EarthShell Products, but an adverse determination in litigation or infringement proceedings to which we are or may become a party could subject us to significant liabilities and costs to third parties or require us to seek licenses from third parties. Although patent and intellectual property disputes are often settled through licensing or similar arrangements, costs associated with those arrangements could be substantial and could include ongoing royalties. Furthermore, we cannot assure you that we could obtain the necessary licenses on satisfactory terms or at all. We could incur substantial costs attempting to enforce our licensed patents against third party infringement, or the unauthorized use of our trade secrets and proprietary know-how or in defending ourselves against claims of infringement by others. Accordingly, if we suffered an adverse determination in a judicial or administrative proceeding or failed to obtain necessary licenses, it would prevent us from manufacturing or licensing others to manufacture some of our products.
Established competitors in the foodservice disposables industry could improve the ability to recycle their existing products or develop new environmentally preferable, disposable foodservice containers which could render our technology obsolete and could negatively impact our ability to compete.
Competition among existing food and beverage container manufacturers in the foodservice industry is intense. At present, most of our competitors have substantially greater financial and marketing resources at their disposal than we do, and many have well-established supply, production and distribution relationships and channels. Companies producing products utilizing competitive materials such as paper, plastic or polystyrene may reduce their prices or engage in advertising or marketing campaigns designed to protect their respective market shares and impede market acceptance of EarthShell Products. Recently, a number of paper and plastic disposable packaging manufacturers and converters have tried to increase recycling of their products. Increased recycling of paper and plastic products could reduce their negative environmental impact, which is one significant basis upon which we intend 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. We expect that many existing packaging manufacturers may actively seek competitive alternatives to our products and processes. The development of competitive, environmentally preferable, disposable foodservice containers, whether or not based on our products and technology, could render our technology obsolete and could impair our ability to compete.
Our loss of key technical and management personnel could be highly disruptive to our business operations.
At present we depend upon obtaining and retaining the services of qualified scientific and technical personnel, many of whom are employees of EKI and whose services are provided pursuant to the Technical Services Agreement. We are highly dependent on our Vice Chairman of the Board, President and Chief Executive Officer, Simon K. Hodson, who has been involved with EarthShell since its inception. We do not hold “key man” insurance on any of our personnel. If we lost the services of any of our key employees, it could be highly disruptive to our business operations.
If the U.S. Food and Drug Administration (the “FDA”) were to find that our products did not comply with FDA regulations, they could ask us to voluntarily withdraw our products from the marketplace or seek legal remedies and sanctions to force us to withdraw our products, either of which would prevent us from realizing future revenues from those products.
The FDA regulates the manufacture, sale and use of EarthShell Products. 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 comply with FDA regulations if the components used in the food and beverage containers:
o are approved by the FDA as indirect food additives for their intended
uses andcomply with the applicable FDA indirect food additive
regulations; or
o are generally recognized as safe for their intended uses and are of
suitable purity for those intended uses.
Each of the components of the EarthShell Big Mac® sandwich container and all other current prototype products is either approved by the FDA as an indirect food additive for its intended use, codified in the FDA’s regulations as generally recognized as safe for its intended use, or a commonly recognized food ingredient that we and our consultants regard as generally recognized as safe for its intended use. However, we have not asked the FDA whether it concurs with our determination. We intend to ensure that the raw materials used in the EarthShell Big Mac® sandwich container are of suitable purity for their intended uses by specifying standards to be met by suppliers of raw materials and by material and product testing. The FDA does not require that manufacturers of EarthShell Products seek FDA concurrence that components are generally recognized as safe for their intended uses or that the raw materials are of suitable purity for their intended uses. As a result, we believe that the EarthShell Big Mac® sandwich container and other current prototype EarthShell Products will comply with all requirements of the FDA and do not require FDA approval. We cannot assure you, however, that the FDA would agree with these conclusions.
If the FDA were to disagree with our determinations with respect to the EarthShell sandwich container or future products, the FDA could ask us to voluntarily withdraw the products from the marketplace. They could also begin legal action to remove the products from the marketplace and, if appropriate, pursue additional sanctions against us and our management. Such actions by the FDA would prevent us from realizing future revenues from those products.
Fluctuations or decreases in the trading price of our common stock may adversely affect the liquidity of the stock’s trading market and our ability to raise capital through future offerings of capital stock.
The stock market from time to time experiences extreme price and volume fluctuations which are often unrelated to the operating performance of particular companies. Since our initial public offering in March 1998, the market price of our common stock has been volatile, and it may continue to be volatile in the future. Factors that may significantly impact the market price and marketability of our common stock include, but are not limited to:
o insufficient cash to finance our business;
o changes in our technological innovations or new commercial products
or those of our competitors;
o unacceptable economics of manufacturing our products;
o inability to license the technology to third parties;
o development or disputes concerning proprietary rights;
o failure to meet analysts' earnings estimates;
o loss of key management;
o adverse regulatory actions or decisions;
o general economic and other external factors; and
o period-to-period fluctuations in our financial results.
Fluctuations or decreases in the trading price of our common stock may adversely affect the liquidity of the stock’s trading market and our ability to raise capital through future offerings of capital stock.
Over 70 million, or more than 70%, of our total outstanding shares may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Approximately 70 million of EarthShell’s 100,045,166 outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 (“Rule 144”) promulgated under the Securities Act of 1933. This means that they may not be sold without first being registered under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. These approximately 70 million shares, which are held by current stockholders, are eligible for sale pursuant to Rule 144, subject to the volume and manner of sale limitations under Rule 144. In addition, we granted “demand” and “piggy-back” registration rights to all of our stockholders who owned our preferred stock and common stock before our initial public offering, including EKI. We cannot predict the effect, if any, that public sales of these shares or the availability of shares for sale will have on the market price of our common stock from time to time. Nevertheless, if our stockholders, and particularly our directors and officers, sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
Our charter documents and Delaware law include provisions that may discourage a potential takeover, even if it would be beneficial to our stockholders.
Our Certificate of Incorporation and Bylaws and the Delaware General Corporation Law include provisions that may discourage persons from pursuing a non-negotiated takeover of EarthShell and prevent changes of control under some circumstances, even if doing so would be beneficial to our stockholders.
Our projected international revenues are subject to risks inherent in international business activities.
We expect sales of our products and services in foreign countries to account for a material portion of our revenues. These sales are subject to risks inherent in international business activities, including:
o any adverse change in the political or economic environments in
these countries;
o economic instability;
o any adverse change in tax, tariff and trade or other regulations;
o the absence or significant lack of legal protection for intellectual
property rights;
o exposure to exchange rate risk for revenues which are denominated in
currencies other than U.S. dollars; and
o difficulties in managing joint venture businesses spread over
various jurisdictions.
Our revenues could be substantially less than we expect if these risks affect our ability to successfully sell our products in the international market.
We will receive all of the net proceeds from the sale of our common stock registered by the registration statement of which this prospectus is a part. The proceeds we receive will be used for general corporate purposes or as may be stated in a supplement or supplements to this prospectus.
Our common stock may be offered for sale and sold in one or more transactions, including block transactions, at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at prices determined on a negotiated or competitive bid basis. Shares of common stock may be sold directly, through agents designated from time to time, or by such other means as may be specified in the supplement to this prospectus. Participating agents or broker-dealers in the distribution of any of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended. Any discount or commission received by any underwriter and any participating agents or broker-dealers, and any profit on the resale of shares of common stock purchased by any of them may be deemed to be underwriting discounts or commissions under the Securities Act.
Shares of our common stock may be sold through a broker-dealer acting as agent or broker or to a broker-dealer acting as principal. In the latter case, the broker-dealer may then resell such shares of common stock to the public at varying prices to be determined by the broker-dealer at the time of resale.
To the extent required, the number of shares of common stock to be sold, information relating to the underwriters, the purchase price, the public offering price, if applicable, the name of any underwriter, agent or broker-dealer, and any applicable commissions, discounts or other items constituting compensation to such underwriters, agents or broker-dealers with respect to a particular offering will be set forth in an accompanying supplement to this prospectus.
If underwriters are used in a sale, shares of common stock will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Shares of common stock may be offered to the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters. The underwriter or underwriters with respect to a particular underwritten offering of shares of common stock will be named in the supplement to this prospectus relating to that offering and, if an underwriting syndicate is used, the managing underwriter or underwriters will be stated on the cover of the prospectus supplement.
Under the securities laws of some states, the shares of common stock registered by the registration statement may be sold in those states only through registered or licensed brokers or dealers.
Any person participating in the distribution of common stock registered under the registration statement that includes this prospectus will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the applicable SEC rules and regulations, including, among others, Regulation M, which may limit the timing of purchases and sales of any of our common stock by any such person. Furthermore, Regulation M may restrict the ability of any person engaged in the distribution of our common stock to engage in market-making activities with respect to our common stock. These restrictions may affect the marketability of our common stock and the ability of any person or entity to engage in market-making activities with respect to our common stock.
Upon sale under the registration statement that includes this prospectus, the shares of common stock registered by the registration statement will be freely tradable in the hands of persons other than our affiliates.
Gibson, Dunn and Crutcher LLP, Los Angeles, California, will pass upon the legality of the common stock being offered by this prospectus for EarthShell.
The financial statements incorporated in this prospectus by reference from EarthShell’s Annual Report on Form 10-K for the year ended December 31, 1999 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
This prospectus contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements can typically be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecasts,” and the like. These statements appear in a number of places in this prospectus and include statements regarding our intentions, plans, strategies, beliefs or current expectations and those of our directors or our officers with respect to, among other things:
o our financial prospects;
o our financing plans;
o trends affecting our financial condition or operating results;
o our strategies for growth, operations, and product development and
commercialization; and
o conditions or trends in or factors affecting the foodservice
disposables industry.
Forward-looking statements do not guarantee future performance and involve risks and uncertainties that could cause actual results to differ materially from those anticipated. The information contained in this prospectus, or incorporated by reference, identifies important factors that could cause such differences.
We have filed with the Securities and Exchange Commission a Registration Statement on Form S-3 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes part of the Registration Statement, omits some of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the SEC pursuant to the Securities Act of 1933 and the rules and regulations of the SEC. We also file reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934.
You may read and copy the Registration Statement, including exhibits and schedules thereto, as well as our reports, proxy statements and other information that we file, at the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the public reference rooms. The SEC also maintains a web site that contains reports, proxy and information statements and other information filed electronically with the SEC at http://www.sec.gov. Our web site is located at http://www.earthshell.com.
Our statements in this prospectus as to the contents of any contract or other document referred to are not necessarily complete. For a complete understanding of any such contract or other document, you should read that contract or document, which has been filed as an exhibit to the Registration Statement.
You should rely on the information provided in this prospectus. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
Our annual report on Form 10-K for the fiscal year ended December 31, 1999, which has been filed with the SEC, is incorporated by reference into this prospectus.
All documents that we file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and before the termination of the offering of the shares of common stock shall be deemed incorporated by reference into this prospectus and to be a part of this prospectus from the respective filing dates of such documents.
We will provide without charge to each person to whom a copy of this prospectus is delivered, upon such person’s written or oral request, a copy of any and all of the information incorporated by reference in this prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the information that this prospectus incorporates. Requests should be directed to Investor Relations, 800 Miramonte Drive, Santa Barbara, California, 93109. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed modified, superseded or replaced for purposes of this prospectus to the extent that a statement contained in this prospectus or in any subsequently filed document that also is or is deemed to be incorporated by reference in this prospectus modifies, supersedes or replaces such statement. Any statement so modified, superseded or replaced shall not be deemed, except as so modified, superseded or replaced, to constitute a part of this prospectus.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
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USE OF PROCEEDS S-2
PLAN OF DISTRIBUTION S-2
MARKET FOR OUR COMMON STOCK S-2
PROSPECTUS
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RISK FACTORS 1
USE OF PROCEEDS 11
PLAN OF DISTRIBUTION 11
LEGAL MATTERS 12
EXPERTS 12
FORWARD-LOOKING STATEMENTS 12
WHERE YOU CAN FIND MORE
INFORMATION 12
INFORMATION INCORPORATED BY
REFERENCE 13
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