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EarthShell Misses a Key Deadline on Products

Packaging: Firm delays first shipments of biodegradable containers to McDonald's, and its shares pay a price.


EarthShell Corp., which attracted investors a year ago with promises of biodegradable sandwich and coffee containers, saw its shares drop 17% on Wednesday after the firm said it will delay its first shipment to McDonald's Corp.

EarthShell, headquartered in Santa Barbara until late last year, makes food packaging from biodegradable materials such as limestone and recycled potato starch.

At the time of its initial public offering last year, EarthShell said it would begin shipping its products to the fast-food giant by the end of March this year.

EarthShell shares fell $2.06 on Wednesday to close at $9.75 on Nasdaq. The Baltimore-based company's shares have dropped more than 50% from their IPO price of $21. Salomon Smith Barney and Credit Suisse First Boston underwrote the deal.

EarthShell, which has a three-year contract with McDonald's, its key customer, said Wednesday it needs more time to ready production lines that will make the sandwich packaging.

Company officials said there were some cracks in the containers and other glitches.

One analyst reached Wednesday who did not want to be named said the shipping deadline was self-imposed by EarthShell and did not break any contractual agreement with McDonald's.

"While publicly, they've missed a major milestone, it's not going to hurt them contractually. McDonald's is still on board," the analyst said.

William F. Spengler, Earth-Shell's chief financial officer, promised shipments would begin in the second quarter.

"While an important milestone for us to meet to establish confidence in the public markets, it's more important for us to make sure the commercialization process is ready," he said.

Spengler, who was hired in January, said the company has made progress in the last 12 months.

"We've come a tremendous way," he said. "We've brought in a whole range of seasoned management and come awfully close to hitting a milestone established by people who did not have the input of those with management expertise."

Although EarthShell moved its headquarters to Baltimore, its parent company, E. Khashoggi Industries, which owns about a 70% stake, is still located in Santa Barbara, as are many of the firm's research facilities.

Chairman Essam Khashoggi is the younger brother of Adnan Khashoggi, a key middleman in secret White House arm sales to Iran during 1985-86.


Coming to Earth

Since its initial public offering at $21 a year ago, EarthShell has been a poor performer. On Wednesday, the stock dropped 17%. Weekly closes and latest:

Wednesday: $9.75

Source: Bloomberg News

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