SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
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EARTHSHELL CORPORATION
(Name of Registrant as Specified in its Charter)
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Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
EARTHSHELL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 21, 2005
The 2005 Annual Meeting of Stockholders of EarthShell Corporation (the
"Company") will be held at the Hotel Andalucia, located at 31 W. Carrillo
Street, Santa Barbara, California on July 21, 2005 at 10:00 a.m. Pacific
Daylight Time, for the purposes of:
(1) Electing six directors to serve until the 2006 annual meeting
of stockholders and until their successors are elected and
have qualified;
(2) Transacting such other business as may properly come before
the meeting and at any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on May 25, 2005 as
the record date for the determination of stockholders who are entitled to
receive notice of, and to vote at, the Annual Meeting and any adjournments or
postponements thereof. You are cordially invited to attend the meeting in
person. Whether or not you expect to attend, please sign and date the enclosed
proxy and return it as promptly as possible in the enclosed self-addressed,
postage-prepaid envelope. If you attend the Annual Meeting and wish to vote in
person, your proxy will not be used as long as you have notified the Secretary
in writing of your intention to revoke your proxy before it has been voted.
If you received your annual meeting materials by mail, the notice of
annual meeting, proxy statement and proxy card are enclosed. If you received
your annual meeting materials via e-mail, the e-mail contains voting
instructions and links to the annual report and the proxy statement on the
Internet, which are both available at www.proxyvote.com.
You will note from the enclosed proxy materials that our co-founder, Essam
Khashoggi, has decided not to seek re-election to the Board of Directors this
year. Mr. Khashoggi will continue to be available to the Company in the future
as needed. The Company wants to take this opportunity to express its
appreciation for all of the contributions of Mr. Khashoggi during the past years
and particularly for supporting the Company through its critical stages of
development.
By Order of the Board of Directors
/s/ D. Scott Houston
D. Scott Houston
Secretary
Santa Barbara, California
EARTHSHELL CORPORATION
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PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JULY 21, 2005
This Proxy Statement is furnished to the stockholders of EarthShell
Corporation, a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
2005 Annual Meeting of Stockholders (the "Annual Meeting") to be held at the
Hotel Andalucia, 31 W. Carrillo Street, Santa Barbara, California, at 10:00 a.m.
Pacific Daylight Time, on July 21, 2005, and at any and all adjournments or
postponements thereof. This Proxy Statement and the form of proxy will be mailed
on or about June 29, 2005 to all stockholders entitled to vote at the Annual
Meeting.
The cost of the solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, directors and officers of the Company, without
receiving any additional compensation, may solicit proxies personally or by
telephone or telegraph. The Company will request brokerage houses, banks, and
other custodians or nominees holding stock in their names for others to forward
proxy materials to their customers or principals who are the beneficial owners
of shares and will reimburse them for their expenses in doing so. The Company
has retained the services of U.S. Stock Transfer Corporation to assist in the
solicitation of proxies from brokerage houses, banks and other custodians or
nominees holding stock in their names for others.
Record Date and Voting
On May 25, 2005, the record date for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting, the Company had
18,435,4542 shares of common stock, par value $0.01 per share ("Common Stock"),
outstanding. Presence at the Annual Meeting, in person or by proxy, of a
majority of the outstanding shares of Common Stock will constitute a quorum for
the transaction of business at the Annual Meeting or any adjournment thereof.
Abstentions or broker non-votes are counted for purposes of determining the
presence of a quorum for transaction of business. With regard to the election of
directors, votes may be cast in favor or withheld; votes that are withheld will
be excluded entirely from the vote and will have no effect. Broker non-votes are
shares which are represented at the Annual Meeting which a broker or nominee has
indicated it does not have discretionary authority to vote. A broker non-vote
will generally have the effect of a negative vote.
Each such share of Common Stock is entitled to one vote on all matters
properly brought before the meeting. The vote of a plurality of the shares cast
in person or by proxy is required to elect a nominee for director. With respect
to the election of each director at the Annual Meeting, each holder of Common
Stock is entitled to vote the number of shares owned by such stockholder. The
nominees who receive the greatest number of votes shall be elected to fill the
vacancies on the Board. Stockholders are not permitted to cumulate their shares
of Common Stock for the purpose of electing directors or otherwise.
Simon K. Hodson and D. Scott Houston, the persons named as proxy holders
on the proxy card accompanying this Proxy Statement, were selected by the Board
of Directors to serve in that capacity. Mr. Hodson is a director of the Company.
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Unless contrary instructions are indicated on the proxy, all shares of
Common Stock represented by valid proxies received pursuant to this solicitation
(and not revoked in writing before they are voted) will be voted at the Annual
Meeting FOR the nominees named below for election as directors. With respect to
any other business, which may properly come before the Annual Meeting and be
submitted to a vote of stockholders, proxies received by the Board of Directors
will be voted in accordance with the best judgment of the designated proxy
holders. Under the Company's Bylaws, stockholder proposals and nominations for
persons for elections to the Board, other than those made by or at the direction
of the Board, may be made at the Annual Meeting only pursuant to a timely notice
in writing delivered or mailed to the Secretary of the Company at the Company's
offices at 3916 State Street, Suite 110, Santa Barbara, California 93105 not
later than the tenth day following the first public announcement of the Annual
Meeting. A stockholder may revoke his or her proxy at any time before exercise
by delivering to the Secretary of the Company a written notice of such
revocation, by filing with the Secretary of the Company a duly executed proxy
bearing a later date, or by voting in person at the Annual Meeting, provided
that, in accordance with the Company's Bylaws, the stockholder has delivered to
the Secretary a written notice of the stockholder's intention to revoke the
proxy and vote in person prior to the voting of the proxy.
ELECTION OF DIRECTORS
The Board of Directors of the Company is currently comprised of seven
members, four of whom will be standing for re-election and three of whom will
not be standing for re-election. Two new director nominees have been nominated
to replace those directors who are not standing for re-election. The Board of
Directors plans to continue to search for another candidate who can be nominated
to sit on the Board as an independent director. All directors are elected each
year at the annual meeting of stockholders. In the absence of instructions to
the contrary, the persons named as proxy holders in the accompanying proxy
intend to vote in favor of the election of the nominees designated below to
serve until the next annual meeting of stockholders and until their respective
successors shall have been elected and qualified. The Board of Directors expects
that each of the nominees will be available to serve as a director. If any
nominee should become unavailable for election, the shares of Common Stock
represented by the enclosed proxy may (unless such proxy contains instructions
to the contrary) be voted for such other person or persons as may be determined
by the proxy holders. Each of the nominee directors have been nominated by the
Board of Directors.
The following table sets forth the name and age of each director nominated
for election at the Annual Meeting, the year the director was first elected and
his or her position with the Company:
Name Age Position Director Since
---- --- -------- --------------
Simon K. Hodson.......... 50 Vice Chairman of the Board and Chief Executive Officer 1992
Hamlin M. Jennings....... 57 Director 2003
Walker Rast.............. 69 Director 2003
Michael C. Gordon........ 69 Director nominee 2005
D. Scott Houston......... 50 Director nominee and Chief Financial Officer --
Vincent J. Truant ....... 57 Director nominee, President and Chief Operating Officer --
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The following is a biographical summary of the experience of each of the
director nominees and those current directors who are not standing for
re-election:
Director Nominees
Simon K. Hodson has served as Vice Chairman of the Board and Chief
Executive Officer of the Company since its organization in November 1992.
Additionally, Mr. Hodson served as President of the Company from May 1999 until
May 2002, and previously from December 1995 until May 1996. Mr. Hodson has also
served as President and Vice Chairman of E. Khashoggi Industries, LLC ("EKI")
and its predecessor entity since its organization in June 1991 and as President
and Vice Chairman of Concrete Technology Corporation ("CTC") since August 1987.
Mr. Hodson was President of National Cement & Ceramics Laboratories, Inc., a
company previously engaged in materials science research, from June 1990 through
1995. He is a co-inventor of a number of U.S. and foreign patented inventions,
all belonging to EKI.
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Hamlin M. Jennings has served as a Director of the Company since January
2003. Since 1987, Dr. Jennings has been a Professor in the Civil and
Environmental Engineering Department and the Materials Sciences and Engineering
Department at Northwestern University. In 2002, he assumed the Chairmanship of
the Civil and Environmental Engineering Department. Prior to his appointment at
Northwestern, Dr. Jennings worked at the National Institute of Standards and
Technology, Imperial College London, and the University of Cape Town. He is a
fellow of the Institute of Materials in the United Kingdom and Fellow of the
American Ceramic Society. Additionally, Dr. Jennings is owner and President of
Evanston Materials Consulting Corporation, founded in 1997, which specializes in
cement-based materials and coatings. Dr. Jennings holds 12 patents, is the
associate editor of two journals and has published over 120 scientific papers.
Walker Rast has served as a Director of the Company since September 2003.
Mr. Rast is currently a business consultant and a member of the Educational
Foundation Board of the University of South Carolina and a member of the
Advisory Board of the College of Engineering and Information Technology. From
1994 to the present, Mr. Rast was a founding member and major stockholder in two
startup companies using technology jointly developed with the University of
South Carolina. One company has developed sea and inland water purification with
zero waste discharge. The other is developing a new method for hydrogen
production. From 1987 to 1994, Mr. Rast was a member of the Executive Board of
Directors of Royal Packaging Industries Van Leer, a worldwide packaging company
based in the Netherlands. From 1979 to 1987, Mr. Rast was Chairman and CEO of
Keyes Fibre Company (now known as The Chinet Company), first an operating group
of Arcata Corporation and then of Royal Packaging Industries Van Leer. Mr. Rast
held various domestic and international executive positions with Van Leer and
Arcata Corporation for over ten years, and was previously with U.S. Gypsum
Corporation for eleven years.
Michael C. Gordon was appointed to the Board of Directors in June 2005.
Mr. Gordon is currently the Director of SEC Services for Gumbiner Savett Inc.,
Certified Public Accountants and Business Advisors. From 1990 through 2001, Mr.
Gordon was an audit partner with BDO Seidman, where he was in charge of the
audit department of the Los Angeles office. From 1977 to 1990, he was an audit
partner with Laventhol and Horwath where he was also in charge of the audit
department of the Los Angeles office. Prior to 1977, he was an audit partner
with Arthur Young & Company. Mr. Gordon has over forty years of public
accounting, SEC, and financial reporting experience. The Board of Directors has
determined that Mr. Gordon qualifies as an "audit committee financial expert" as
that term is defined in Item 401(h)(2) of Regulation S-K in the Securities
Exchange Act of 1934. Mr. Gordon is serving as Chairman of the Audit Committee.
D. Scott Houston has served as the Company's Chief Financial Officer since
October 1999, and the Company's Secretary since December 1999. From January to
October 1999, Mr. Houston served as Senior Vice President of Corporate Planning
and Assistant Secretary. From July 1993 until January 1999, Mr. Houston served
as Chief Financial Officer. From August 1986 until joining the Company, he held
various positions with EKI and its affiliates, including Chief Financial Officer
and Vice President of CTC from 1986 to 1990. From 1984 to 1986, Mr. Houston
operated Houston & Associates, a consulting firm. From July 1980 until September
1983, Mr. Houston held various positions with the Management Information
Consulting Division of Arthur Andersen & Co., an international accounting and
consulting firm.
Vincent J. Truant has served as the Company's President and Chief
Operating Officer since May 15, 2002. From March 2001 to May 2002, Mr. Truant
served as Senior Vice President and Chief Marketing Officer. From October 1999
to March 2001, and from March 1999 to October 1999, respectively, he served as
Senior Vice President and as Vice President of Marketing, Environmental Affairs
and Public Relations, and from April 1998 to March 1999 as Vice President of
Marketing and Sales. During a prior 15-year tenure at Sweetheart Cup Company
("Sweetheart"), Mr. Truant served as Vice President and General Manager for the
National Accounts Group and the McDonald's Corporation Strategic Business Units.
Before joining Sweetheart, Mr. Truant was engaged in both domestic and
international marketing assignments for Philip Morris Inc. and its subsidiary,
Miller Brewing Company, as well as Eli Lilly & Company.
Retiring Directors
Essam Khashoggi, John Daoud, and Layla Khashoggi have served as directors since
the Company's inception in November 1992 but are not standing for re-election.
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Essam Khashoggi has served as Chairman of the Board of the Company since
its organization in November 1992. Mr. Khashoggi has also served as Chief
Executive Officer of EKI and its predecessor entity, E. Khashoggi Industries,
since its organization in June 1991. Mr. Khashoggi has served as a director and
officer of a number of domestic and foreign companies engaged in licensing,
manufacturing, real estate, marketing and design and he has served as a Trustee
for the University of California Santa Barbara Foundation.
John Daoud has served as Secretary of the Company from October 1996
through December 1999 and as the Assistant Secretary of the Company from June
1993 until October 1996. Mr. Daoud has also served as the Chief Financial
Officer and Secretary of EKI and its predecessor entity since its organization
in June 1991 and as the Manager and Principal Officer of Condas International,
LLC and its predecessor from 1987 through October 2003. Since 1972, Mr. Daoud
has advised Mr. Khashoggi and his affiliated entities on certain financial
matters both in an individual capacity as well as Manager and Principal Officer
of Condas International, LLC and its predecessor.
Layla Khashoggi has been a member of the Management Committee of EKI since
October 1997 and a Director of CTC for the past five years. Mrs. Khashoggi has
served as Chairman of the Development Committee and as an Executive Committee
member of the Board of Laguna Blanca School, Site Council Member and Co-Chairman
of the Budget Committee of San Marcos High School, Executive Committee member
and Chairman of the Marketing Committee of the Santa Barbara Zoo Board, and
member of the Board of Trustees of the Santa Barbara Public Education
Foundation. Mrs. Khashoggi is Essam Khashoggi's spouse.
Director Nominating Process
The Board's policy with respect to director nominations is to assess the
appropriate size of the Board, and whether any vacancies are expected due to
retirement or otherwise. In the event that vacancies are anticipated, or
otherwise arise, the Board considers various potential candidates for director.
The Board also considers properly submitted stockholder nominations for
candidacy for director.
The Board utilizes a variety of methods for identifying and evaluating
director candidates. Candidates may come to the attention of the Board through
its current members, stockholders or other persons. These candidates are
evaluated at regular or special meetings, and may be considered at any point
during the year. In evaluating all nominees, the Board considers a variety of
criteria, including business experience and skills, independence, judgment,
integrity, the ability to commit sufficient time and attention to Board
activities and the absence of potential conflicts with the Company's interests
Any stockholder nominations proposed for consideration by the Board should
include the nominee's name and qualifications for Board membership and should be
addressed to EarthShell Corporation, 3916 State Street, Suite 110, Santa Barbara
California 93105, Attention: Board of Directors. Following verification of the
stockholder status of persons recommending candidates to the Board,
recommendations are aggregated and considered by the Board at a regularly
scheduled meeting. If any materials are provided by a stockholder in connection
with the nomination of a director candidate, such materials are forwarded to the
Board.
Committees of the Board of Directors
The Board maintains five standing committees: the Executive Committee, the
Audit Committee, the Compensation Committee, the Stock Option Committee and the
Conflicts Committee. The Company does not have a standing Nominating Committee,
as the Board believes that the process is best conducted by the entire Board of
Directors. Therefore, the Board performs the functions of the nominating
committee and the Company does not have a written charter for such a committee.
Director nominees are recommended to the full Board by Management with the full
Board nominating the candidates for directors. The committees are presently
comprised of the following directors:
Executive Audit Compensation
Committee Committee Committee
--------------------- ------------------- -------------------------
Mr. Khashoggi (chair) Mr. Gordon (chair) Mr. Khashoggi (chair)
Mr. Daoud Mr. Rast Mrs. Khashoggi
Mr. Hodson Dr. Jennings vacancy
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Stock Option Conflicts
Committee Committee
----------------------------------- --------------------------------
Mr. Khashoggi (chair) Dr. Jennings (chair)
vacancy Mr. Rast
vacancy
Executive Committee
The Executive Committee held frequent meetings in 2004, and at times took
action by unanimous written consent in lieu of meetings. The primary function of
the Executive Committee is to perform all of the duties otherwise vested in the
Board of Directors when the Board is not in session, except for the following
matters which have not been delegated to the Executive Committee: (1) declaring
cash or stock dividends or distributions to stockholders of the Company; (2)
taking action on matters otherwise specifically delegated to other committees of
the Board of Directors; (3) amending or repealing the Certificate of
Incorporation or Bylaws of the Company, or adopting new ones; (4) approving a
plan of merger, acquisition or divestiture or sale, lease or exchange of
substantially all of the business, properties or assets of the Company; (5)
authorizing or approving the issuance or sale of shares of stock of the Company;
(6) authorizing the Company to perform or make a contract or commitment that
requires a financial commitment by the Company exceeding the applicable amount
budgeted under the operating budget or capital budget approved by the Board of
Directors, if such contract or commitment, together with any other such contract
or commitment, involves a payment by the Company of more than $1 million in the
aggregate; and (7) electing or removing officers, directors or members of any
committee of the Board of Directors. The Executive Committee functions according
to a written charter.
Compensation Committee
The Compensation Committee held 2 meetings in 2004. The functions of the
Compensation Committee include: (1) reviewing and recommending to the Board of
Directors the annual base salary, bonus and other benefits for each of the
senior executive officers of the Company; (2) reviewing and commenting on new
executive compensation programs that the Company proposes to adopt; (3)
periodically reviewing the results of the Company's executive compensation and
perquisite programs to ensure that they are properly coordinated to yield
payments and benefits that are reasonably related to executive performance; (4)
helping to ensure that a significant portion of executive compensation is
reasonably related to the long-term interests of the stockholders; (5)
participating in the preparation of certain portions of the Company's annual
proxy statement; (6) hiring a compensation expert to provide independent advice
on compensation levels, if necessary; and (7) helping to ensure that the Company
undertakes appropriate planning for management succession and advancement. The
Compensation Committee operates according to a written charter.
Audit Committee
The Audit Committee held 4 meetings in 2004. The Company's Board of
Directors has adopted a written charter for the Audit Committee. The Audit
Committee charter, last amended on March 26, 2003, outlines the functions of the
Audit Committee, which include: (1) engaging an accounting firm to act as the
Company's independent external auditor (the "Auditor"); (2) determining the
Auditor's compensation, the proposed terms of its engagement, its independence
from the Company and its performance during each year of its engagement; (3)
reviewing the Company's annual financial statements and significant disputes, if
any, between management of the Company and the Auditor that arise in connection
with the preparation of those financial statements; (4) reviewing the results of
each external audit; (5) reviewing the procedures employed by the Company in
preparing published quarterly financial statements and related management
commentaries; (6) reviewing any major changes proposed to be made in auditing
and accounting principles and practices in connection with the Company's
financial statements; (7) reviewing the adequacy of the Company's internal
financial controls; and (8) if the Company appoints a Director of Internal
Audit, meeting periodically with that person to evaluate compliance with the
foregoing duties.
The Company's audit committee is to be comprised of at least three
independent Directors. Mr. Gordon serves as chairman of the Audit Committee. The
Board of Directors has determined that Mr. Gordon is an "audit committee
financial expert" as that term is defined in Item 401(h)(2) of Regulation S-K in
the Securities Exchange Act of 1934. The committee is currently comprised of Mr.
Gordon, Dr. Hamlin Jennings and Mr. Walker Rast, each of whom are independent
directors within the meaning of the National Association of Securities Dealers'
listing standards.
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Stock Option Committee
The Stock Option Committee held 2 meetings in 2004. The Stock Option
Committee is responsible for administering the Company's 1994 Stock Option Plan
and 1995 Stock Incentive Plan (the "Plans") including, without limitation, the
following: (1) adopting, amending and rescinding rules relating to the Plans;
(2) determining who may participate in the Plans and what awards may be granted
to such participants; (3) granting awards to participants and determining the
terms and conditions thereof, including the number of shares of Common Stock
issuable pursuant to the awards; (4) determining the terms and conditions of
options automatically granted to directors pursuant to the Plans; (5)
determining whether and the extent to which adjustments are required pursuant to
the anti-dilution provisions of the Plans; and (6) interpreting and construing
the Plans and the terms and conditions of any awards granted thereunder.
Conflicts Committee
The Conflicts Committee held 2 meetings in 2004. The functions of the Conflicts
Committee include reviewing potential related party or conflict of interest
transactions to (1) determine whether each such transaction is on at least as
favorable terms to the Company as might be available from other third parties,
(2) determine whether such transactions are reasonably likely to further the
Company's business activities and interests, (3) determine whether the process
by which the decision to enter into such transactions was approved or ratified
and is fair, (4) help ensure that all such transactions are disclosed in the
Company's filings with the Securities and Exchange Commission as necessary and
(5) if necessary, retain an independent expert to determine the advisability of
the Company's entering into such transactions, and to determine fair terms for
such transactions. The Conflicts Committee operates according to a written
charter.
Board and Committee Attendance and Compensation
In 2004 the Board of Directors held 14 meetings. All directors attended at
least 75% of the Board meetings and the meetings of the committees on which they
served.
Independent Auditors
The Company has selected Farber & Hass LLP as its auditors for fiscal year
2005. Representatives from Farber & Hass LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they desire
to do so and to respond to appropriate questions.
The Audit Committee pre-approved the engagement of Farber & Hass LLP to
provide both audit and tax services for the fiscal year ended December 31, 2004,
including the quarterly reviews for the three quarters of 2004. Farber & Hass
LLP provided no other audit services, audit-related services, tax services or
permitted non-audit services for and during the fiscal year ended December 31,
2004 except for the statutory audit of the Company's benefit plan for the year
ended December 31, 2003 and the analysis of the Company's net operating loss
carry forward. The Audit Committee adopted a pre-approval policy relating to
audit services for all audit-related services, tax services and non-audit
services to be performed by its auditors from 2004 onward.
During the fiscal years ended December 31, 2004 and 2003, the following
audit, audit-related, tax and other fees were incurred by the Company:
Audit Fees. For the year ended December 31, 2004, Farber & Hass LLP
charged the Company an aggregate of approximately $ 78,600 for professional
services rendered for the 2004 audit of the Company's financial statements and
the review of the financial statements included in the Company's quarterly
reports on Form 10-Q for the three quarters of 2004. For the year ended December
31, 2003, Farber & Hass LLP charged the Company an aggregate of $59,710 for
professional services rendered for the 2003 audit of the Company's financial
statements and the review of the financial statements included in the Company's
quarterly reports on Form 10-Q for the quarters ended June 30, 2003 and
September 30, 2003. In addition, the Company paid to Deloitte & Touche, LLP, the
Company's prior independent public accountants, an aggregate of approximately
$16,800 for professional services rendered in connection with the inclusion of
their audit opinions related to the 2002 and 2001 audits in the Company's
December 31, 2003 Form 10-K and the review of the financial statements included
in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003.
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Audit-Related Fees. During the year ended December 31, 2004, the Company
incurred no fees for services related to Farber & Hass LLP's review of the
Company's financial statements included in various SEC documents that are not
included in "Audit Fees", and Farber & Hass LLP charged the Company $4,500 for
benefit plan statutory audits. During the year ended December 31, 2003, the
Company incurred fees of $28,750 for assurance and related services related to
Deloitte & Touche, LLP's review of the Company's financial statements included
in various SEC documents that are not included in "Audit Fees", and Farber &
Hass LLP charged the Company $6,500 for benefit plan statutory audits.
Tax Fees. During the year ended December 31, 2004, the Company incurred
fees of $6,400 for Farber & Hass LLP's preparation of its tax returns. During
the year ended December 31, 2003, the Company incurred fees of $16,243 to
Deloitte & Touche, LLP for tax return preparation.
All Other Fees. During the year ended December 31, 2003, the Company
engaged Deloitte & Touche, LLP to analyze the performance of certain
manufacturing equipment the Company had installed in Germany for a fee of
$16,487.
Audit Committee Report
The Audit Committee reviews the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the internal
control system. The Company's independent auditors are responsible for
expressing an opinion on the conformity of our audited financial statements to
generally accepted accounting principles.
In this context, the Audit Committee has reviewed and discussed the
audited financial statements with management and the independent auditors, and
has also discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees). The Audit Committee also received from the independent auditors the
written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and discussed with them their
independence from the Company and its management. The Audit Committee has
further considered whether, and determined that, the independent auditors'
provision of non-audit services to the Company is compatible with the firm's
independence.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committee:
Dr. Hamlin Jennings
Mr. Walker Rast
The above report of the Audit Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not be deemed
filed under such Acts.
Compensation of Directors
Under a compensation plan based on a study conducted by SCA Consulting
LLC, the Board pays to each non-employee director an annual retainer fee of
$20,000, payable quarterly, plus a fee of $1,000 for each regular meeting
attended in person. Committee chairpersons receive an additional $1,000 per
year. All of the directors, except for Mr. Hodson, are currently considered to
be non-employee directors of the Company.
8
The 1995 Stock Incentive Plan provides that each non-employee Director
automatically be granted options to purchase 2,083 shares of the Company's
Common Stock, effective at the conclusion of each annual meeting. All such stock
options (i) vest ratably at 25% at the end of each calendar quarter following
the grant, provided the director holding the options continues to serve as a
director at the end of each such quarter, and (ii) have an exercise price equal
to the "fair market value" of the underlying shares, which is defined in the
1995 Stock Incentive Plan as the closing trading price on the day before such
annual meeting.
In April 2004, based on the financial condition of the Company, the Board
of Directors unanimously agreed to defer the payment of the director fees
discussed above until such time as the financial condition of the Company
improves. Certain of the deferred directors' fees have been paid subsequent to
December 31, 2004. As of June 15, 2005, the Company had outstanding accrued and
unpaid directors' fees of approximately $110,000. In June 2005, the Board
granted to each of the Company's non-employee Directors who have served during
the past year 10,000 restricted shares of the Company's common stock
In June, 2005, Mr. Gordon was appointed to the Board to fill the vacancy
created by the resignation of Dr. Roland. Mr. Gordon received an initial grant
of 10,000 restricted shares of the Company's common stock.
9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of each class of the Company's voting securities as of June
2, 2005, by (i) each person or company known by the Company to be the beneficial
owner of more than 5% of the Company's outstanding shares, (ii) each director of
the Company, or any nominee for directorship, (iii) each of (a) the Chief
Executive Officer of the Company, (b) the Company's executive officers as of
December 31, 2004 and (c) two additional individuals who were not executive
officers as of the year ended December 31, 2004 (each, a "Named Executive
Officer"), and (iv) all directors and Named Executive Officers of the Company as
a group.
Percentage of Shares
Number of Shares of of Common Stock
Name and address (1) Common Stock Outstanding (2)
Essam Khashoggi (3) 7,664,449 39.25%
Simon K. Hodson (4) 4,500 *
John Daoud (5) 37,077 *
Layla Khashoggi (6) 9,894 *
Hamlin Jennings (7) 4,513 *
Walker Rast (8) 1,562 *
Vincent J. Truant (9) 37,083 *
D. Scott Houston (10) 44,120 *
John Nevling (11) 2,916 *
Michael Gordon 0 *
Directors and Named Executive
Officers as a group 7,806,114 39.70%
E. Khashoggi Industries, LLC (12) 6,720,891 34.43%
----------
* Indicates ownership of less than 1%.
(1) The address of all individuals, entities and stockholder groups listed in
the table is c/o EarthShell Corporation, 3916 State St. Suite 110, Santa
Barbara, California 93105.
(2) Applicable percentage of ownership is based on 18,435,452 shares of common
stock outstanding as of June 2, 2005, together with securities exercisable
or convertible into shares of common stock within 60 days of June 2, 2005,
for each stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Shares of
common stock subject to securities exercisable or convertible into shares
of common stock that are currently exercisable or exercisable within 60
days of June 2, 2005 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. The
table does not include options that are subject to certain milestones that
have not yet been accomplished.
(3) Includes 5,637,558 shares held by EKI and 715,436 shares held by
EKINVESCO, the controlling owner of each being Mr. Khashoggi. Includes
218,228 shares held by other entities, including CTC, in which Mr.
Khashoggi also has a controlling ownership interest. Also includes fully
exercisable options to purchase 9,894 shares of Common Stock issued by the
Company to Mr. Khashoggi and warrants held by EKI to purchase 1,083,333
shares of Common Stock of the Company. Mr. Khashoggi has sole voting and
dispositive power with respect to all shares referenced in this note, and
is therefore deemed to be the beneficial owner of such shares.
(4) Mr. Hodson holds a minority ownership interest in EKI and CTC. This does
not include any of the shares held by EKI
(5) Includes options to purchase 25,000 shares of Common Stock from EKI which
were granted to Mr. Daoud in his capacity as an officer of EKI, and
options to purchase 12,077 shares of Common Stock granted under the 1995
Stock Incentive Plan, all of which are fully vested and exercisable.
(6) Includes options to purchase 9,894 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable, but
does not include the shares held by her husband, Mr. Khashoggi.
(7) Includes options to purchase 4,513 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
(8) Includes options to purchase 1,562 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
10
(9) Includes options to purchase 32,917 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
(10) Includes options to purchase 42,037 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
(11) Includes options to purchase 2,916 shares of Common Stock granted under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
(12) Includes all of the shares owned and issuable under stock options and
warrants which are reflected in this table as attributable to Mr.
Khashoggi.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of each of
the Company's executive officers. Subject to rights under applicable employment
agreements, executive officers of the Company serve at the pleasure of the Board
of Directors.
Name Age Position Officer Since
---- --- -------- -------------
Simon K. Hodson.......... 50 Vice Chairman of the Board and Chief Executive Officer 1992
D. Scott Houston......... 50 Chief Financial Officer and Secretary 1993
Vincent J. Truant........ 57 President and Chief Operating Officer 1998
----------
For a biographical summary of the experience of Messrs. Hodson, Houston
and Truant, please refer to the summaries of Directors' experience provided
above.
11
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to the
compensation of the Named Executive Officers. The Company did not grant any
restricted stock awards or stock appreciation rights or make any long-term
incentive plan payouts during the periods set forth below.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
------------------------------------------------ ------------------------
Fiscal year Other Annual Securities Underlying
Name and Ended Salary Bonus Compensation Options
Principal Position December 31 ($) ($) ($)(1) (#)
Simon K. Hodson 2004 $500,000(2) $ -- 2,750 400,000
Vice Chairman of the Board 2003 500,000 -- 2,250 41,667(4)
and Chief Executive Officer 2002 500,000 -- 2,500 41,667(5)
Vincent J. Truant 2004 350,000 -- 2,625 50,000
President and Chief 2003 350,000 -- 3,063 20,833(4)
Operating Officer 2002 321,875(3) -- 2,844 29,167(5)
D. Scott Houston (6) 2004 327,200 -- 3,590 50,000
Chief Financial Officer 2003 327,200 -- 2,454 20,833(4)
and Secretary 2002 327,200 -- 2,419 26,667(5)
John B. Nevling (7) 2004 116,363 -- 2,677 50,000
V.P. Product Management 2003 104,565 -- 3,135 --
and Environmental Affairs 2002 101,000 -- 3,030 --
Michael P. Hawks (8) 2004 110,000 -- -- 35,000
Principal Accounting Officer 2003 60,849 -- -- 4,167
2002 -- -- -- --
----------
(1) Reflects payments under the Company's 401(k) plan. The Company provides
various perquisites to its executives which, in accordance with SEC
regulations, are not itemized because their value is less than 10% of an
executive's salary.
(2) Includes $141,667 deferred salary. (See Employment Agreements and
Arrangements)
(3) Reflects a mid-year salary adjustment effective May 16, 2002 as a result
of Mr. Truant's becoming President of the Company on that date.
(4) This option grant is only exercisable upon the successful completion of a
sale of the Company.
(5) This option grant is only exercisable at such time as the share price of
the volume weighted average price of the common stock of the Company shall
be at or above $36 per share for at least 90 days.
(6) Includes $142,222 deferred salary in 2004 and $7,200 in car allowance
payments made to Mr. Houston in 2002, 2003, and 2004. (See "Employment
Agreements and Arrangements")
(7) Mr. Nevling was not considered to be an executive officer of the Company.
He resigned from his position with the Company in March 2005 and his
options expired 30 days following his resignation.
(8) Mr. Hawks resigned from his position with the Company in October 2004 and
his options expired 30 days following his resignation. He was a temporary
employee through an agency through June 30, 2003. In addition to his
salary for the remainder of 2003, the Company paid the agency $68,547 in
fees for his services from January 1 - June 30, 2003.
12
Stock Option Grants in 2004
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in 2004 to the Named
Executive Officers:
Potential Realizable Value at
Assumed Rates of Stock
Appreciation for Option Term
Individual Grants (1)
------------------------------------------ ------------------------------------------
Number of % of Total
Shares Options
Underlying Granted to Exercise
Name and Options Employees Price Expiration
Principal Position Granted (2) in 2004 (per share) Date 5% 10%
---------------------------- ---------- ----------- ----------- ----------- ------------ -------------
Simon K. Hodson 400,000 52.5% $ 0.75 6/25/2014 $ 488,668 $ 778,123
Vice Chairman of the
Board and Chief
Executive Officer
Vincent J. Truant 50,000 6.6% $ 0.75 6/25/2014 $ 61,084 $ 97.265
President and Chief
Operating Officer
50,000(3) 6.6% $ 0.75 6/25/2014 $ 61,084 $ 97.265
D. Scott Houston
Chief Financial Officer
and Secretary
John Nevling 50,000(4) 6.6% $ 0.75(4) -- --
Vice President of Product
Management and
Environmental Affairs
Michael Hawks 35,000(4) 4.6% $ 0.75(4) -- --
Principal Accounting
Officer
----------
(1) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. In each case, the
Company would use the market price of the Common Stock on the date of
grant to compute the potential realizable values. All options granted in
2004 were granted at the then existing market price of $0.75 per share.
(2) Except for Mr. Houston, the options granted to executives in 2004 become
vested and exercisable upon the completion by the Company of certain key
milestones, including 1) that the Company's plates and bowls are supplied
by a licensee to a customer at a level equivalent to the level that would
be required by 1,500 Wal Mart stores for a consecutive period of no less
than three months, and 2) the product supply economics must be consistent
with the License Agreement between EarthShell and the Licensee including
royalty structure.
(3) The options granted to Mr. Houston become vested and exercisable upon 1)
resolution of all past due payables for not more than $800,000, and 2) a
resolution of all pending litigation related to payables.
(4) When initially granted, these options had an expiration date of June 25,
2014, but expired early 30 days following the date of resignation.
13
Aggregated Option Exercises In 2004 and 2004 Year-End Option Values
The following table sets forth for the Named Executive Officers
information with respect to options exercised, unexercised options and year-end
option values, in each case with respect to options to purchase shares of the
Company's Common Stock.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at Fiscal Year End Fiscal
2004 Year End 2004 (1)
Shares ------------------------------ ---------------------------
Name and Acquired on Value
Principal Position Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
------------------ ----------- -------- ------------- ----------- ------------- -----------
Simon K. Hodson -- -- 483,334 -- $680,000 --
Vice Chairman of the
Board and Chief
Executive Officer
Vincent J. Truant -- -- 100,000 32,917 $ 85,000 --
President and Chief
Operating Officer
D. Scott Houston -- -- 97,500 42,037 $ 85,00 --
Chief Financial Officer
and Secretary
John Nevling -- -- 50,000 2,916 $ 85,000 --
Vice President of Product
Management and
Environmental Affairs
Michael Hawks -- -- -- -- -- --
Principal Accounting
Officer
----------
(1) The market price of the Company's common stock at December 31, 2004 was
$2.45.
Employment Agreements and Arrangements
Simon Hodson currently does not have a written employment agreement with
the Company. His previous employment agreement expired on September 30, 2001.
Mr. Hodson receives an annual salary of $500,000, subject to annual review and
increase at the discretion of the Board of Directors. He may also be entitled to
receive (i) an annual bonus, the amount of which is determined by the
Compensation Committee and (ii) options or other rights to acquire Common Stock,
under terms and conditions determined by the Stock Option Committee or the full
Board of Directors, as appropriate. Mr. Hodson may be terminated at any time
with or without cause. In order to conserve cash until the Company is able to
establish its royalty revenue stream, Mr. Hodson agreed to a 40% deferral of
base salary effective April 16, 2004 resulting in the deferral of $141,667 for
the year ended December 31, 2004.
D. Scott Houston entered into a written employment agreement with the
Company on October 19, 1993. Mr. Houston receives an annual salary of $320,000,
subject to annual review and increase at the discretion of the Board of
Directors. He may also be entitled to receive (i) an annual bonus, the amount of
which is determined by the Compensation Committee and (ii) options or other
rights to acquire Common Stock, under terms and conditions determined by the
Stock Option Committee or the full Board of Directors, as appropriate. Mr.
Houston may be terminated at any time, with or without cause, upon thirty (30)
days notice. In order to conserve cash until the Company is able to establish
its royalty revenue stream, Mr. Houston voluntarily agreed to a 75% deferral of
base salary resulting in cash compensation of $80,000 per year effective April
16, 2004. As of October 16, 2004, the cash portion of Mr. Houston's salary was
adjusted to $213,333 per year. Total deferred compensation for the year ended
December 31, 2004 was $142,222 and as of May 31, 2005 was $186,667.
14
Vincent J. Truant entered into an employment agreement with the Company
with a commencement date of May 1, 1998. From time to time, Mr. Truant has
received salary increases and incentive stock options as determined by the
Compensation and Options Committees of the Board of Directors or the full Board
of Directors, as appropriate. Effective May 15, 2002, the Board increased Mr.
Truant's salary to $350,000 in connection with his new responsibilities as
President and Chief Operating Officer. Mr. Truant may also be entitled to
receive (i) an annual bonus in an amount equal to one year's base salary,
provided certain financial and other milestones determined by Mr. Truant and the
Compensation Committee are met by Mr. Truant and the Company and, in the event
such milestones are not met, or are significantly exceeded, such other lesser or
greater bonus as the Compensation Committee shall determine, and (ii) options or
other rights to acquire Common Stock, under terms and conditions determined by
the Stock Option Committee or the full Board of Directors, as appropriate.
Pursuant to the terms of his employment agreement, Mr. Truant may be terminated
at any time, with or without cause, upon thirty (30) days written notice,
provided that, if the Company terminates Mr. Truant's employment for other than
cause, he will be entitled to receive a one-time severance payment equal to 100%
of his then-current annual base salary.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who beneficially own more than 10%
of the Company's Common Stock to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the SEC. Officers, directors and greater than
10% beneficial owners are required by the SEC to furnish the Company with copies
of all Forms 3, 4 and 5 that they file. Based solely upon the Company's review
of the copies of such forms it has received, and certain other information
available to it, to the best of the Company's knowledge:
EKI, a 10% beneficial owner, did not timely file one report reporting
three conversions of debt. The conversions of debt were reported on November 15,
2004.
Mr. Khashoggi did not timely file one report reporting the gift of shares
of Common Stock to each of his three children and one report reporting three
conversions of debt by EKI, an affiliate of Mr. Khashoggi, described above. The
gift was reported on May 20, 2005 and the conversions of debt by EKI were
reported on November 10, 2004.
Mrs. Khashoggi did not timely file one report reporting her husband's gift
of shares of Common Stock reported above and one report reporting three
conversions of debt by EKI, an affiliate of Ms. Khashoggi, described above. The
gift was reported on May 20, 2005 and the conversions of debt by EKI were
reported on November 10, 2004.
Compensation Committee Interlocks and Insider Participation
All decisions relating to executive compensation during 2004 were made by
the Company's Compensation Committee, which was comprised of Mr. Khashoggi, Mrs.
Khashoggi and, until February 2, 2005 when he resigned, Dr. Roland or the Board
of Directors, as appropriate. None of the members of the Compensation Committee
were officers of the Company in 2004. Mr. Khashoggi is the controlling
stockholder of EKI, the Company's principal stockholder with whom the Company
has certain relationships and related transactions described below. Mr.
Khashoggi is the beneficial owner of 39.25% of the Common Stock of the Company.
The Company has an exclusive, worldwide, royalty-free license in
perpetuity 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).
15
On July 29, 2002, the Company entered into an amendment to its Amended and
Restated License Agreement with EKI for the license described above (the
"License Agreement") expanding the field of use for the EarthShell technology to
include noodle bowls used for packaging instant noodles, a worldwide market that
the Company estimates to be approximately $1 billion. Because the noodle bowl
development was made at no cost to EarthShell and is an incremental field of
use, EarthShell agreed to pay to EKI 50% of any royalty or other consideration
it receives in connection with the sale of products within this particular field
of use.
In addition, on July 29, 2002 the Company entered into a License &
Information Transfer Agreement with bio-tec Biologische Naturverpackungen GmbH &
Co. KG and bio-tec Biologische Naturverpackungen Forschungs und Entwicklungs
GmbH, together known as "Biotec", a wholly owned subsidiary of EKI, to utilize
Biotec's technology for foodservice disposable packaging applications, including
food wraps and cutlery (the "Biotec Agreement"). EKI had previously granted to
the Company priority rights to license certain product applications on an
exclusive basis from Biotec in consideration for the Company's payment of a
$100,000 minimum monthly payment to Biotec. In addition, in consideration of the
monthly payment, Biotec agreed to render technical services to the Company at
Biotec's cost plus 5%. The licensing fee and services arrangements continued
under the Biotec Agreement. Under the terms of the Biotec Agreement, Biotec is
entitled to receive 25% of any royalties or other consideration that the Company
receives in connection with the sale of products utilizing the Biotec
technology, after applying a credit for all minimum monthly payments received to
date. In connection with the issuance of the Company's 2% secured convertible
debentures (the "2006 Debentures"), Biotec agreed to subordinate the licensee
fee payments due from EarthShell until the debentures were retired.
During this period, the license fees due to Biotec were accrued. In
September of 2004, as part of an overall restructuring of its debt, EarthShell
and Biotec entered into an agreement to convert $1.475 million of the $2.475
million of accrued license fees as of September 1, 2004, plus accrued interest
into 491,778 shares of EarthShell common stock and to eliminate, for two years,
the $100,000 per month minimum license fee. In December 2004, the agreement was
amended and EarthShell paid to Biotec $125,000, leaving a balance owing of
$875,000. During 2002 and January 2003, EKI made a series of loans to the
Company totaling approximately $5.8 million. In connection with the issuance and
sale in March 2003 of the 2006 Debentures to a group of institutional investors,
EKI agreed to subordinate the repayment of these loans to the payment in full of
the Company's obligations under the 2006 Debentures. In addition, EKI and Biotec
agreed to subordinate certain payments referenced above to which they were
otherwise entitled under the License Agreement and the Biotec Agreement to the
satisfaction in full of the Company's obligations under the 2006 Debentures.
They further agreed not to assert any claims against the Company for breaches of
the License Agreement or the Biotec Agreement until such time as the Company's
obligations under the 2006 Debentures were satisfied in full. EKI and Biotec
also agreed to allow the Company to pledge its interest in the License Agreement
to secure its obligations under the 2006 Debentures, and certain additional
concessions were made by EKI and Biotec to permit the Company greater
flexibility in selling its rights under the License Agreement and the Biotec
Agreement to third parties in an insolvency context. These rights terminated
upon the satisfaction in full of the obligations under the 2006 Debentures in
October 2004. In consideration for its willingness to subordinate the payments
and advances that were owed to it, the Company issued to EKI in March 2003 a
warrant to acquire 83,333 shares of the Company's common stock at a price of
$6.00 per share with a ten year term.
In October 2004, in connection with the settlement of the March 2006
Debentures, EKI converted all of its outstanding loans to EarthShell
($2,755,000) into unregistered common stock at $3 per share and $532,644 of
accumulated interest at $4 per share for a total of 1,051,494 shares received by
EKI. As of December 31, 2004, the loans from EKI to EarthShell had all been
retired. In May 2005, an additional 44,387 shares were issued to EKI pursuant to
a 90 day price protection clause, which provided for an adjustment in the
effective conversion price of the interest portions of the EKI loans from $4 per
share to $3 per share.
Under the terms of the License Agreement and an Amended and Restated
Agreement for the Allocation of Patent Costs between the Company and EKI, any
patents granted in connection with the EarthShell technology are the property of
EKI, and EKI may utilize and/or license 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. Effective January 1, 2001, rather than
reimbursing EKI for patent costs, EarthShell assumed direct responsibility to
manage and maintain the patent portfolio underlying the License Agreement with
EKI and continues to pay directly all relevant costs.
16
In July 2002, the Company extended a loan in the amount of $55,000 to Mr.
Vincent Truant, President and Chief Operating Officer. The loan, which bore
interest at 7% per annum, was due upon demand by the Company. In May 2005, the
Compensation Committee of the Board of Directors approved a bonus to Mr. Truant
equal to the total principal amount and accrued interest, and the note was
cancelled.
In May 2005, the Company granted a warrant to EKI to purchase 1million
shares of the Company's common stock at $3 per share in consideration of EKI's
continued support of the Company since its inception, including providing bridge
loans at below market terms from time to time. The warrant expires in May of
2015.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors of EarthShell
Corporation is pleased to present its annual report on executive compensation.
This report describes the function of the Compensation Committee, the objectives
of the Company's executive compensation program, the various components of
compensation, and explains the basis upon which 2004 compensation determinations
were made by the Compensation Committee with respect to the executive officers
of the Company, including the Named Executive Officers, with the exception of
Mr. Nevling, who was not an executive officer of the Company, and Mr. Hawks, who
was not an executive officer of the Company as of the end of its 2004 fiscal
year.
Compensation Committee Charter
The Compensation Committee is charged with the following responsibilities:
o reviewing and recommending to the Board of Directors the annual base
salary, bonus and other benefits for the senior executive officers
of the Company;
o reviewing and commenting on new executive compensation programs that
the Company proposes to adopt;
o periodically reviewing the results of the Company's executive
compensation and perquisite programs to ensure that they are
properly coordinated to yield payments and benefits that are
reasonably related to executive performance;
o helping to ensure that a significant portion of executive
compensation is reasonably related to the long-term interests of the
stockholders;
o participating in the preparation of certain portions of the
Company's annual proxy statement;
o if necessary, hiring a compensation expert to provide independent
advice on compensation levels; and
o helping to ensure that the Company undertakes appropriate planning
for management succession and advancement.
Compensation Components
The Company's executive compensation program consists of a mixture of base
salary, cash bonuses and stock options. In determining the mix and total amount
of compensation for each executive officer, the Compensation Committee
subjectively considers each executive's overall value to the Company including
past and expected contributions by the executive to the Company's goals. In
addition, the Compensation Committee strives to balance short-term and long-term
incentive compensation to achieve desired results.
Shortly following the Company's initial public offering in March 1998,
anticipating that it would be hiring several new executives as part of its next
stage of development, the Company commissioned SCA Consulting LLC ("SCA"), a Los
Angeles based executive compensation consulting firm, to update its executive
compensation strategy and total pay structure. As part of its assignment, SCA
developed a study of the compensation practices of newly public, development
stage companies. The Compensation Committee references this study as it
administers each of the three components of its executive compensation program
to ensure that its compensation practices are competitive and that the overall
compensation package appropriately attracts, motivates, rewards, and retains key
employees with outstanding abilities.
17
Base Salary. The Company has historically determined base salary for its
executives based on qualifications, job requirements and competitive market
salaries that such qualifications and job requirements command. As the Company
grows, it will continue to rely on peer group competitive compensation practices
to remain consistent and competitive in its compensation practices.
Salaries for executives are reviewed by the Compensation Committee on an
annual basis and may be adjusted based upon their assessment of the individual's
contribution to and financial growth of the Company as well as competitive pay
levels. The Compensation Committee made no executive salary adjustments in 2004.
In order to conserve cash until the Company is able to establish its royalty
revenue stream, Mr. Hodson and Mr. Houston agreed to a 40% and 75% deferral in
base salary, respectively, effective April 16, 2004. In October 2004, Mr.
Houston's deferred salary percentage was changed to 33%.
The Company paid base compensation to Mr. Vincent Truant, President and
Chief Operating Officer, in the amount of $350,000 for his services to the
Company during 2004. Mr. D. Scott Houston, Chief Financial Officer and Secretary
received base compensation during 2004 of $327,200, of which, Mr. Houston
received $ 184,978 in cash payments and $142,222 was deferred, as described
above. The base salary figures for Mr. Houston include a $7,200 car allowance.
Bonus. Bonuses may be granted for a fiscal year after the financial
results for that fiscal year become available. The Compensation Committee meets
to consider annual bonuses for each executive based on individual performance as
well as overall financial results of the Company for the year. There is no plan
requiring that bonuses be paid. However, pursuant to their employment
agreements, certain executive officers may be entitled to receive an annual
bonus, the actual amount of which is determined in the sole discretion of the
Compensation Committee.
The Compensation Committee also may consider bonus compensation in light
of the accomplishment of specific milestones developed by management in support
of the annual strategic plan.
In determining whether to grant management bonuses for 2004, the
Compensation Committee considered both individual performance as well as the
Company's overall performance. Although the Compensation Committee noted several
significant individual and Company achievements during the year, in light of the
delays the Company has experienced in commercializing the Company's technology
as well as the financial condition of the Company, the Compensation Committee
determined that no bonuses for 2004 would be granted.
Stock Options. The Stock Option Committee believes that significant equity
interests in the Company in the form of stock options held by the Company's
management serve to align the interests of the executive management team with
those of stockholders. The Stock Option Committee may grant stock options and
restricted stock to executives and other key employees of the Company pursuant
to the 1995 Stock Incentive Plan, or may recommend that the Board of Directors
do so, as appropriate. In June 2004, prior to Mr. Roland resigning from the
Board and the Stock Option Committee, the Committee granted the Named Executive
Officers fully vested stock options issued under the 1995 Stock Incentive Plan
at the then-current market price exercisable only upon successful completion of
certain milestones that are critical to the long-term success of the Company.
The option grants were as follows:
Stock Options
Simon K. Hodson 400,000
Vincent Truant 50,000
D. Scott Houston 50,000
Michael Hawks 35,000
John Nevling 35,000
The stock options granted are reflected in the Stock Options Grant table.
The Stock Option Committee will continue to consider various methods to
provide additional incentives to management and employees of the Company,
including granting additional stock options and/or restricted stock or
recommending that the Board of Directors do so, as appropriate. In determining
the grants of stock options and restricted stock, the Stock Option Committee
will take into account, among other things, the respective scope of
responsibility and the anticipated performance requirements and contributions to
the Company of each proposed award recipient as well as the amounts of prior
grants.
18
Compensation to Chief Executive Officer in 2004
The Compensation Committee meets annually to evaluate the Chief Executive
Officer's performance and to review the Chief Executive Officer's compensation.
A founder of the Company and co-innovator of the EarthShell technology, Mr.
Simon K. Hodson has been a driving force in making the Company - as a
corporation and as a new packaging concept - a reality. His concern for the
environment, coupled with his visionary leadership and commitment, has helped
the Company achieve its current state of development.
In reviewing Mr. Simon Hodson's compensation, the Compensation Committee
considers his principal responsibilities, which include providing overall vision
and strategic direction for EarthShell, attracting and retaining highly
qualified employees and developing and maintaining key customer and capital
relationships.
Mr. Hodson received a base compensation of $500,000 during 2004. This
amount was based on the Compensation Committee's assessment that Mr. Hodson is
uniquely qualified to lead the Company through its early development stages to
initial commercialization. The Board determined that his vision for the Company,
both from a technical and business viewpoint, continues to be pivotal in
bringing the Company to the point of commercializing its first product lines.
Based in part on the foregoing, the Compensation Committee concluded that the
$500,000 base salary compensation was appropriate for 2004.
In order to conserve cash until the Company is able to establish its
royalty revenue stream, Mr. Hodson agreed to a 40% deferral of his base salary,
effective April 16, 2004. In June 2005, the portion of Mr. Hodson's 2004 salary
which had been deferred was paid.
In determining Mr. Hodson's 2004 annual bonus, the Compensation Committee
considered both Mr. Hodson's individual performance as well as that of the
Company overall. Although the Compensation Committee noted several significant
achievements during the year, in light of the delays the Company has experienced
in commercializing the Company's technology as well as the financial condition
of the Company, the Compensation Committee determined that no bonus for 2004
would be granted.
On June 25, 2003, Mr. Hodson was granted 10-year, fully vested options to
purchase 400,000 shares of Common Stock at the then-current market value,
exercisable only after the completion of certain milestones that are critical to
the long-term success of the Company.
Mr. Hodson owns a minority profits interest in EKI, the Company's majority
stockholder.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the deductibility of compensation over $1 million to certain
executive officers unless, in general, the compensation is paid pursuant to a
plan which is performance related, non-discretionary and has been approved by
the Company's stockholders. The Company did not pay any compensation in 2003
that would be subject to Code Section 162(m). The Compensation Committee intends
to establish policies regarding qualification of compensation under Section
162(m) of the Code to the extent it considers such policies appropriate.
Submitted by the Company's Compensation Committee
Mr. Khashoggi
Mrs. Khashoggi
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STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total return on the Company's
Common Stock for the last five fiscal years to the total cumulative return on
the S&P 500 Index and the Dow Jones Containers & Packaging Industry Group Index
(USA). The comparison assumes $100 was invested in the Company's common stock
and the indexes on December 31, 1999 and assumes reinvestment of dividends
before consideration of income taxes.
The stock performance depicted in the graph below is not necessarily
indicative of future performance. The Stock Performance Graph shall not be
deemed to be "soliciting material" or to be "filed" with the Securities and
Exchange Commission or subject to Regulations 14A or 14C or to the liabilities
of Section 18 of the Exchange Act, except to the extent that the Company
specifically requests that such information be treated as soliciting material or
specifically incorporates it by reference into a filing under the Securities Act
or Exchange Act.
[GRAPH OMITTED]
12/31/99 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004
EarthShell Index 100.0 31.1 48.5 14.1 3.6 4.9
S&P 500 Index 100.0 89.9 78.1 59.9 75.7 82.5
Dow Jones CTR 100.0 63.9 79.3 84.5 99.6 117.5
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All relationships and related transactions reported in this Annual Report
are described under the caption "Compensation Committee Interlocks and Insider
Participation."
OTHER MATTERS
Submission of Stockholder Proposals for Next Year's Annual Meeting.
Stockholders interested in presenting a proposal for consideration at the
Company's 2006 annual meeting of stockholders may do so by following the
procedures prescribed by Rule 14a-8 under the Securities Act of 1934 and the
Company's Bylaws. To be eligible for inclusion in the proxy statement and proxy
card, stockholder proposals must be received by the Company's Secretary at the
Company's offices at 3916 State St., Suite 110, Santa Barbara, California 93105
no later than March 8, 2006. Stockholders who intend to present a proposal at
the 2006 annual meeting, without including such proposal in the Company's proxy
statement, must provide the Company's Secretary with written notice of such
proposal in accordance with the Company's Bylaws (not less than 90 days in
advance of such meeting or, if later, the tenth day following the first public
announcement of the date of the meeting).
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Other Matters. The Board of Directors of the Company knows of no matters
to be presented at the Annual Meeting other than those described in this Proxy
Statement. Other business may properly come before the meeting, and in that
event it is the intention of the persons named in the accompanying proxy to vote
in accordance with their judgment on such matters unless such proxy contains
instructions to the contrary.
Communications with the Board of Directors / Board Attendance. Any
stockholder interested in communicating with members of the Board of Directors,
any of its directors, or any of its committees may send written communications
to EarthShell Corporation, 3916 State St., Suite 110, Santa Barbara, California
93105, Attention: Board of Directors. Communications received in writing are
forwarded to the Board of Directors, the appropriate committee, or to any
individual director or directors to whom the communication is directed, unless
the communication is unduly hostile, threatening, illegal, does not reasonably
relate to the Company or its business, or is similarly inappropriate. The
Chairman of the Board has the authority to discard or disregard any
inappropriate communications or to take other appropriate actions with respect
to any such inappropriate communications. Directors are encouraged to attend the
Annual Meeting. Last year all of the directors attended this meeting.
Annual Report. The Company's Annual Report to Stockholders, including the
Company's audited financial statements for the year ended December 31, 2004, is
being mailed herewith to all stockholders of record. THE COMPANY WILL PROVIDE
WITHOUT CHARGE TO ANY PERSON SOLICITED HEREBY, UPON THE WRITTEN REQUEST OF ANY
SUCH PERSON, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A. SUCH REQUESTS
SHOULD BE DIRECTED TO THE CHIEF FINANCIAL OFFICER OF THE COMPANY AT 3916 STATE
ST., SUITE 110, SANTA BARBARA, CALIFORNIA 93105.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors
/s/ D. Scott Houston
D. Scott Houston
Secretary
Santa Barbara, California
June 30, 2005
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EARTHSHELL CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of EarthShell Corporation, a Delaware
corporation, acting under the Delaware General Corporation Law, hereby
constitutes and appoints Simon K. Hodson and D. Scott Houston, and each of them,
proxies of the undersigned, each with the power of substitution, to attend and
act for the undersigned at the Annual Meeting of Stockholders of said
corporation to be held on July 21, 2005, at 10:00 a.m. Pacific Daylight Time, at
the Hotel Andalucia, 31 W. Carrillo Street, Santa Barbara, California, and at
any adjournments or postponements thereof in connection therewith to vote and
represent all of the shares of common stock of said corporation which the
undersigned would be entitled to vote, as follows:
(1) ELECTION OF DIRECTORS
|_| FOR ALL NOMINEES |_| WITHHOLD AUTHORITY FOR ALL NOMINEES
|_| FOR ALL EXCEPT (See instructions below)
If you wish to withhold authority to vote for any individual
nominee, mark "FOR ALL EXCEPT" and strike a line through the
nominee's name in the list below for whom you wish to withhold
authority:
SIMON K. HODSON D. SCOTT HOUSTON
HAMLIN M. JENNINGS VINCENT J. TRUANT
WALKER RAST
MICHAEL C. GORDON
(2) OTHER BUSINESS: In their discretion the proxies are authorized to
vote upon such other business as may properly come before the
meeting or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
EARTHSHELL CORPORATION
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Each of the above-named proxies present at said meeting, either in person
or by substitute, shall have and exercise all the powers of said proxies
hereunder. This proxy will be voted in accordance with the choices specified by
the undersigned on the other side of this proxy. IF NO INSTRUCTIONS TO THE
CONTRARY ARE INDICATED HEREON, THIS PROXY WILL BE TREATED AS A GRANT OF
AUTHORITY TO VOTE FOR THE ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS
NAMED ON THE OTHER SIDE HEREOF AND AS A GRANT OF AUTHORITY TO VOTE ON ANY OTHER
MATTERS THAT MAY COME BEFORE THE MEETING.
The undersigned acknowledges receipt of a copy of the Notice of Annual
Meeting and Proxy Statement relating to the meeting.
------------------------------ --------------------------------
Date Signature
--------------------------------
Signature (if held jointly)
Please sign your name exactly as it
appears on this proxy. When signing as
an attorney, executor, administrator,
trustee or guardian, please give your
full title as such.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN,
DATE AND RETURN YOUR PROXY PROMPTLY IN THE POSTAGE PREPAID
ENVELOPE PROVIDED.
I/we plan |_| do not plan |_| to attend the stockholders meeting.
23