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
----------
EARTHSHELL CORPORATION
(Name of Registrant as Specified in its Charter)
----------
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:
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(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
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(1) Amount Previously Paid:
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(4) Date Filed:
EARTHSHELL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 28, 2004
The 2004 Annual Meeting of Stockholders of EarthShell Corporation (the
"Company") will be held at the Radisson Hotel, 1111 E. Cabrillo Boulevard, Santa
Barbara, California 93101, on June 28, 2004 at 10:00 a.m. Pacific Daylight Time,
for the purposes of:
(1) Electing seven directors to serve until the 2005 annual
meeting of stockholders and until their successors are
elected and have qualified;
(2) Approving an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
Common Stock from 25,000,000 to 40,000,000 and increase the
total number of shares of all classes of stock the Company
is authorized to issue; and
(3) 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 10, 2004
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, in accordance with the Company's
Bylaws, 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.
By Order of the Board of Directors
/s/ Scott Houston
D. Scott Houston
Secretary
Santa Barbara, California
June 8, 2004
EARTHSHELL CORPORATION
__________________
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 28, 2004
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
2004 Annual Meeting of Stockholders (the "Annual Meeting") to be held at the
Radisson Hotel, 1111 East Cabrillo Boulevard, Santa Barbara, California 93101,
at 10:00 a.m. Pacific Daylight Time, on June 28, 2004, and at any and all
adjournments or postponements thereof. This Proxy Statement and the form of
proxy will be mailed on or about June 10, 2004 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 10, 2004, the record date for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting, the Company had
14,128,966 shares of common stock, par value $.0l per share (the "Common
Stock"), outstanding. 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, up to the
number of directors then to be elected, shall be the persons then elected.
Stockholders are not permitted to cumulate their shares of Common Stock for the
purpose of electing directors or otherwise.
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.
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 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 6740 Cortona Drive,
Santa Barbara, California 93117 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.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board of Directors of the Company is currently comprised of seven
members. 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.
Under the Company's Bylaws, nominations of persons for election 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 delivered or mailed to the
Secretary of the Company. To be timely, a stockholder's written notice must be
delivered or mailed to the Secretary at the Company's offices at 6740 Cortona
Drive, Santa Barbara, California 93117 not later than the tenth day following
the first public announcement of the Annual Meeting.
The following table sets forth the name and age of each director
nominated for reelection at this year's annual meeting of shareholders, the year
the director was first elected and his or her position with the Company:
Name Age Position Director Since
------------------------- --- ------------------------------------------------------- --------------
Essam Khashoggi.......... 64 Chairman of the Board 1992
Simon K. Hodson.......... 49 Vice Chairman of the Board and Chief Executive Officer 1992
John Daoud............... 68 Director 1992
Layla Khashoggi.......... 46 Director 1992
George W. Roland......... 64 Director 2001
Hamlin M. Jennings....... 55 Director 2003
Walker Rast.............. 68 Director 2003
The following is a biographical summary of the experience of each of the
directors:
Essam Khashoggi has served as Chairman of the Board of the Company
since its organization in November 1992. Mr. Khashoggi has also served as
Chairman of the Management Committee and Chief Executive Officer of E. Khashoggi
Industries, LLC ("EKI") and its predecessor entity, E. Khashoggi Industries,
since their organization in October 1997 and June 1991, respectively. 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.
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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 EKI and its predecessor entity since
their organization in October 1997 and June 1991, respectively, 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.
John Daoud has served as a Director of the Company since its
organization in November 1992. Mr. Daoud 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 their
organization in October 1997 and June 1991, respectively, 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. From 1970 to 1972, Mr. Daoud was a Senior Auditor with
PricewaterhouseCoopers.
Layla Khashoggi has served as a Director of the Company since its
organization in November 1992. Mrs. Khashoggi has also been a member of the
Management Committee of EKI since its organization in 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.
George W. Roland has served as a Director of the Company since
September 2001. Dr. Roland is currently a business consultant and is a member of
the Board of Directors, and previously served as President and Chief Executive
Officer from 1995 to 1998, of Astropower, Inc. Solar Power Division. Dr. Roland
served as President and Chief Executive Officer for Siemens Solar Industries,
L.P. from 1993 until 1995. Prior to 1993, Dr. Roland was a consultant to the
President of Applied Superconductors and the Vice President and Division Manager
of Kennametal, Inc., a large technology firm, for over ten years. Dr. Roland
holds over 15 patents and has published over 35 scientific papers.
Hamlin M. Jennings has served as a Director of the Company since
January 1, 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. Dr. Jennings received a Ph.D. in materials science
from Brown University in 1975, and a Bachelor of Science in Physics from Tufts
University in 1969. 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, when he was appointed to fill the vacancy created by the resignation of
Mr. Bert Moyer from the Board in August 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 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
President of Keyes Fibre Company (now know as The Chinet Company), first an
operating group of Arcata Corporation and then of Royal Packaging Industries Van
Leer. Mr. Rast held various executive positions with Arcata Corporation for over
ten years, and was previously with U.S. Gypsum Corporation for over ten years.
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Committees of the Board of Directors
The Board maintains five standing committees: the Executive Committee
of the Board of Directors, 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.
The Board utilizes a variety of methods for identifying and evaluating
nominees for director. The Board's policy 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. 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. The Board considers properly
submitted stockholder nominations for candidacy for director.
In evaluating such nominations, like all nominations, 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, 6740 Cortona Drive, Santa
Barbara, California 93117, 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.
The committees are presently comprised of the following directors:
Executive Audit Compensation
Committee Committee Committee
------------------------- --------------------- ------------------------
Mr. Khashoggi (Chair) Dr. Roland (Chair) Mr. Khashoggi (Chair)
Mr. Daoud Dr. Jennings Mrs. Khashoggi
Mr. Hodson Mr. Rast Dr. Roland
Stock Option Conflicts
Committee Committee
--------------------------- ------------------------
Dr. Roland (Chair) Dr. Roland (Chair)
Mr. Khashoggi Dr. Jennings
Mr. Rast
Executive Committee
The Executive Committee held frequent meetings in 2003, and at times
performed some of its functions by unanimous written consents 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 is not contemplated by, or 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
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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.
Compensation Committee
The Compensation Committee held 2 meeting in 2003. 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 upon 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)
ensuring 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) ensuring that the Company undertakes appropriate
planning for management succession and advancement.
Audit Committee
The Audit Committee held 5 meetings in 2003. The Company's Board of
Directors has adopted a written charter for the Audit Committee. The Audit
Committee charter, revised on March 26, 2003, outlines the functions of the
Audit Committee, which include: (1) recommending the engagement of an accounting
firm to act as the Company's independent external auditor (the "Auditor"); (2)
reviewing 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 members of the audit committee are all
independent within the meaning of the National Association of Securities
Dealers' listing standards. The Board of Directors has determined that Dr.
Roland qualifies as the "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.
Stock Option Committee
The Stock Option Committee held 2 meetings in 2003. 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 no formal meetings in 2003, but performed
its functions by unanimous written consents in lieu of meetings. The functions
of the Conflicts Committee include: (1) reviewing proposed transactions between
the Company and (a) interested directors, (b) the controlling stockholder, which
is the parent of the Company and (c) other similar transactions that involve
possible questions of conflicts of interest or self-dealing; (2) reviewing
transactions or conduct involving the Company and an interested director to
determine whether each transaction is on at least as favorable terms to the
Company as might be available from other third parties; (3) reviewing the
fairness of transactions having self-dealing elements to determine whether each
is reasonably likely to
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further the Company's business activities and interests; (4) reviewing the
fairness of each transaction having self-dealing elements to determine whether
the process by which the decision to enter into such a transaction was approved
or ratified is fair; (5) ensuring that minority public stockholders affected by
a proposal are treated fairly; (6) ensuring that all conflict-of-interest
transactions are disclosed in the Company's filings with the Securities and
Exchange Commission; and (7) if necessary, retaining an independent expert to
determine the advisability of the Company's entering into transactions involving
a possible conflicts of interest, and to determine fair terms for such proposed
transactions.
Board and Committee Attendance and Compensation
In 2003 the Board of Directors held 19 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 2004. Representatives from Farber & Hass LLP are expected to be present at
the Annual Meeting. Such representatives will have the opportunity to make a
statement if they desire to do so, and are expected to be available to respond
to appropriate questions.
The Audit Committee pre-approved the engagement of Farber & Hass LLP to
provide audit services for the fiscal year ended December 31, 2003, including
the quarterly reviews for the quarters ended June 30, 2003 and September 30,
2003. Farber & Hass LLP provided no other audit services, audit-related
services, tax services or permitted non-audit services for and during the fiscal
year ending 2003, except for the statutory audit of the Company's benefit plan
for the year ended December 31, 2002. The Audit Committee has been in
discussions with respect to the adoption of a pre-approval policy relating to
audit services for the fiscal year ending 2004 and for all audit-related
services, tax services and non-audit services to be performed by Farber & Hass
LLP during the fiscal year ending 2004.
During the fiscal years ended December 31, 2003 and 2002, the following
audit, audit-related, tax and non-audit fees were incurred by the Company:
Audit Fees. 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,
Deloitte & Touche, LLP, the Company's prior independent public accountants,
charged the Company 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. For the year ended
December 31, 2002, Deloitte & Touche, LLP charged the Company an aggregate of
$168,050 for professional services rendered for the 2002 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
2002.
Audit-Related Fees. 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
charged the Company $6,500 for benefit plan statutory audits. During the year
ended December 31, 2002, the Company incurred fees of $3,500 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.
Tax Fees. During the year ended December 31, 2003, the Company incurred
fees of $16,243 for tax return preparation. During the year ended December 31,
2002, the Company incurred fees of $12,000 for tax preparation.
Non-Audit Fees. During the year ended December 31, 2003, the Company
engaged Deloitte & Touche, LLP to analyze the performance of the manufacturing
equipment in Germany at a fee of $16,487. During the year ended December 31,
2002, the Company engaged Deloitte & Touche, LLP to consult on franchise tax
reporting at a fee of $540.
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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. 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, 2003 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committee:
Dr. George W. Roland (Chair)
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.
The 1995 Stock Incentive Plan, as amended, 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.
8
PROPOSAL NO. 2
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES
The Board of Directors has approved and is hereby soliciting
stockholder approval of an amendment to the Certificate of Incorporation to (i)
increase the number of shares of Common Stock the Company is authorized to issue
from 25,000,000 to 40,000,000 and in connection therewith (ii) to increase the
total number of shares of all classes of stock that the Company is authorized to
issue from 35,000,000 to 50,000,000. The full text of the proposed amendment to
the Certificate of Incorporation is set forth below. The Company is currently
authorized to issue 25,000,000 shares of Common Stock and 10,000,000 shares of
preferred stock, par value $0.01 per share ("Preferred Stock"). If the
stockholders approve this proposal, the Board of Directors will have the
authority, in its sole discretion, to file such an amendment at any time after
the Annual Meeting.
Purposes and Effects of the Proposed Amendments
The proposed amendment would increase the number of shares of Common
Stock the Company is authorized to issue from 25,000,000 to 40,000,000. The
additional 15,000,000 shares would become a part of the existing class of Common
Stock and, if and when issued, would have the same rights, privileges and
preferences as the shares of Common Stock presently issued and outstanding. On
May 10, 2004, 14,128,966 shares of Common Stock were issued and outstanding and
held of record by 1,175 registered stockholders. The Board of Directors believes
it is desirable to increase the number of shares of Common Stock the Company is
authorized to issue to provide the Company with adequate authorized share
capital for possible future issuances.
The issuance of additional shares of Common Stock might dilute, under
certain circumstances, the ownership and voting rights of the stockholders. The
proposed increase in the number of shares of Common Stock that the Company is
authorized to issue is not intended to inhibit a change in control of the
Company. The availability for issuance of additional shares of Common Stock
could, however, discourage, or make more difficult, efforts to obtain control of
the Company. For example, the issuance of shares of Common Stock in a public or
private sale, merger or similar transaction would increase the number of
outstanding shares, thereby possibly diluting the interest of a party attempting
to obtain control of the Company. The Company is not aware of any pending or
threatened efforts to acquire control of the Company. The Company has no present
commitments, agreements or intent to issue additional shares of Common Stock
other than with respect to currently reserved shares, in connection with
transactions in the ordinary course of the Company's business or shares which
may be issued under the Company's 1995 Stock Incentive Plan. Other than
increasing the number of authorized shares of the Company's Common Stock, the
proposal to increase the authorized shares of Common Stock will not affect the
rights, preferences or privileges of the Company's stockholders
Amendments to Certificate of Incorporation
If approved, Article V, Section 1 of the Certificate of Incorporation
would be amended and restated substantially as follows:
Number of Authorized Shares. The Corporation shall be authorized to
issue two classes of shares of stock to be designated, respectively,
"Common Stock" and "Preferred Stock". The total number of shares of all
classes of stock that the Corporation shall have the authority to issue
is Fifty Million (50,000,000) shares, consisting of Forty Million
(40,000,000) shares of Common Stock, par value $0.01 per share and Ten
Million (10,000,000) shares of Preferred Stock, par value $0.01 per
share.
Vote Required
Approval of Proposal No. 2 requires the affirmative vote of a majority
of the shares of the Company's Common Stock entitled to notice of, and to vote
at, the Annual Meeting. Abstentions and broker non-votes will be counted as a
vote against this proposal.
9
The Board of Directors believes that approval of Proposal No. 2 is in
the best interests of the Company for the reasons stated above. THEREFORE, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL NO.
2.
10
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
April 23, 2004, 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, (iii) the Chief Executive Officer of the Company and
each of the other executive officers of the Company whose cash compensation
exceeded $100,000 during the fiscal year ended December 31, 2003 (collectively,
the "Named Executive Officers") 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
-------------------------------------------- ------------------- ---------------------
Essam Khashoggi (2) (3)..................... 5,077,311 35.91%
Simon K. Hodson (4)......................... 3,500 *
John Daoud (5).............................. 35,515 *
Layla Khashoggi (3)......................... 10,415 *
George W. Roland (6)....................... 5,479 *
Hamlin Jennings (7)......................... 2,951 *
Walker Rast................................. - *
Vincent J. Truant (8)....................... 32,917 *
D. Scott Houston (9)........................ 44,120 *
Per J. Andersen (10)........................ 46,666 *
Directors and Named Executive Officers
as a group ............................... 5,258,874 36.52%
E. Khashoggi Industries, LLC................ 4,049,899 28.66%
EKINVESCO................................... 715,436 5.06%
------------------
* 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, 6740 Cortona Drive, Santa
Barbara, California 93117.
(2) Includes 4,049,899 shares held by E. Khashoggi Industries, LLC ("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 a fully exercisable warrant to purchase 83,333
shares of Common Stock issued by the Company. Mr. Khashoggi has sole
voting and dispositive power with respect to all 5,066,896 shares
referred to in this note, and is therefore deemed to be the beneficial
owner of such shares.
(3) Includes options to purchase 10,415 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(4) Represents shares held by Hodson Investments, LLC. Does not include any
of the shares held by EKI, or the 71,739 shares held by CTC. Mr. Hodson
holds a minority ownership interest in EKI and CTC.
(5) Includes options to purchase 25,000 shares of Common Stock from EKI
which were issued to Mr. Daoud in his capacity as an officer of EKI,
and options to purchase 10,515 shares of Common Stock issued under the
1995 Stock Incentive Plan, all of which are fully vested and
exercisable.
(6) Includes options to purchase 5,479 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(7) Includes options to purchase 2,951 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(8) Includes options to purchase 28,750 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(9) Includes options to purchase 42,037 shares of Common Stock issued under
the 1995 Stock Incentive Plan which are fully vested and exercisable.
(10) Includes options to purchase 8,333 shares of Common Stock issued under
the 1995 Stock Incentive Plan, and options to purchase 38,333 shares of
Common Stock issued by EKI, all of which are fully vested and
11
exercisable. As of December 31, 2003, Dr. Andersen was no longer an
employee of the Company. The information shown is based upon the
Company's best knowledge and the fact that Dr. Andersen has not filed
any Schedule 13Ds, 13Gs or Forms 4 or 5 with the Securities and
Exchange Commission after the date of his departure.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of each of
the Company's executive officers. Subject to rights under any employment
agreements, officers of the Company serve at the pleasure of the Board of
Directors.
Name Age Position Officer Since
------------------------- --- ------------------------------------------------------ -------------
Simon K. Hodson.......... 49 Vice Chairman of the Board and Chief Executive Officer 1992
Vincent J. Truant........ 56 President and Chief Operating Officer 1998
D. Scott Houston......... 49 Chief Financial Officer and Secretary 1993
The following is a biographical summary of the experience of Mr. Truant
and Mr. Houston. For a biographical summary of the experience of Mr. Hodson,
kindly refer to the summaries of Directors' experience provided above.
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 most recently 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.
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.
12
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
Annual Compensation Compensation Awards
Fiscal year ---------------------------------------------- -----------------------
Name and Ended Other Annual Securities Underlying
Principal Position December 31 Salary ($)* Bonus ($) Compensation ($) Options (#)
---------------------------------- ----------- --------------- ----------- ---------------- -----------------------
Simon K. Hodson................... 2003 $500,000 $ -- $2,250 (1) --
Vice Chairman of the Board 2002 500,000 -- 2,500 (1) --
and Chief Executive Officer 2001 500,000 -- 2,437 (1) --
Vincent J. Truant................. 2003 350,000 -- 3,063 (1) --
President and Chief 2002 321,875 (2) -- 2,844 (1) --
Operating Officer 2001 275,000 278,000 (3) 2,156 (1) 8,333 (4)
D. Scott Houston.................. 2003 327,200 (5) -- 2,454 (1) --
Chief Financial Officer 2002 327,200 (5) -- 2,419 (1) --
and Secretary 2001 320,000 139,000 (3) 2,250 (1) 8,333 (4)
Per J. Andersen (6)............... 2003 287,200 (5) -- -- --
Chief Science Officer 2002 287,200 (5) -- -- --
2001 280,000 139,000 (3) -- 8,333 (4)
Amitabha Kumar (7)................ 2003 168,713 -- 5,021 (1) --
Vice President of 2002 165,000 -- 4,950 (1) --
Technology 2001 155,417 -- 4,663 (1) --
----------------------
* 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 the executive's salary.
(1) Reflects payments under the Company's 401(k) plan.
(2) Reflects a mid-year salary adjustment effective May 16, 2002 as a
result of Mr. Truant becoming President of the Company on that date.
Mr. Truant's current salary is $350,000.
(3) On May 9, 2001, the Compensation and Stock Option Committees approved a
bonus in the form of a stock grant of 4,167 shares of Common Stock to
Mr. Truant and 2,083 shares of Common Stock each to Mr. Houston and Dr.
Andersen.
(4) As additional bonus compensation, the Compensation and Stock Option
Committees approved the grant of fully vested incentive stock options
to purchase 8,333 shares of Common Stock to Mr. Truant, Mr. Houston and
Dr. Andersen. The options are for a term of ten years at a strike price
of $44.04. The closing price of the stock on the date of the grants was
$44.04 per share and the Company paid the withholding tax on the
grants.
(5) Reflects $7,200 in car allowance payments made to Mr. Houston and Dr.
Andersen.
(6) Dr. Andersen is no longer an employee of the Company, effective
December 31, 2003.
(7) Prior to 2003, Mr. Kumar was Director of Foam and Paperboard Materials
Research. Mr. Kumar is no longer an employee of the Company. Mr. Kumar
resigned from all positions with the Company in March 2004.
13
Stock Option Grants in 2003
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in 2003 to the Named
Executive Officers:
Potential Realizable Value at
Assumed Rates of Stock
Individual Grants Appreciation for Option Term (1)
------------------------------------------------------------- --------------------------------
Number of % of Total
Shares Options
Underlying Granted to
Name and Options Employees Exercise Price Expiration
Principal Position Granted in 2003 (per share) Date 5% 10%
---------------------------- ---------- ----------- -------------- ---------- ------------- ------------
Simon K. Hodson............. 41,667 38% $4.80 9/19/2013 $301,348 $479,846
Vice Chairman of the
Board and Chief
Executive Officer
Vincent J. Truant........... 20,833 19% 4.80 9/19/2013 150,670 239,917
President and Chief
Operating Officer
D. Scott Houston............ 20,833 19% 4.80 9/19/2013 150,670 239,917
Chief Financial
Officer
and Secretary
Per J. Andersen............. 20,833 19% 4.80 9/19/2013 150,670 239,917
Chief Science Officer
Amitabha Kumar.............. -- -- -- -- -- --
Vice President of
Technology
--------------------
(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.
14
Aggregated Option Exercises In 2003 and 2003 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 Underlying Value of Unexercised In-The-
Unexercised Options at Fiscal Money Options at Fiscal
Year End 2003 Year End 2003 (1)
------------------------------- ----------------------------
Shares
Name and Acquired on Value
Principal Position Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
--------------------------- ----------- -------- ------------- ----------- ------------- -----------
Simon K. Hodson............. -- -- 83,334 -- -- --
Vice Chairman of the
Board and Chief
Executive Officer
Vincent J. Truant........... -- -- 50,000 32,917 -- --
President and Chief
Operating Officer
D. Scott Houston............ -- -- 47,500 42,037 -- --
Chief Financial
Officer
and Secretary
Per J. Andersen............. -- -- 44,166 8,333 -- --
Chief Science Officer
Amitabha Kumar.............. -- -- -- -- -- --
Vice President of
Technology
------------------------
(1) The closing price of the Common Stock on the NASDAQ Market on December
31, 2003 was $1.80.
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. 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% reduction in base salary to $300,000 per year effective
April 16, 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 the Common Stock, under terms and conditions determined by the
Stock Option Committee. 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
15
revenue stream, Mr. Houston agreed to a 75% reduction in base salary to $80,000
per year effective April 16, 2004, and is currently working on a part-time
basis.
Vincent J. Truant entered into an employment agreement with the Company
with a commencement date of May 1, 1998. The agreement provides for an annual
salary of $225,000 and options to acquire 6,250 shares of the Company's Common
Stock at an exercise price equal to $252.00 per share, which is the price at
which the Company's Common Stock was first sold to the public in the Company's
initial public offering. The Board of Directors increased Mr. Truant's annual
salary to $250,000 on September 29, 1999. The Board of Directors further
increased Mr. Truant's salary to $275,000 effective January 1, 2000. On 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. 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.
In light of recent changes in reporting requirements, the Company has
undertaken a review of all available past Section 16(a) filings to ensure proper
disclosure of its officers', directors' and 10% beneficial owners' compliance
with the new reporting requirements. Each of the transactions reported below are
grants of Company stock options with exercise prices greater than the Company's
current stock price. 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:
From 1999 through 2003, Mr. Khashoggi did not file in a timely manner
five reports each reporting two stock option grants. These stock option grants
were reported on May 28, 2004.
From 1999 through 2003, Mrs. Khashoggi did not file in a timely manner
five reports each reporting two stock option grants. These stock option grants
were reported on May 28, 2004.
From 2000 through 2003, Mr. Daoud did not file in a timely manner four
reports each reporting one stock option grant. These stock option grants were
reported on May 28, 2004.
From 2002 through 2003, Dr. Roland did not file in a timely manner a
Form 3, one report reporting two stock option grants and one report reporting
one stock option grant. These stock option grants as well as the commencement of
Dr. Roland's insider status were reported on May 28, 2004.
In 2002 and 2003, Mr. Moyer did not file in a timely manner a Form 3
and two reports each reporting one stock option grant. These stock option grants
as well as the commencement of Mr. Moyer's insider status were reported on May
28, 2004.
In 2003, Mr. Jennings did not file in a timely manner two reports each
reporting one stock option grant. These stock option grants were reported on May
28, 2004.
In 2003, Mr. Rast did not file in a timely manner a Form 3. The
commencement of Mr. Rast's insider status was reported on June 4, 2004.
16
From 1999 through 2001, Mr. Houston did not file in a timely manner
three reports each reporting one stock option grant. These stock option grants
were reported on May 28, 2004.
From 1999 through 2001, Mr. Truant did not file in a timely manner
three reports each reporting one stock option grant. These stock option grants
were reported on May 28, 2004.
From 2001 through 2003, Mr. Andersen did not file in a timely manner a
Form 3 and one report reporting one stock option grant. The Company is working
with outside legal counsel to remedy these filings.
In 2003, Mr. Hawks, appointed Chief Accounting Officer of the Company
as of November 1, 2003, did not file in a timely manner a Form 3 and one report
reporting one stock option grant. This stock option grant as well as the
commencement of Mr. Hawks' insider status was reported on May 28, 2004.
Compensation Committee Interlocks and Insider Participation
All decisions relating to executive compensation during 2003 were made
by the Company's Compensation Committee, which was comprised of Mr. Khashoggi,
Mrs. Khashoggi and Mr. Moyer through July 2003 (at which time Mr. Moyer resigned
from the Board), and Mr. Khashoggi, Mrs. Khashoggi and Dr. Roland from July 2003
through December 31, 2003. None of the members were officers of the Company in
2003. 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
35.91% of the Common Stock of the Company.
The Company has an exclusive, worldwide, royalty-free license to use
and license EKI technology to manufacture and sell disposable, single-use
containers for packaging or serving food and beverages intended for consumption
within a short period of time (less than 24 hours).
On July 29, 2002, the Company entered into an amendment to its Amended
and Restated License Agreement with EKI (the "License Agreement") expanding the
field of use for the EarthShell technology to include noodle bowls used for
packaging instant noodles. Because the noodle bowl development was made at no
cost to EarthShell and is an incremental field of use, EarthShell will pay to
EKI 50% of any royalty or other consideration it receives in connection with the
sale of products within this field of use.
In addition, on July 29, 2002 the Company entered into a License &
Information Transfer Agreement with Biotec (the "Biotec Agreement"), a wholly
owned subsidiary of EKI, to utilize Biotec technology for foodservice
applications, including food wraps and cutlery used in foodservice applications.
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 monthly licensing fee 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 were continued in 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 Biotec technology.
During 2002, and January 2003, EKI made a series of loans to the
Company totaling approximately $5.8 million. These loans were used to pay
operating costs, and accrued interest at 7% or 10% per annum. In connection with
the issuance and sale in March 2003 of the Company's 2% secured convertible
debentures due in 2006 (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 to which they were otherwise
entitled under the License Agreement and the Biotec Agreement referenced above
(other than their respective percentages of any royalties received by the
Company) to the satisfaction in full of the Company's obligations under the 2006
Debentures. They further agreed to not assert any claims against the Company for
breaches of the License Agreement or the Biotec Agreement (other than the
assertion of certain equitable remedies to enjoin the Company from, for example,
selling products outside its field of use) until such time as the Company's
obligations under the 2006 Debentures are 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
17
insolvency context. These rights terminate upon the satisfaction in full of the
obligations under the 2006 Debentures. In consideration for its willingness to
subordinate the payments and advances that are owed to it, the Company issued to
EKI in March 2003 an immediately vested 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.
Under the terms of the License Agreement and the Amended and Restated
Patent 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 obtain a benefit therefrom, including the
utilization and/or licensing of the patents and related technology in a manner
or for uses unrelated to the license granted to the Company in the foodservice
disposables field of use. Effective January 1, 2001, EarthShell assumed direct
responsibility to manage and maintain the patent portfolio underlying the
License Agreement with EKI and to pay directly all related costs.
In connection with the issuance and sale of the 2006 Debentures, Mr.
Essam Khashoggi, who controls EKI and is the beneficial owner of 35.91% of the
Company's Common Stock, agreed for himself and on behalf of EKI, not to sell any
of the Company's shares for an 18 month period ending in August 2004 (excluding
shares issuable to former EKI employees under existing option grants and shares
pledged under an existing security agreement with a third party lender).
During 1998, EKI entered into certain agreements with an equipment
manufacturer providing for the purchase by EKI of certain technology applicable
to starch-based disposable packaging. EKI licenses such technology to the
Company on a royalty-free basis pursuant to the License Agreement. In connection
with this purchase, and pursuant to the terms of a letter agreement with EKI,
the Company agreed to pay the seller of the technology $3.5 million on or about
December 31, 2003. In the fourth quarter of 2003, the Company negotiated a
reduction of the obligation to $1.6 million, which was then paid in the fourth
quarter of 2003. In addition, the Company is required to pay the seller $3.0
million over the five-year period commencing January 1, 2004 if EKI, the Company
or their licensees make active use of the technology and have not purchased, by
December 31, 2003, at least $35.0 million of equipment from the seller. As of
December 31, 2003, the Company and its licensees have neither actively used the
technology nor purchased equipment from the seller. The Company does not plan to
make active use of the technology during the year ending December 31, 2004. EKI
has agree to indemnify the Company to the extent the Company is required to pay
any portion of this $3.0 million obligation solely as a result of EKI's or its
licensees' active use of such patents and related technology (other than use by
the Company or its sublicensees).
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 is due upon
demand by the Company.
In 2003, the Company paid Mr. Rast, a Director, a $4,000 consulting fee
for doing a detailed evaluation of its demonstration equipment in Europe.
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 2003 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. Kumar who was not an officer of the Company.
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;
18
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 ensuring 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 ensuring 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.
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.
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 2003. Pursuant to an employment agreement effective October 15,
1993, Mr. D. Scott Houston, Chief Financial Officer and Secretary received base
compensation during 2003 of $327,200, reflecting various adjustments since 1993.
In addition, the Company paid a base salary to Dr. Per J. Andersen, Chief
Science Officer in the amount of $287,200 for his services to the Company during
2003. The base salary figures for Mr. Houston and Dr. Andersen reflect a $7,200
car allowance.
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 2003. 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% reduction in base salary, respectively, effective April 16, 2004.
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.
19
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.
On March 24, 2004, the Compensation Committee met to review and
consider the performance of senior management. In determining whether to grant
management bonuses for 2003, 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 2003
would be granted.
Stock Options. The Compensation 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. In September of 2003, the
Stock Option Committee granted to individual members of management 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 41,667
Vincent Truant 20,833
D. Scott Houston 20,833
Per J. Andersen 20,833
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. 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.
Compensation to Chief Executive Officer in 2003
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 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 2003. 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 2003.
In order to conserve cash until the Company is able to establish its
royalty revenue stream, Mr. Hodson agreed to a 40% reduction in base salary
effective April 16, 2004.
20
In determining Mr. Hodson's 2003 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 2003 would be granted.
On September 19, 2003, Mr. Hodson was granted 10-year, fully vested
options to purchase 41,667 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
Dr. Roland
21
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, 1998 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.
[Plot Points for Graphic]
EarthShell Index S&P 500 Index Dow Jones CTR Index
12/31/1998 100.0 100.0 100.0
12/31/1999 34.6 119.5 94.4
12/31/2000 10.7 107.4 60.3
12/31/2001 16.8 93.4 74.9
12/31/2002 4.9 71.6 79.8
12/31/2003 1.3 90.5 94.0
22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All relationships and related transactions reported in this Proxy
Statement 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 2005 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 6740 Cortona Drive, Santa Barbara, California 93117 no
later than December 15, 2004. Stockholders who intend to present a proposal at
the 2005 annual meeting, without including such proposal in the Company's proxy
statement, must provide the Company's Secretary with written notice of such
proposal no later than February 28, 2005.
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
may send written communications to the Board of Directors or any of the
Directors to EarthShell Corporation, 6740 Cortona Drive, Santa Barbara, CA
93117, Attention: Board of Directors. Communications received in writing are
forwarded to the Board of Directors 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 meetings of stockholders. 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, 2003,
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 6740 CORTONA
DRIVE, SANTA BARBARA, CALIFORNIA 93117.
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/ Scott Houston
---------------------
D. Scott Houston
Secretary
Santa Barbara, California
June 8, 2004
23
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,
the attorneys and 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 June 28, 2004, at 10:00 a.m.
Pacific Daylight Time, at the Radisson Hotel, 1111 East Cabrillo Boulevard,
Santa Barbara, California, and at any adjournments 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 the nominees listed below ( ) WITHHOLD AUTHORITY to vote for
the nominees listed below
If you wish to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below:
ESSAM KHASHOGGI LAYLA KHASHOGGI
SIMON K. HODSON WALKER RAST
JOHN DAOUD GEORGE W. ROLAND
HAMLIN JENNINGS
(2) To approve an amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock and increase
the total number of shares of all classes of stock the Company is
authorized to issue.
( ) FOR ( ) AGAINST ( ) ABSTAIN
(3) 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
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.