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:
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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
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.:
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(4) Date Filed:
EARTHSHELL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 22, 2006
The 2006 Annual Meeting of Stockholders of EarthShell Corporation (the
"Company") will be held at the Towson Sheraton, located at Dulaney Valley Road,
Baltimore, Maryland on June 22, 2006 at 10:00 a.m. Eastern Daylight Time, for
the purposes of:
(1) Electing five directors to serve until the 2007
annual meeting of stockholders and until their
successors are elected and have qualified;
(2) Approving an amendment to the Company's 1995 Stock
Incentive Plan increasing the number of shares of
Common Stock available for awards; 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 1, 2006
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.
By Order of the Board of Directors
/s/ D. Scott Houston
D. Scott Houston
Secretary
Baltimore, Maryland
EARTHSHELL CORPORATION
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PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 22, 2006
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
2006 Annual Meeting of Stockholders (the "Annual Meeting") to be held at the
Towson Sheraton, Dulaney Valley Road, Baltimore, Maryland, at 10:00 a.m. Eastern
Daylight Time, on June 22, 2006, and at any and all adjournments or
postponements thereof. This Proxy Statement and the form of proxy is being
mailed on or about May 11, 2006 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 1, 2006, the record date for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting, the Company had
19,154,167 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.
A list of shareholders entitled to vote at the Annual Meeting will be
open to the examination of any shareholder, for any purpose germane to the
Annual Meeting, during normal business hours for a period of ten days before the
Annual Meeting at our corporate offices at 1301 York Road, Suite 200,
Lutherville, Maryland 21093, and at the time and place of the Annual Meeting.
Vincent J. Truant 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. Messrs. Truant and Houston are
both officers and directors of the Company.
2
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 1301 York Road, Suite 200, Lutherville, Maryland 21093 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 five
members, all of whom will be standing for re-election. 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
---- --- -------- --------------
Vincent J. Truant ....... 58 Director, Chairman of the Board, and Chief Executive 2005
Officer
D. Scott Houston......... 51 Director and Chief Financial Officer 2005
Hamlin M. Jennings....... 58 Director 2003
Walker Rast.............. 70 Director 2003
Michael C. Gordon........ 70 Director 2005
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The following is a biographical summary of the experience of each of the
director nominees:
Director Nominees
Vincent J. Truant has served as the Company's Chief Executive Officer
since September 1, 2005, as President since 2002 and as a Director since July
2005. In February 2006, Mr. Truant was also elected Chairman of the Board of
EarthShell. From May 15, 2002 to August 31, 2005, Mr. Truant served as the
Company's President and Chief Operating Officer. From March 2001 to May 2002,
Mr. Truant served as Senior Vice President and Chief Marketing Officer of the
Company. 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 fifteen (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.
3
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 a Director of the Company since July
2005, as the Company's Chief Financial Officer since October 1999, and as 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 E. Khashoggi Industries 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.
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.
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
4
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, 1301 York Road, Suite 200,
Lutherville, Maryland 21093, 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
At the annual meeting of the Board in July 2005, the Company
reorganized the Committees of the Board, Currently, the Board maintains three
standing committees: the Audit Committee, the Compensation Committee, the
Corporate Governance and Nominating Committee. The Board has written charters
for each of its committees.
Director nominees are recommended to the full Board by the Corporate
Governance and Nominating Committee with input from Management. The committees
are presently comprised of the following Directors:
Audit Committee Compensation Committee Corporate Goverance & Nominating
Committee
Mr. Gordon (Chair) Dr. Jennings (Chair) Mr. Rast (Chair)
Mr. Rast Mr. Gordon Dr. Jennings
Dr. Jennings Mr. Rast Mr. Gordon
Executive Committee
The Executive Committee was dissolved at the July 2005 annual meeting
of the Board in connection with the reorganization of Board and the Board
committees. Prior to being dissolved, the Executive Committee held frequent
meetings in 2004 and in 2005, and at times took action by unanimous written
consent in lieu of meetings. The primary function of the Executive Committee was
to perform all of the duties otherwise vested in the Board when the Board is not
in session, except for the following matters which were not delegated to the
Executive Committee: (a) declaring cash or stock dividends or distributions to
stockholders of the Company; (b) taking action on matters otherwise specifically
delegated to other committees of the Board of Directors; (c) amending or
repealing the Certificate of Incorporation or Bylaws of the Company, or adopting
new ones; (d) 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; (e) authorizing or approving the issuance or sale of shares of
stock of the Company; (f) 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, 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 (g) electing or removing officers, directors or
members of any committee of the Board. The Executive Committee functioned
according to a written charter.
Compensation Committee
The Compensation Committee held two (2) meetings in 2005. At the annual
meeting of the Board in July 2005, the Stock Options Committee was dissolved and
the functions of that committee were assumed by the Compensation Committee.
Prior to August 2005, the functions of the Compensation Committee included: (a)
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; (b) reviewing and commenting on new executive compensation programs
that the Company proposes to adopt; (c) 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; (d) helping to ensure that a significant
portion of executive compensation is reasonably related to the long-term
interests of the stockholders; (e) participating in the preparation of certain
portions of the Company's annual proxy statement; (f) hiring a compensation
expert to provide independent advice on compensation levels, if necessary; and
(g) helping to ensure that the Company undertakes appropriate planning for
management succession and advancement.
5
On August 11, 2005, a new charter was adopted for the Compensation Committee. As
outlined in the new charter, the functions of the Compensation Committee
include: (a) oversee the Company's overall compensation structure, policies and
programs, and assess whether the Company's compensation structure establishes
appropriate incentives for management and employees; (b) review and approve
corporate goals and objectives relevant to the compensation of the Chief
Executive Officer (the "CEO"), evaluate the CEO's performance in light of those
goals and objectives, and either as a committee or together with the other
independent directors (as directed by the Board), determine and approve the
CEO's compensation level based on this evaluation; (c) administer and make
recommendations to the Board with respect to non-CEO compensation and the
Company's incentive-compensation and equity-based compensation plans; (d) review
and recommend to the Board the annual base salary, bonus, and other benefits for
the executive officers of the Company with the goal of ensuring that a
significant portion of executive compensation is reasonably related to the
long-term interests of the stockholders; (e) approve stock option and other
stock incentive awards for executive officers; (f) review and approve the design
of other benefit plans pertaining to executive officers; (g) review and
recommend employment agreements and severance arrangements for executive
officers, including change-in-control provisions, plans or agreements; (h)
approve, amend or modify the terms of any compensation or benefit plan that does
not require shareholder approval; (i) review periodically succession plans
relating to positions held by executive officers, and make recommendations to
the Board regarding the selection of individuals to fill these positions; (j)
annually evaluate the performance of the Committee and the adequacy of the
committee's charter; and (k) produce a Committee report on executive
compensation as required by the Securities and Exchange Commission (the "SEC")
to be included in the company's annual proxy statement filed with the SEC. The
Compensation Committee Charter is included in Appendix B of this proxy
statement.
Audit Committee
The Audit Committee held four meetings in 2005. Previous to August 11,
2005 the functions of the Audit Committee included: (a) engaging an accounting
firm to act as the Company's independent external auditor (the "Auditor"); (b)
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; (c) 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; (d)
reviewing the results of each external audit; (e) reviewing the procedures
employed by the Company in preparing published quarterly financial statements
and related management commentaries; (f) reviewing any major changes proposed to
be made in auditing and accounting principles and practices in connection with
the Company's financial statements; (g) reviewing the adequacy of the Company's
internal financial controls; and (h) if the Company appoints a Director of
Internal Audit, meeting periodically with that person to evaluate compliance
with the foregoing duties.
On August 11, 2005, a new charter was adopted for the Audit Committee.
As outlined in the new charter, the functions of the Audit Committee include: a)
oversee the Company's accounting and financial reporting processes and the
audits of the Company's financial statements; engaging an accounting firm to act
as the Company's independent external auditor (the "Auditor"); 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; b)
oversee the Company's compliance with legal and regulatory requirements; c)
oversee the outside auditor's qualifications and independence; d) oversee the
performance of the company's internal audit function and outside auditor; e)
oversee the Company's system of disclosure controls and system of internal
controls; and f) prepare the report required by the rules of the SEC to be
included in the Company's annual proxy statement. The Audit Committee Charter is
included in APPENDIX B of this proxy statement.
The Company's Audit Committee is to be comprised of at least three (3)
independent Directors. Mr. Gordon serves as Chairman of the Audit Committee. The
Board 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, as amended. The Committee is currently comprised of
Messrs. Gordon, Jennings and Rast, each of whom are independent Directors within
the meaning of the Nasdaq Stock Market listing standards.
6
Stock Option Committee
The Stock Option Committee was dissolved in connection with the
reorganization of the Board and the committees of the Board at the annual
meeting of the Board in July 2005. The functions of the Stock Option Committee
are now carried out by the Compensation Committee, as outlined above. Prior to
being dissolved, the Stock Option Committee held one meeting in 2005. The Stock
Option Committee was responsible for administering the Company's 1994 Stock
Option Plan and 1995 Stock Incentive Plan (collectively, the "Plans") including,
without limitation, the following: (a) adopting, amending and rescinding rules
relating to the Plans; (b) determining who may participate in the Plans and what
awards may be granted to such participants; (c) granting awards to participants
and determining the terms and conditions thereof, including the number of shares
of common stock issuable pursuant to the awards; (d) determining the terms and
conditions of options automatically granted to directors pursuant to the Plans;
(e) determining whether and the extent to which adjustments are required
pursuant to the anti-dilution provisions of the Plans; and (f) interpreting and
construing the Plans and the terms and conditions of any awards granted
thereunder.
Conflicts Committee / Corporate Governance & Nominating Committee
At the annual meeting of the Board in July 2005, the Conflicts
Committee was dissolved and a new Corporate Governance and Nominating Committee
was organized. The Corporate Governance & Nominating Committee held three (3)
meetings in 2005. The functions of the Conflicts Committee included reviewing
potential related party or conflict of interest transactions to: (a) determine
whether each such transaction is on at least as favorable terms to the Company
as might be available from other third parties, (b) determine whether such
transactions are reasonably likely to further the Company's business activities
and interests, (c) determine whether the process by which the decision to enter
into such transactions was approved or ratified and is fair, (d) help ensure
that all such transactions are disclosed in the Company's filings with the SEC
as necessary and (e) 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.
A charter for the Corporate Governance and Nominating Committee was
adopted on August 11, 2005. The functions of the Corporate Governance and
Nominating Committee include: a) identifying qualified individuals to become
Board members; b) determining the composition of the Board and its committees;
c) considering questions of possible conflicts of interest; d) developing and
implementing the Company's corporate governance guidelines; and e) monitoring a
process to assess Board effectiveness. The Conflicts Committee / Corporate
Govenance & Nominating Committee Charter is included in APPENDIX B of this
proxy statement.
Board and Committee Attendance
The Board of Directors held twelve (12) meetings in 2005. All Directors
attended at least seventy-five percent of the Board meetings and the meetings of
the Committees on which they served in 2005.
Code of Ethics
The Company has adopted a Code of Ethics that applies to all Directors,
officers and employees, including the Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer of the Company. The Company has posted
its Code of Ethics on its website at www.earthshell.com. The Company intends to
satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or a waiver from, a provision of its Code of Ethics that applies
to the Company's Principal Executive Officer, Principal Financial Officer,
Principal Accounting Officer or Controller, or persons performing similar
functions and that relates to an element enumerated in Item 406(b) of Regulation
S-K by posting such information on its website.
Independent Auditors
The Audit Committee pre-approved the engagement of Farber, Hass, Hurley
& McEwen, LLP to provide both audit and tax services for the fiscal year ended
December 31, 2005, including the quarterly reviews for the three quarters of
2005. Farber, Hass, Hurley & McEwen. LLP provided no other audit services,
audit-related services, tax services or permitted non-audit services for and
during the fiscal year ending 2005. 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.
7
During the fiscal year ended December 31, 2005, the following audit,
audit-related, tax and non-audit fees were incurred by the Company:
Audit Fees. For the year ended December 31, 2005, Farber & Hass LLP charged the
Company an aggregate of approximately $94,200 for professional services rendered
for the 2005 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 2005.
All Other Fees. During the year ended December 31, 2005, the Company incurred
fees of $8,750 for tax return preparation.
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, 2005 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committee:
Michael C. Gordon
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
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 and $500 for telephonic board meetings. Committee
chairpersons receive an additional $1,000 per quarter for their committee
service except for the audit committee chairman, who receives $3,000 per
quarter. All of the directors, except for Mr. Truant and Mr. Houston, 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 25,000 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, and as of
March 31, 2006, the Company had outstanding accrued and unpaid directors'
fees of approximately $167,917. In June 2005, the Board granted to each of
the Company's non-employee Directors who had served during the previous 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.
PROPOSAL NO. 2
AMENDMENT OF THE COMPANY'S 1995 STOCK INCENTIVE PLAN TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK AVAILABLE FOR AWARDS THEREUNDER BY 2,750,000 SHARES
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1995 Stock Incentive Plan (the "1995 Plan") in order
to change the number of shares of Common Stock available thereunder from
1,250,000 to 4,000,000 shares.
The Board of Directors has approved and is hereby soliciting
stockholder approval of an amendment to the 1995 Plan in the form set forth in
"Appendix B" to the Proxy Statement.
The Company has utilized stock options granted pursuant to the 1995
Plan to attract, retain and motivate its employees, directors and consultants by
providing for or increasing their proprietary interests in the Company. Under
the 1995 Plan, every employee and consultant of the Company, or any of its
subsidiaries, is eligible to be considered for the grant of awards. The 1995
Plan had a ten year term, which was extended by the Board in 2005 for two more
years, to terminate in November 2007.
A total of 10,000,000 shares of Common Stock are currently reserved for
issuance under the 1995 Plan. As of May 1, 2006, no shares of Common Stock
remained available for issuance under the 1995 Plan. The Board of Directors
believes that the availability of sufficient number of shares available for
issuance under the 1995 Plan is integral to attract, retain and motivate
qualified employees fundamental to the success of the Company. Subject to
stockholder approval, in April 2006, the Board of Directors approved an increase
of 2,750,000 shares of Common Stock issuable under the 1995 Plan, which, if
approved by the stockholders, would increase the total shares reserved for
issuance under the 1995 Plan since its inception from 1,250,000 shares to
4,000,000 shares.
Summary of the 1995 Plan
The purpose of the 1995 Plan is to enable the Company to attract,
retain and motivate its employees and consultants by providing for or increasing
the proprietary interests of such employees and consultants in the Company and
to enable the Company to attract, retain and motivate its non-employee directors
and further align their interests with those of the Company's stockholders by
providing for or increasing the proprietary interest of such directors in the
Company.
Any person who is a director, employee or consultant to the Company or
any of its subsidiaries, including any director who is also such an employee, is
eligible to be considered for the grant of awards under the 1995 Plan. The 1995
Plan also currently provides for the automatic grant of options to non-employee
directors of the Company. As of May 1, 2006, approximately three employees
(including two employee directors) and three non-employee directors were
participating in the 1995 Plan.
9
The maximum number of shares of Common Stock that may currently be
issued pursuant to all awards (including ISOs) granted under the 1995 Plan is
1,250,000, subject to certain anti-dilution adjustments. The maximum number of
shares of Common Stock that may currently be issued pursuant to ISOs granted
under the 1995 Plan is also 1,250,000. Under the proposed amendment to the 1995
Plan, the maximum number of shares that may be issued pursuant to awards
(including ISOs) granted under the 1995 Plan is 4,000,000, and the maximum
number of shares of Common Stock that may be issued pursuant to ISOs is
4,000,000.
No employee may be granted awards under the 1995 Plan with respect to
more than 500,000 shares of Common Stock during any calendar year, subject to
certain anti-dilution adjustments. This limitation is intended to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") so that compensation attributable to awards under the 1995 Plan
qualifies as performance-based compensation under Section 162(m) of the Code. In
addition, non-employee directors of the Company are currently entitled to
receive automatic option grants to purchase 25,000 shares of Common Stock on an
annual basis.
The 1995 Plan is administered by The Compensation Committee (the
"Committee") of the Board of Directors. The Committee is authorized to enter
into any type of arrangement with an eligible employee that, by its terms,
involves or might involve the issuance of (i) Common Stock or (ii) a derivative
security with an exercise or conversion privilege at a price related to the
Common Stock or with a value derived from the value of the Common Stock. Awards
under the 1995 Plan are not restricted to any specified form or structure and
may include arrangements such as sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, phantom stock, dividend equivalents, performance units or
performance shares. An award may consist of one such arrangement or two or more
such arrangements in tandem or in the alternative. Any stock option granted to
an employee may be an ISO or a nonqualified stock option.
Subject to the provisions of the 1995 Plan, the Committee is authorized
and empowered to administer the 1995 Plan, including, without limitation: (i)
adopting, amending and rescinding rules and regulations relating to the 1995
Plan; (ii) determining which persons may participate in the 1995 Plan and to
which of such participants, if any, awards shall be granted under the 1995 Plan;
(iii) granting awards to participants and determining the terms and conditions
of awards granted under the 1995 Plan, including the number of shares of Common
Stock issuable pursuant thereto; (iv) determining, with certain exceptions, the
terms and conditions of the Director Options that are automatically granted
under the 1995 Plan; (v) determining whether, and the extent to which,
anti-dilution adjustments are required and (vi) interpreting and construing the
1995 Plan and the terms and conditions of any awards granted under the 1995
Plan.
The anti-dilution provisions of the 1995 Plan generally provide for
adjustments to the number of shares issuable pursuant to awards if the
outstanding securities subject to the 1995 Plan increases or decreases as a
result of certain events including, but not limited to, reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend or
other distribution. The anti-dilution provisions of the 1995 Plan also generally
provide that no adjustment shall be made under the provisions of the 1995 Plan
to the extent such adjustment would cause ISOs issued or issuable under the 1995
Plan to be treated as other than ISOs, or to the extent that the Committee
determines that such adjustment would result in the disallowance of federal
income tax deduction for compensation attributable to awards under the 1995 Plan
by causing such compensation to be treated as other than "performance-based
compensation" under Section 162(m) of the Internal Revenue Code.
The 1995 Plan currently does not specify a minimum exercise price or
other consideration that a recipient of an award must pay to obtain the benefit
of an award, and therefore the maximum compensation payable pursuant to the 1995
Plan, during the term of the 1995 Plan and awards granted thereunder, is
currently equal to the number of shares of Common Stock with respect to which
awards may be issued thereunder, multiplied by the value of such shares on the
date such compensation is measured (which, in the case of non-statutory options,
will generally be the date of exercise of the options). Awards may be issued
under the 1995 Plan for any lawful consideration including services rendered by
the recipient of such award. Any exercise price or other consideration payable
in respect of any awards currently made under the 1995 Plan are to be determined
by the Committee and included in the terms of such award. However, Director
Options automatically granted to non-employee directors on an annual basis will
have an exercise price per share equal to the Fair Market Value of the Common
Stock on the business day immediately preceding the date of the grant. Each such
Director Option granted pursuant to the 1995 Plan vests and becomes exercisable
25% at the end of each calendar quarter following the grant date, subject to the
condition that the recipient is a director on such date.
10
Awards may not be granted under the 1995 Plan on or after the twelvth
anniversary of its adoption (ISOs may not be issued with a term over 10 years).
Each Director Option granted under the 1995 Plan expires upon the first to occur
of the following: (i) the first anniversary of the date upon which the optionee
ceases to be a director as a result of death or total disability; (ii) the 90th
day after the date upon which the optionee ceases to be a director for any
reason other than death or total disability or (iii) the fifth anniversary of
the date of grant of such Director Option.
An award may include a provision conditioning or accelerating the
receipt of benefits upon the occurrence of specified events, such as a change in
control of the Company (as defined by the Committee), an acquisition of a
specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or other significant corporate transaction described in
the 1995 Plan. Further, all outstanding Director Options theretofore granted
under this 1995 Plan terminate upon the first to occur of the following: (i) the
dissolution or liquidation of the Company; (ii) a reorganization, merger or
consolidation of the Company as a result of which the outstanding securities of
the class then subject to such outstanding Director Options are exchanged for or
converted into cash, property and/or securities not issued by the Company, which
reorganization, merger or consolidation shall have been affirmatively
recommended to the stockholders of the Company by the Board or (iii) the sale of
substantially all of the property and assets of the Company.
The 1995 Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") and is not required to be
qualified under Section 401(a) of the Code.
New Plan Benefits
The following table discloses the number of shares subject to awards
that have been granted under the 1995 Plan as of March 31,2006 to (i) the
persons named under "Executive Compensation Summary Compensation Table" above,
(ii) the Company's current executive officers as a group, (iii) the Company's
current directors who are not executive officers as a group, and (iv) all
employees as a group. The closing price of the Company's Common Stock on NASD
Over the Counter Market was $1.90 on April 28, 2006.
11
Number of
Name of Individual Shares Subject
or Identity of To Options
Group or Position Granted (#)
------------------- -----------
Vincent J. Truant 482,917
D. Scott Houston 504,166
Paul Susie 40,000
Michael C. Gordon 25,000
Hamlin Jennings 30,034
M. Walker Rast 28,603
Executive Officers as a group 927,083
Directors as a group 93,637
Employees as a group 927,083
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to compensation
plans under which equity securities of the Company are currently authorized for
issuance to employees or non-employees (such as directors, consultants,
advisors, vendors, customers, suppliers or lenders), as of December 31, 2006:
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
------------- ------------------- ------ ------------------------
(a) (b) (c)
Equity compensation plans 1,164,425 $ 8.50 --
approved by security
holders....
Equity compensation plans not 465,000 $ 2.10 --
approved by security
holders (1).....
Total............. 1,629,425 $ 6.68 --
----------
(1) These options are intended to be included within the 1995 Plan, and were
granted, subsequet to the 2005 Annual Stockholders Meeting, subject to
approval by the Shareholders of this proposed amendment to the 1995 Plan
to increase the number of shares authorized under the 1995 Plan.
Vote Required and Board of Directors' Recommendation
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 of Stockholders. Abstentions and broker non-votes will be
counted as present for purposes of determining a quorum, but will each be
counted as a "NO" vote for purposes of determining whether this proposal has
been approved.
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
12
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
March 31, 2006, 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) the Chief
Executive Officer of the Company and each of the other Named Executive Officer,
and (iv) all directors and Named Executive Officers of the Company as a group.
Percentage of
Number of Shares of
Shares of Common Stock
Name and Address (1) Common Stock Outstanding (2)
-------------------- ------------ ---------------
Hamlin Jennings (3) 40,034 *
Walker Rast (4) 38,603 *
Michael Gordon (5) 25,000 *
Vincent J. Truant (6) 37,083 *
D. Scott Houston (7) 419,120 *
Paul B. Susie (8) 10,000 *
Directors and Named Executive Officers as a group (9) 539,840 2.24%
Essam Khashoggi (10) 7,943,603 31.76%
E Khashoggi Industries, LLC(11) 5,999,939 23.99%
----------
* 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, 1301 York Road, Suite 200,
Lutherville, MD 21093.
(2) Applicable percentage of ownership is based on 19,365,188 shares of common
stock outstanding as of March 31, 2006 together with securities
exercisable or convertible into shares of common stock within 60 days of
March 31, 2006, 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 March 31, 2006 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.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(3) Includes options to purchase 30,034 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(4) Includes options to purchase 28,603 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable
(5) Includes options to purchase 25,000 shares of Common Stock issued under
the 1995 Stock Incentive Plan, all of which are fully vested and
exercisable.
(6) Includes options to purchase 32,917 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(7) Includes options to purchase 417,037 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(8) Includes options to purchase 10,000 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(9) Includes options to purchase 533,591 shares of Common Stock issued under
the 1995 Stock Incentive Plan, which are fully vested and exercisable.
(10) Includes 5,916,606 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 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 referred
to in this note, and is therefore deemed to be the beneficial owner of
such shares.
(11) Includes warrants to purchase 1,083,833 shares of Common Stock of the
Company.
13
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
---- --- -------- -------------
Vincent J. Truant............... 58 Chairman of the Board and Chief 1998
Executive Officer
D. Scott Houston................ 51 Chief Financial Officer and 1993
Secretary
Paul B. Susie............. .... 39 Principal Accounting Officer 2005
The following is a biographical summary of the experience of each of the
executive officers.
Vincent J. Truant has served as the Company's Chief Executive Officer
since September 1, 2005, as President since 2002 and as a Director since July
2005. In February 2005, Mr. Truant was also elected Chairman of the Board of
EarthShell. From May 15, 2002 to August 31, 2005, Mr. Truant served as the
Company's President and Chief Operating Officer. From March 2001 to May 2002,
Mr. Truant served as Senior Vice President and Chief Marketing Officer of the
Company. 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 fifteen (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.
D. Scott Houston has served as the Company's Chief Financial Officer
since October 1999, as the Company's Secretary since December 1999 and as a
Director since July 2005. 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.
Paul B. Susie has served as the Company's Controller since October
2005. From March 1998 until joining the Company, Mr. Susie held positions as
controller for Baltimore Marine Industries, Inc.and more recently American Pool
Enterprises, Inc. (a division of FirstService Corporation). From 1994 to 1998,
Mr. Susie held various audit, tax and consulting positions with Stegman &
Company, a regional accounting and consulting firm. From 1991 to 1994, Mr. Susie
served in the audit division of PriceWaterhouseCoopers, an international
accounting and consulting firm.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of the Named Executive Officers. The "Named Executive Officers"
include, (i) the Company's Chief Executive Officer, (ii) the Company's executive
officers as of December 31, 2005; and (iii) two (2) additional individuals who
were not executive officers as of the year ended December 31, 2005. 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.
14
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Securities
Fiscal year Other Annual Underlying
Name and Ended Salary Bonus Compensation Options
Principal Position December 31 ($) ($) ($)(1) (#)
Vincent J. Truant 2005 $ 366,667(2) $ -- $ 1,747 350,000
Chairman of the Board, Chief 2004 350,000 -- 2,625 50,000
Executive Officer and Former 2003 350,000 -- 3,063 20,833
President
D. Scott Houston (3) 2005 257,200 70,000 67,569 375,000
Chief Financial Officer and 2004 184,978 142,272 3,590 50,000
Secretary 2003 327,200 -- 2,454 20,833
Paul B. Susie (4) 2005 24,724(4) -- 544 40,000
Principal Accounting Officer
Simon K. Hodson 2005 395,444(5) -- 5,833 500,000
Former Vice Chairman of the Board 2004 500,000(5) -- 2,750 400,000
and Former Chief Executive Officer 2003 500,000 -- 2,250 41,667(6)
----------
(1) Reflects payments under the Company's 401(k) plan and accrued vacation
payments. The Company provides various perquisites to its executives
which, in accordance with SEC regulations, are not itemized because their
value is less than ten percent (10% ) of an executive's salary.
(2) Reflects a mid-year salary adjustment effective September 1, 2005 as a
result of Mr. Truant's becoming Chief Executive Officer of the Company on
that date.
(3) Includes $106,667 and $142,222 of deferred salary in 2005 and 2004,
respectively (of which $70,000 and $142,222 were treated as deferred
bonuses in 2004 and 2004, respectively). Also includes $7,200 in car
allowance made to Mr. Houston in 2003, 2004, and 2005.
(4) Mr. Susie joined the Company on October 31, 2005.
(5) Includes $141,667 deferred salary for 2004 and $133,333 in 2005. Mr.
Hodson resigned on October 31, 2005.
(6) This option grant is only exercisable upon the successful completion of a
sale of the Company.
Stock Option Grants in 2005
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in 2005 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 Exercise
Options Employees in Price (Per Expiration
Name and Principal Position Granted 2005 Share) Date 5% 10%
--------------------------- ------- ---------- ----------- ---------- ------------ -----------
Vincent J. Truant 350,000 28% $2.10 9/1/2015 $ 771,750 $ 808,500
Chairman of the Board, Chief
Executive Officer and
Former President
D. Scott Houston. 300,000 24% $1.85 5/11/2015 $ 236,250 $ 247,500
Chief Financial Officer 75,000 6% $2.15 10/12/2014 169,313 177,375
and Secretary
Paul B. Susie 40,000 3% $2.15 11/29/2015 $ 90,300 $ 94,600
Principal Accounting Officer
Simon K. Hodson 500,000 39% $1.85 10/31/2010 $ 393,750 $ 412,500
Former Vice Chairman of the
Board and Former Chief
Executive 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.
15
Aggregated Option Exercises In 2005 and 2005 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 Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Options at
2005 Fiscal Year End 2005 (1)
Shares --------------------------- --------------------------
Acquired on Value
Name and Principal Position Exercise Realized Unexercisable Exerciable Unexercisable Exercisable
--------------------------- -------- -------- ------------- ---------- ------------- -----------
Vincent J. Truant -- -- 450,000 32,917 $ 100,000 $ --
Chairman of the Board, Chief
Executive Officer and
Former President
D. Scott Houston -- -- 97,500 417,037 100,000 600,000
Chief Financial Officer
and Secretary
Paul B. Susie -- -- 30,000 10,000 -- --
Principal Accounting Officer
Simon K. Hodson -- -- -- 500,000 -- 1,000,000
Former Vice Chairman of the
Board and Former Chief
Executive Officer
----------
(1) The market price of the Company's common stock at December 31, 2005 was
$2.00.
Employment Agreements and Arrangements
Vincent J. Truant entered into an employment agreement with the Company
on August 26, 2005. Pursuant to the agreement, Mr. Truant receives and annual
salary of $400,000. Additionally, Mr. Truant was granted options to acquire
350,000 shares of the Company's stock at an exercise price equal to the market
share price of the Company's common stock at the close of trading on August 26,
2005, ($2.10 per share). Mr. Truant may also be entitled to receive (i) an
annual bonus in an amount up to one year's base salary, provided certain
criteria is met and (ii) additional stock options or restricted stock under such
terms and conditions as are defined in the future by the Compensation Committee
of the Board of Directors at their sole discretion.
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. Mr. Houston also receives a car
allowance of $600 per month. In order to conserve cash until the Company was
able to establish its royalty revenue stream, in April 2004, Mr. Houston
voluntarily agreed to go part time and to reduce his base salary 75%, which
resulted in an adjustment to his cash compensation to $80,000 per year. Mr.
Houston continued to work much more than was originally contemplated and in
October 2004, the cash portion of Mr. Houston's salary was adjusted to a rate of
$213,333 per year. The Company also agreed to payout Mr. Houston's accrued
vacation pay in the amount of $61,540, which was paid out over several pay
periods in 2005. As of September 1, 2005, Mr. Houston resumed his full time
status with the Company, at his original salary of $320,000 per year. However,
he receives only 2/3/3 of his salary in cash and has agreed to receive the
balance in the future as deferred compensation. In 2005, based on his continued
contributions at significantly reduced compensation during the Company's
difficult financial period, the Board approved the grant to Mr. Houston of a
deferred compensation award relating to that period, to be paid at such future
time as the Company is in a position to do so. Although this deferred
compensation award was initially booked as deferred salary, the Board has
clarified that this amount be classified as a special deferred bonus. Total
accrued deferred compensation due to Mr. Houston as of the year ended December
31, 2005 was $248,889.
16
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:
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
the conversion of debt by EKI, an affiliate of Mr. Khashoggi in October 2005.
The gift was reported on May 20, 2005 and the conversion of debt by EKI was
reported on February 24, 2006.
Mrs. Khashoggi did not timely file one report reporting her husband's
gift of shares of Common Stock reported above and one report reporting the
conversion of debt by EKI, an affiliate of Ms. Khashoggi, in October 2005. The
gift was reported on May 20, 2005 and the conversion of debt by EKI was reported
on February 24, 2006.
Compensation Committee Interlocks and Insider Participation
All decisions relating to executive compensation during 2005 were made
by the Company's Compensation Committee. None of the members of the Committee
were officers of the Company in 2005.
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.
Mr. Essam Khashoggi and E. Khashoggi Industries represent a greater
than 10% ownership in the Company. The following transactions occurred during
2005.
During 2002 and 2003, EKI made various simple interest working capital
loans to the Company (the "Simple Interest Loans"). As part of the settlement of
the 2006 Debentures in October of 2004, EKI agreed to convert all of the
outstanding Simple Interest Loans to EarthShell ($2,755,000) into unregistered
common stock at $3.00 per share and $532,644 of accumulated interest into
unregistered common stock at $4.00 per share, for a total of 1,051,494 shares
received by EKI. In May 2005, an additional 44,387 shares were issued to EKI
pursuant to a ninety (90) day price protection clause, which provided for an
adjustment in the effective conversion price of the interest portions of the
Simple Interest Loans from $4.00 per share to $3.00 per share
In 2005, the Company also granted a ten (10) year warrant to Essam
Khashoggi to purchase one million (1,000,000) shares of the Company's common
stock at $3.00 per share in consideration of his continued support of the
Company since its inception, including providing bridge loans at below market
terms from time to time.
On October 11, 2005, the Company entered into the EKI Loan with EKI
pursuant to which the Company issued to EKI a promissory note to EKI in the
principal amount of $1,000,000. As of the second week of January 2006, EKI has
advanced the full $1,000,000 to the Company. Interest accrues on the principal
balance of the EKI Loan at a variable per annum rate, as of any date of
determination, that is equal to the rate published in the "Money Rates" section
of The Wall Street Journal as being the "Prime Rate", compounded monthly. All
accrued but unpaid interest and outstanding principal is due and payable on the
earliest to occur of the following: (i) the second (2nd) anniversary of the date
of the EKI Loan; (ii) five (5) days following the date the Company has received
$3 million or more in aggregate net cash proceeds from all financing
transactions, equity contributions, and transactions relating to the sale,
licensing, sublicensing or disposition of assets or the provision of services
(including advance royalty payments, proceeds from the sale of the Company's
common stock and fees for technological services rendered to third parties),
measured from the date of the EKI Loan and not taking into account the proceeds
advanced under the EKI Loan; or (iii) the occurrence of an Event of Default (as
defined in the EKI Loan).
On October 11, 2005, the Company entered into the Debt Conversion
Agreement with EKI, pursuant to which the Company and EKI agreed that a
receivable in an amount equal to $837,145.69 (previously owed to bio-Tec
Biologische Naturverpackunger GmbH & Co.KG), but which receivable was
subsequently assigned to EKI) be converted into 279,048 shares of common stock
of the Company. The conversion price equals $3.00 per share. Pursuant to the
Debt Conversion Agreement, the Company and EKI released each other from any and
all claims in connection with the receivable.
17
Biotec License Agreement. On July 29, 2002 the Company entered into a
license and information transfer agreement (the "Biotech License Agreement")
with bio-tec Biologische Naturverpackungen GmbH & Co. KG and bio-tec Biologische
Naturverpackungen Forschungs und Entwicklungs GmbH (the "Biotec Group") to
utilize the Biotec Group technology for foodservice disposable packaging
applications. EKI had previously granted to the Company priority rights to
license certain product applications on an exclusive basis from the Biotec Group
in consideration for the Company's payment of a $100,000 minimum monthly payment
to Biotec. 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 (2) years, the $100,000 per month minimum license fee. In
December of 2004, the amended Biotec License Agreement was further amended and
EarthShell paid to Biotech $125,000, leaving a balance owing of approximately
$875,000, which was subsequently reduced to approximately $837,000. On August
31, 2005, in connection with the sale of Biotec by EKI, Biotec License Agreement
was again amended and restated (the "Amended and Restated Biotec License") and
the minimum monthly payment to retain exclusivity was completely eliminated and
the balance of approximately $837,000 owing to EarthShell was assigned by the
Biotec Group to EKI. Under the Amended and Restated Biotec License, the Company
has a fully paid up license to use the Biotec technology in the EarthShell
fields of use, with certain limited exclusions, exclusively through June 2008.
The Company can maintain its exclusivity provided it has been successful in
commercializing the Biotec technology and is making certain minimum royalty
payments under the license by June 2008. The Company has paid to the Biotec
Group $125,000 in cash, has converted approximately $1.475 million into 491,778
shares of unregistered stock, and in 2005 had assigned the balance owing to the
Biotec Group of $837,000 to EKI. The $837,000 balance was ultimately converted
by EKI in October 2005 into shares of EarthShell common stock at $3 per share,
as described above.
In August 2005, the Company granted a warrant to Mr. Essam Khashoggi to
purchase 1million shares of the Company's common stock at $3 per share in
consideration of Mr. Khashoggi'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 2005 compensation determinations
were made by the Compensation Committee with respect to the executive officers
of the Company, including the Named Executive Officers.
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 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.
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 Company paid base compensation to Mr. Vincent Truant, Chairman of
the Board and Chief Executive Officer, at an annual rate of $350,000 which was
then adjusted to $400,000 upon his being named Chief Executive Officer effective
September 1, 2005. Also effective September 1, 2005, the salary for Mr. D. Scott
Houston, Chief Financial Officer and Secretary resumed his full time status with
the Company and his salary was adjusted to the former rate of $320,00 per year,
of which, Mr. Houston receives $213,333 in cash payments and $106,667 in
deferred compensation, as described above.
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.
In determining whether to grant management bonuses for 2005, 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
granted only one bonus, which was in the amount of $70,000 to Mr. Houston, who
had voluntarily gone to reduced salary on a part time basis, but continued to
put in a nearly full time effort. The bonus for Mr. Houston will be accrued and
will be paid at some future date as the Committee is able.
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. 2005,the Stock Option Committee or its
successor committee, the Compensation Committee, granted the Named Executive
Officers stock options issued under the 1995 Stock Incentive Plan at the
then-current market as follows:
Stock Options
-------------
Vincent Truant 350,000
D. Scott Houston 375,000
Paul B. Susie 40,000
Simon K. Hodson 500,000
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.
Compensation to Chief Executive Officer in 2005
The Compensation Committee meets annually to evaluate the Chief
Executive Officer's performance and to review the Chief Executive Officer's
compensation.
In reviewing Mr. Vincent J. Truant'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. Truant received a base annual salary of $400,000 which was
effective on September 1, 2005. This amount was based on the Compensation
Committee's assessment that Mr. Truant is uniquely qualified to lead the Company
through its transition stage and into commercialization. Based in part on the
foregoing, the Compensation Committee concluded that the $400,000 base salary
compensation was appropriate for 2005.
The former CEO, Mr. Simon K. Hodson, resigned effective August 31, 2005
and his last day of employment was October 31, 2005. He received a salary at the
annual rate of $500,000 for 2005, of which $300,000 was cash compensation and
$200,000 was deferred compensation, accruing interest at the rate of 8% per
annum. During 2005, Mr. Hodson received total cash compensation of $395,444,
which was comprised of cash salary through October 31, 2005 of $250,000, and the
payment of accumulated deferred compensation of $141,667 related to 2004 and
$25,000 related to 2005. The balance of accumulated deferred compensation due to
Mr. Hodson as of December 31, 2005 was $179,361.
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 2005
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.
20
Submitted by the Company's Compensation Committee
Dr. Jennings, Mr. Gordon, and Mr. Rast
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, 2000 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.
[The following table was represented as a line chart in the printed material]
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."
22
OTHER MATTERS
Submission of Stockholder Proposals for Next Year's Annual Meeting.
Stockholders interested in presenting a proposal for consideration at the
Company's 2007 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 1301 York Road, Suite 200, Lutherville, Maryland 21093 no
later than March 1, 2007. 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).
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, York Road, Suite 200, Lutherville, Maryland 21093,
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, 2005,
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. SUCH REQUESTS
SHOULD BE DIRECTED TO THE CHIEF FINANCIAL OFFICER OF THE COMPANY AT 1301 YORK
ROAD, SUITE 200, LUTHERVILLE, MARYLAND 21093.
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
Baltimore, Maryland
May 11, 2006
23
APPENDIX A
AMENDMENT 8
TO
1995 STOCK INCENTIVE PLAN
OF
EARTHSHELL CORPORATION,
AS AMENDED AND RESTATED(1)
The 1995 Stock Incentive Plan of EarthShell Corporation, a Delaware
corporation, as amended and restated (the "Plan"), is hereby amended as follows:
1. Section 5(a) of the Plan is hereby amended to provide that the
aggregate number of Common Shares that may be issued pursuant to all Incentive
Stock Options granted under the Plans shall not exceed 4,000,000;
2. Section 5(c) of the Plan is hereby amended to provide that the
aggregate number of Common Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under the Plans shall not exceed
4,000,000.
Except as amended hereby, the Plan shall continue in full force and
effect.
IN WITNESS WHEREOF, the Corporation has caused this Eight Amendment to
be duly executed as of this __ day of June, 2006.
EARTHSHELL CORPORATION,
a Delaware corporation
By: ______________________________
Name: ______________________________
Title: ______________________________
----------
(1) First Amendment to 1995 Stock Incentive Plan dated May 1, 1997 and
effective January 8, 1997
Second Amendment to 1995 Stock Incentive Plan dated November 4, 1997
Third Amendment to 1995 Stock Incentive Plan dated February 5, 1999
Fourth Amendment to 1995 Stock Incentive Plan dated March 16, 1999
Fifth Amendment to 1995 Stock Incentive Plan dated March 16, 2000
Sixth Amendment to 1995 Stock Incentive Plan dated June 3, 2003
Seventh Amendment to 1995 Stock Incentive Plan dated July 21, 2005
24
APPENDIX B
EarthShell Corporation
Audit Committee Charter
Approved by the Board of Directors
on August 11, 2005
This charter sets forth the authority and responsibility of the Audit
Committee (the "Committee") of the Board of Directors (the "Board") of
EarthShell Corporation (the "Company").
I. COMPOSITION
The Committee shall be appointed annually to serve at the pleasure of
the Board and will be comprised of not less than three members of the Board who
are "independent directors". The Board shall designate one member as chair or
delegate the authority to designate a chair to the Committee. Members of the
Committee shall be appointed by the Board upon the recommendation of the
Corporate Governance and Nominating Committee. For purposes hereof, an
"independent director" is a director who meets the applicable independence
requirements of the NASD and Securities and Exchange Commission (the "SEC")
rules, as determined by the Board.
Each member of the Committee must be financially literate as required
by Nadsaq corporate governance standards, no member shall have participated in
the preparation of the Company's (or any subsidiary) financial statements at any
time during the past three years and at least one member of the Committee shall
be an "audit committee financial expert," as determined by the Board in
accordance with SEC rules.
II. MEETINGS
The Committee shall meet at least four times annually, or more
frequently as circumstances dictate. Regular meetings of the Committee may be
held without call or notice at such times and places as the Committee from time
to time may fix. Special meetings of the Committee may be called by the Chairman
of the Committee or by the Secretary of the Company when requested to do so by
any two members of the Committee. Notice shall be given in the same manner as
notice of special meetings of the Board.
Any action required or permitted to be taken at any meeting of the
Committee may be taken without a meeting if consent in writing is given thereto
by all members of the Committee and such consent is filed with the minutes.
Minutes of the meetings of the Committee will be prepared promptly by
the Secretary of the Company or a delegate. The Secretary shall cause minutes of
the meetings to be kept in the minute books of the Company of the Committee.
These minutes shall be made available to the members of the Board from time to
time for their information.
III. QUORUM
A majority of the members of the Committee, but no fewer than two
persons, shall constitute a quorum for the transaction of business at any
meeting of the Committee. Any action of the Committee to be effective must be
authorized by the affirmative vote of a majority of the members thereof present
and in any event shall require not less than two affirmative votes.
IV. PURPOSE
The purposes of the Committee shall be to:
25
o oversee the Company's accounting and financial reporting processes
and the audits of the Company's financial statements;
o oversee the Company's compliance with legal and regulatory
requirements;
o oversee the outside auditor's qualifications and independence;
o oversee the performance of the company's internal audit function and
outside auditor;
o oversee the Company's system of disclosure controls and system of
internal controls; and
o prepare the report required by the rules of the SEC to be included
in the Company's annual proxy statement.
V. DUTIES AND RESPONSIBILITIES
To fulfill its responsibilities and duties the Committee shall:
1. Review Procedures and the Outside Auditor
o Be directly responsible, in its capacity as a committee of the
Board, for the appointment, compensation and oversight of the work
of the outside auditor. In this regard, the Committee shall appoint,
retain, compensate, evaluate, and terminate, when appropriate, the
outside auditor, which shall report directly to the Committee.
o Approve in advance all audit services to be provided by the outside
auditor. (By approving the audit engagement, an audit service within
the scope of the engagement shall be deemed to have been
pre-approved.)
o Establish policies and procedures for the engagement of the outside
auditor to provide audit and permissible non-audit services, which
shall include pre-approval of all permissible non-audit services to
be provided by the outside auditor.
o Consider, at least annually, the independence of the outside
auditor, including whether the outside auditor's performance of
permissible non-audit services is compatible with the auditor's
independence, and obtain and review a report by the outside auditor
describing any relationships between the outside auditor and the
Company or any other relationships that may adversely affect the
independence of the outside auditor.
o Establish policies for the hiring of employees and former employees
of the outside auditor.
o Review and discuss with the outside auditor: (A) the scope of the
audit, the results of the annual audit examination by the auditor,
and any difficulties the auditor encountered in the course of its
audit work, including any restrictions on the scope of the outside
auditor's activities or on access to requested information, and any
significant disagreements with management; (B) any reports of the
outside auditor with respect to interim periods; and (C) any
significant changes to the Company's accounting principles and any
items required to be communicated by the outside auditor in
accordance with SAS 61.
o Review and discuss with management and the outside auditor the
annual audited and quarterly financial statements of the Company,
including: (A) an analysis of the auditor's judgment as to the
quality of the Company's accounting principles, setting forth
significant financial reporting issues and judgments made in
connection with the preparation of the financial statements; (B) the
Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including accounting
policies that may be regarded as critical; and (C) major issues
regarding the Company's accounting principles and financial
statement presentations, including any significant changes in the
Company's selection or application of accounting principles and
financial statement presentations; and receive reports from the
outside auditor as required by SEC rules.
26
o Recommend to the Board based on the review and discussion described
in the preceding three bullet points, whether the financial
statements should be included in the Annual Report on Form 10-K.
o Review with management and the outside auditor the Company's
quarterly financial results prior to the release of earnings and/or
the Company's quarterly financial statements prior to filing or
distribution and review and discuss corporate policies with respect
to earnings press releases, as well as financial information and
earnings guidance, if any, provided to analysts and ratings agencies
o Review press releases with management prior to release, including
review of "pro-forma" or "adjusted" non-GAAP information and press
releases containing financial information.
o Review and discuss with the internal auditor of the Company, if any,
the scope and results of the internal audit program.
o Review and discuss the adequacy and effectiveness of the Company's
internal controls, including any significant deficiencies or
material weaknesses in internal control over financial reporting and
significant changes in internal control over financial reporting.
o Review the reports of management and the outside auditor on internal
control over financial reporting.
o Discuss significant financial risk exposures and the steps
management has taken to monitor, control, and report such exposures.
Review significant findings prepared by the outside auditor and
management's responses to such findings.
2. Other Audit Committee Responsibilities
o On at least an annual basis, review with the Company's counsel, any
legal matters that could have a significant impact on the Company's
financial statements, the Company's compliance with applicable laws
and regulations, and inquiries received from regulators or
governmental agencies.
o Oversee the Company's compliance systems with respect to legal and
regulatory requirements and review the Company's codes of conduct
and programs to monitor compliance with such codes.
o Prepare the report required by the rules of the SEC to be included
in the Company's annual proxy statement.
o Review all related party transactions (as defined in applicable
Nadsaq listing standards).
o Establish, publish, and maintain procedures for the receipt,
retention and treatment of complaints regarding accounting, internal
controls or auditing matters and the confidential, anonymous
submission by employees of concerns regarding questionable
accounting or auditing matters (whistle blower procedures).
o Help provide an open avenue of communication among the outside
auditor, management, the internal audition function and the Board.
o Review and discuss the adequacy and effectiveness of the Company's
disclosure controls and procedures.
o Perform any other activities consistent with this charter, the
Company's Bylaws, and governing law, as the Committee or the Board
deems necessary or appropriate.
o Annually evaluate the performance of the Committee and assess the
adequacy of the Committee's charter. Submit the Charter to the Board
of Directors for approval and have the document published as may be
required by SEC regulations.
o Review and recommend approval of budgets.
27
VI. OUTSIDE ADVISORS
The Committee will have the authority to retain at the expense of the
Company such outside counsel, experts, and other advisors as it determines
appropriate to assist it in the full performance of its functions.
* * * * * *
28
EarthShell Corporation
Compensation Committee Charter
Approved by the Board of Directors
on August 11, 2005
This charter sets forth the authority and responsibility of the
Compensation Committee (the "Committee") of the Board of Directors (the "Board")
of EarthShell Corporation (the "Company").
I. COMPOSITION
The Committee shall be appointed annually to serve at the pleasure of
the Board and will be comprised of not less than three members of the Board who
are "independent directors". The Board shall designate one member as chair or
delegate the authority to designate a chair to the Committee. Members of the
Committee shall be appointed by the Board upon the recommendation of the
Corporate Governance and Nominating Committee. For purposes hereof, an
"independent director" is a director who meets the applicable independence
requirements of NASD, as determined by the Board. Additionally, members of the
Committee must qualify as "non-employee directors" for purposes of Rule 16b-3
under the Securities Exchange Act of 1934, as amended, and as "outside
directors" for purposes of Section 162(m) of the Internal Revenue Code.
II. MEETINGS
The Committee shall meet at least twice annually, or more frequently as
circumstances dictate. Regular meetings of the Committee may be held without
call or notice at such times and places as the Committee from time to time may
fix. Special meetings of the Committee may be called by the Chairman of the
Committee or by the Secretary of the Company when requested to do so by any two
members of the Committee. Notice shall be given in the same manner as notice of
special meetings of the Board.
Any action required or permitted to be taken at any meeting of the
Committee may be taken without a meeting if consent in writing is given thereto
by all members of the Committee and such consent is filed with the minutes.
Minutes of the meetings of the Committee will be prepared promptly by
the Secretary of the Company or a delegate. The Secretary shall cause minutes of
the meetings to be kept in the minute books of the Company of the Committee.
These minutes shall be made available to the members of the Board from time to
time for their information.
III. QUORUM
A majority of the members of the Committee, but no fewer than two
persons, shall constitute a quorum for the transaction of business at any
meeting of the Committee. Any action of the Committee to be effective must be
authorized by the affirmative vote of a majority of the members thereof present
and in any event shall require not less than two affirmative votes.
IV. PURPOSE, DUTIES, AND RESPONSIBILITIES
To fulfill its responsibilities and duties the Committee shall have
direct responsibility to:
29
o oversee the Company's overall compensation structure, policies and
programs, and assess whether the Company's compensation structure
establishes appropriate incentives for management and employees;
o review and approve corporate goals and objectives relevant to the
compensation of the Chief Executive Officer (the "CEO"), evaluate
the CEO's performance in light of those goals and objectives, and
either as a committee or together with the other independent
directors (as directed by the Board), determine and approve the
CEO's compensation level based on this evaluation;
o administer and make recommendations to the Board with respect to
non-CEO compensation and the Company's incentive-compensation and
equity-based compensation plans;
o review and recommend to the Board the annual base salary, bonus, and
other benefits for the executive officers of the Company with the
goal of ensuring that a significant portion of executive
compensation is reasonably related to the long-term interests of the
stockholders;
o approve stock option and other stock incentive awards for executive
officers;
o review and approve the design of other benefit plans pertaining to
executive officers;
o review and recommend employment agreements and severance
arrangements for executive officers, including change-in-control
provisions, plans or agreements;
o approve, amend or modify the terms of any compensation or benefit
plan that does not require shareholder approval;
o review periodically succession plans relating to positions held by
executive officers, and make recommendations to the Board regarding
the selection of individuals to fill these positions;
o annually evaluate the performance of the Committee and the adequacy
of the committee's charter; and
o produce a Committee report on executive compensation as required by
the Securities and Exchange Commission (the "SEC") to be included in
the company's annual proxy statement filed with the SEC.
V. SUBCOMMITTEES
The Committee shall be permitted to delegate any of the foregoing
duties and responsibilities to a subcommittee of the Committee consisting of not
less than two members of the committee.
VI. OUTSIDE ADVISORS
The Committee will have the authority to retain at the expense of the
Company such outside counsel, experts, and other advisors as it determines
appropriate to assist it in the full performance of its functions, including
sole authority to retain and terminate any compensation consultant used to
assist the committee in the evaluation of director, CEO or senior executive
compensation, and to approve the consultant's fees and other retention terms.
* * * * * *
30
EXHIBIT C
EarthShell Corporation
Corporate Governance and Nominating Committee Charter
Approved by the Board of Directors
on August 11, 2005
This charter sets forth the authority and responsibility of the
Corporate Governance and Nominating Committee (the "Committee") of the Board of
Directors (the "Board") of EarthShell Corporation (the "Company").
I. PURPOSE AND AUTHORITY
The primary purpose of the Committee is to assist the Board in:
o identifying qualified individuals to become Board members;
o determining the composition of the Board and its committees;
o considering questions of possible conflicts of interest;
o developing and implementing the Company's corporate governance
guidelines; and
o monitoring a process to assess Board effectiveness.
The Committee will primarily fulfill these responsibilities by carrying
out the activities listed below in Section V of this charter. Subject to any
restrictions or limitations on the delegation of power and authority imposed by
the rules or regulations promulgated by the SEC, the NASD or other applicable
regulatory authority or law, the Committee shall have, and may exercise, all the
powers and authority of the Board reasonably necessary or advisable for the
Committee to perform its responsibilities as set forth in Section V of this
charter.
II. COMPOSITION
The Committee shall be appointed annually to serve at the pleasure of
the Board and will be comprised of not less than three members of the Board who
are "independent directors" for purposes of SEC and other applicable regulatory
rules. The Board shall designate one member of the Committee to serve as
Chairman. Vacancies in the Committee may be filled at any meeting of the Board.
III. MEETINGS
The Committee shall meet at least twice annually, or more frequently as
circumstances dictate. Regular meetings of the Committee may be held without
call or notice at such times and places as the Committee from time to time may
fix. Special meetings of the Committee may be called by the Chairman of the
Committee or by the Secretary of the Company when requested to do so by any two
members of the Committee. Notice shall be given in the same manner as notice of
special meetings of the Board.
Any action required or permitted to be taken at any meeting of the
Committee may be taken without a meeting if consent in writing is given thereto
by all members of the Committee and such consent is filed with the minutes.
Minutes of the meetings of the Committee will be prepared promptly by
the Secretary of the Company or a delegate. The Secretary shall cause minutes of
the meetings to be kept in the minute books of the Company of the Committee.
These minutes shall be made available to the members of the Board from time to
time for their information.
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IV. QUORUM
A majority of the members of the Committee, but no fewer than two
persons, shall constitute a quorum for the transaction of business at any
meeting of the Committee. Any action of the Committee to be effective must be
authorized by the affirmative vote of a majority of the members thereof present
and in any event shall require not less than two affirmative votes.
V. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Committee shall:
1. Identify Qualified Individuals to Become Board Members
The Committee will annually provide to the Board for its approval a
slate of potential Board member nominees to be presented to the
Company's stockholders. When selecting such nominees the Committee will
seek out individuals who have:
o the highest character and integrity;
o an ability and desire to make independent and thoughtful analytical
inquiries;
o meaningful experience at a strategy/policy setting level;
o outstanding ability to work well with others;
o sufficient time available to carry out Board members
responsibilities; and
o freedom from any conflict of interest (other than employment by the
Company of an inside director) that would interfere with his or her
independent judgment and proper performance of responsibilities as a
member of the Board.
2. Review Board and Board Committee Structure
The Committee will, from time to time, review the Board and the Board's
committee structure and function and will provide the Board annually
with a recommended membership slate for each Committee. The Committee
will also recommend additional committee members to fill vacancies as
such vacancies arise.
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3. Corporate Governance
The Committee will develop and recommend to the Board for its approval
a set of corporate governance guidelines. The Committee will review the
guidelines from time to time and recommend any necessary changes.
4. Conflicts of Interest
The Committee will review and consider all potential conflict of
interest and related party transactions and will:
o determine whether each such transaction is on at least as favorable
terms to the Company as might be available from third parties;
o determine whether each such transaction is reasonably likely to
further the Company's business activities and interests;
o determine whether the process by which the decision to enter into
each such transaction was approved or ratified and is fair;
o help ensure that all such transactions are disclosed in the
Company's filings with the SEC as necessary; and
o retain an independent expert, if necessary, to determine the
advisability of the Company's entering into such transactions, and
to determine fair terms for such transactions.
5. Self-Evaluation Process
The Committee will develop and recommend to the Board for its approval
an annual Board self-evaluation process. The Committee will administer
the annual self-evaluation process. In addition, the Committee will:
o as necessary, review changes in the occupation or retirement of
Board members and whether the new occupation or retirement is
consistent with the rationale for originally selecting the person to
be a Board member;
o when presented, review Board member notices regarding invitations to
join other boards of directors; and
o every three years, review each Board member's continuation on the
Board.
6. General
The Committee will report to the Board following meetings of the
Committee and will perform any other activities consistent with this
charter, the Company's Certificate of Incorporation and Bylaws and
governing law as the Committee or the Board deems necessary or
appropriate. The Committee shall have the authority to engage outside
counsel if necessary.
* * * * * *
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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 Vincent J. Truant 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 13, 2006, at 10:00 a.m.
Eastern Daylight Time, at the Towson Sheraton, located at Dulaney Valley Road,
Baltimore, Maryland for the purposes of:
, 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:
VINCENT J. TRUANT HAMLIN JENNINGS
MICHAEL C. GORDON M. WALKER RAST
D. SCOTT HOUSTON
(2) Approving an amendment to the Company's 1995 Stock Incentive Plan
increasing the number of shares of Common Stock available for awards
( ) 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
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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.
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