TELKONET, INC.
902-A COMMERCE ROAD
ANNAPOLIS, MARYLAND 21401
-----------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders:
The 2003 Annual Meeting of Stockholders of Telkonet, Inc. will be held
at the Radisson Hotel, 511 Lexington Avenue, New York, New York, Dynasty
Restaurant, 2nd Floor, on Friday, September 4, 2003 at 5:00 p.m. local time for
the following purposes:
1. To elect five (5) directors, each to serve until the next
annual meeting of stockholders and until his successor has
been elected and qualified;
2. To ratify options granted under Telkonet's Amended and
Restated Stock Incentive Plan;
3. To ratify the appointment of independent accountants for 2003;
and
4. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only stockholders of record at the close of business on July 30, 2003
are entitled to notice of, and to vote at, the meeting or any adjournment
thereof.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, we urge you to complete,
sign, date and return the enclosed proxy card in the enclosed envelope as
promptly as possible.
By order of the Board of Directors,
/s/ Robert P. Crabb
-------------------
Robert P. Crabb
Secretary
Dated: June 30, 2003
YOUR VOTE IS IMPORTANT.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IMMEDIATELY, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
TELKONET, INC.
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation
of proxies by and on behalf of the Board of Directors of Telkonet, Inc. for use
at Telkonet's 2003 Annual Meeting of Stockholders, to be held at the Radisson
Hotel, 511 Lexington Avenue, New York, New York, Dynasty Restaurant, 2nd Floor,
on Friday, September 4, 2003 at 5:00 p.m. local time, and at any adjournment or
postponement of the annual meeting. This proxy statement, the accompanying proxy
card and Telkonet's Annual Report to Stockholders for the fiscal year ended
December 31, 2002 are first being sent to stockholders on or about August 5,
2003.
The solicitation of proxies is made by and on behalf of Telkonet's
Board of Directors. The cost of the solicitation of proxies will be borne by
Telkonet. In addition to solicitation of proxies by mail, employees of Telkonet
or its affiliates may solicit proxies by telephone or facsimile.
The Board of Directors has fixed the close of business on June 30, 2003
as the record date for determining the holders of shares of common stock who are
entitled to notice of, and to vote at, the annual meeting. At the close of
business on June 30, 2003, Telkonet had outstanding 15,977,795 shares of common
stock, par value $0.001 per share. Each stockholder is entitled to one vote per
share of Telkonet's common stock registered in such stockholder's name on
Telkonet's books as of the close of business on July 30, 2003.
Shares of common stock represented by properly executed proxies
received at or prior to the annual meeting that have not been revoked will be
voted at the annual meeting in accordance with the instructions indicated on the
proxies. Stockholders are requested to complete, sign, date and promptly return
the enclosed proxy card in the enclosed postage-prepaid envelope to ensure that
their shares are voted. If the enclosed proxy is signed and returned, the shares
represented thereby will be voted in accordance with any specification made
therein by the stockholder. In the absence of any such specification, the shares
will be voted to elect each of the director nominees set forth under "Election
of Directors" below, for each proposal set forth under "Ratification of Options
Granted Under the Telkonet, Inc. Stock Incentive Plan" and "Ratification of
Appointment of Independent Public Accountants," and in the discretion of
management on any other matter which may properly come before the annual
meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Attendance at the annual
meeting will not, in and of itself, revoke a proxy. Proxies may be revoked by:
o Filing with the Secretary of Telkonet, at or before the taking
of the vote at the annual meeting, a written notice of
revocation dated later than the proxy;
o Executing a later dated proxy relating to the same shares of
common stock and delivering it to the Secretary of Telkonet,
including by facsimile, before the taking of the vote at the
annual meeting; or
o Attending the annual meeting and voting in person.
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Any written revocation or subsequent proxy should be sent so as to be
delivered to Telkonet, Inc., 902-A Commerce Road, Annapolis, Maryland 21401,
Attention: Corporate Secretary, or hand delivered to the Secretary of Telkonet
or his representative at or before the taking of the vote at the annual meeting.
If the annual meeting is postponed or adjourned, proxies given pursuant
to this solicitation will be utilized at any subsequent reconvening of the
annual meeting, except for any proxies that previously have been revoked or
withdrawn effectively, and notwithstanding that proxies may have been
effectively voted on the same or any other matter previously.
Telkonet's bylaws provide that the holders of a majority of the
outstanding Telkonet shares, present in person or by proxy, will constitute a
quorum, and that the affirmative vote of a majority of the shares represented at
the annual meeting and constituting a quorum is required for approval of any
proposal brought before the annual meeting, unless a greater proportion or
number of votes is required by law or by Telkonet's certificate of incorporation
or bylaws. The election of directors will require the affirmative vote of a
majority of the shares present at the annual meeting and constituting a quorum.
Abstentions and broker non-votes will be deemed present for purposes of
constituting a quorum and will have the same legal effect as a vote "against"
each nominee for the Board of Directors and all proposals presented at the
annual meeting.
ITEM 1. ELECTION OF DIRECTORS
Telkonet's bylaws establish the number of directors at not less than
three members. Pursuant to the bylaws, the Board of Directors may increase or
decrease the number of members of the Board of Directors. The Board of Directors
has established the number of directors at five. At the annual meeting, the
shares represented by properly executed proxies, unless otherwise specified,
will be voted for the election of the five nominees named herein, each to serve
until the next annual meeting and until his successor is duly elected and
qualified.
If for any reason any of the nominees is not a candidate when the
election occurs (which is not expected), the Board of Directors expects that
proxies will be voted for the election of a substitute nominee designated by the
Board of Directors. The following information is furnished concerning each
nominee for election as a director.
THE BOARD OF DIRECTORS RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE ELECTION OF EACH NOMINEE.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
Director Name Age Position Since
------------- --- -------- -----
Warren V. Musser 76 Chairman of the Board 2003
Ronald W. Pickett 55 President & Director 2003
A. Hugo DeCesaris 44 Director 2001
David W. Grimes 65 Director 2000
Stephen L. Sadle 57 Chief Operating Officer & Director 2000
3
WARREN V. MUSSER, Chairman of the Board of Directors, has taken over 50
companies public during his distinguished and successful career as an
entrepreneur. A partial list of his accomplishments include: The Musser Group,
Chairman Emeritus, Safeguard Scientifics, Inc. (formerly Safeguard Industries,
Inc.), Chairman of the Board and Chief Executive Officer, Safeguard Scientifics,
Inc., Founder, Chairman of the Board and President, Lancaster Corporation
(became Safeguard Industries, Inc.), Founder & President, Musser and Company,
Inc. (Investment Banking Firm). In addition, Mr. Musser is a Director of
CompuCom Systems, Inc. and Internet Capital Group, Inc., Vice Chairman of
Nutri/System, Inc. and Eastern Technology Council and Chairman of Economics, PA.
He also serves as the Vice President/Development, Cradle of Liberty Council of
the Boy Scouts of America.
RONALD W. PICKETT, President & Director, fostered the development of
Telkonet since 1999 as the Company's principal investor and co-founder of the
Company. He also was the founder, and for twenty years served as Chairman of the
Board of Directors and President, of Medical Advisory Systems, Inc., which is
now named Digital Angel Corporation (AMEX: "DOC"). A graduate of Gordon College,
Mr. Pickett has engaged in various entrepreneurial activities for 35 years.
DAVID W. GRIMES, Director, is a co-founder of Telkonet. From 1963 to
1982, Mr. Grimes was a senior executive with NASA, heading the $200 million per
year Delta Program. He also was founder, and from 1982 to 1989 served as Chief
Executive Officer, of Transpace Carriers Inc., a venture to commercialize the
Delta launch vehicle. From 1989 to 1992, he was the Engineering Division
Director at EER Inc., with supervisory responsibility for more than 100
engineers and technicians on electrical mechanical and thermal tasks for Goddard
Space Flight Center. From 1992 to 1999, Mr. Grimes served as Chief Engineer for
Final Analysis, Inc. and led the design and development of the Low Earth Orbit
constellation of 38 satellites for use in global store and forward
communications. Mr. Grimes is a recognized expert in space and ground
communications systems.
STEPHEN L. SADLE, Director and Chief Operating Officer, is a co-founder
of Telkonet. From 1970 to 1986 Mr. Sadle was president of a successful
infrastructure construction and development company in the Washington, D.C.
metro area. From 1986 to 1999, he was Vice President of Business Development and
Sales for The Driggs Corporation, a major heavy and infrastructure firm
interfacing with both government and the private sectors. From 1999 to 2000, Mr.
Sadle was Vice President and General Sales Manager of Internos, a provider of
web-based vertical intranet applications, and developed operating extranets in
the transportation and construction industries.
A. HUGO DECESARIS, a Director, has over 25 years experience in the
homebuilding industry with Washington Homes, Inc., where he served as Vice
President and a member of the Board of Directors. In January of 2001, Washington
Homes, Inc. became a wholly-owned subsidiary of K. Hovnanian Enterprises, Inc.
and is now one of the top ten homebuilders in the nation. Mr. DeCesaris is
currently the Regional Vice President for the Maryland Division of Washington
Homes, Inc., President and owner of Southern Maryland's largest Marina and a
member of the Board of Directors of MNCBIA Volume Builders Council.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 2002, the Board of Directors
held 9 regular and special meetings, which all directors attended. Telkonet does
not have any standing committees of the Board of Directors. DIRECTORS'
4
COMPENSATION
Telkonet reimburses non-management directors for costs and expenses in
connection with their attendance and participation at Board of Directors
meetings and for other travel expenses incurred on Telkonet's behalf. Telkonet
compensates each non-management director $250.00 for each meeting of the Board
of Directors.
EXECUTIVE OFFICERS
The following table furnishes the information concerning Telkonet's
executive officers as of March 26, 2003.
Name Age Title
---- --- -----
Ronald W. Pickett 55 President
Robert P. Crabb 55 Secretary
E. Barry Smith 52 Chief Financial Officer
Stephen Sadle 56 Chief Operating Officer
James Landry 49 Vice President, Engineering
E. BARRY SMITH, Chief Financial Officer, is a CPA and senior financial
executive with diversified experience in both public and private companies. Mr.
Smith's background includes big-four public accounting experience with the firm
of Deloitte & Touche, Senior Financial Partner with over 15 years executive
management experience with Safeguard Scientifics, Inc. and their partner
companies including: ThinAirApps, Inc. (Wireless Application Provider-sold to
Palm, Inc.) and Tangram Enterprise Solutions (Software/Hardware for PC/LAN
Mainframe Connectivity and Enterprise Software Management). Mr. Smith's
experience also includes, Vice President of Finance & Administration for US Golf
Management (Public/Private Golf Course & Restaurant Management), Vice President
of Finance for International Communications Research (Market Research & Database
Services) and Treasurer for The Chilton Company (Publishing).
JAMES LANDRY, Vice President, Engineering, has over 18 years experience
in developing communications hardware for the enterprise/carrier market with
3Com, US Robotics, Penril Datacomm and Data General. While at 3Com/US Robotics,
he was singularly responsible for the development of the xDSL product line as
well as a number of modems and interface cards. At Penril, he served as the
product development leader for the Series 1544 multiplexer/channel bank and at
Data General he was technical leader of system integration for ISDN WAN. Mr.
Landry brings a wealth of practical design leadership and a solid history of
delivering products to the marketplace. He holds four United States patents.
ROBERT P. CRABB, Secretary, has over 35 years of sales, marketing and
corporate management experience, including a career in sales and management with
the Metropolitan Life Insurance Company. His entrepreneurial expertise also
includes public company administration, financial consulting and
commercial/residential real estate development. Mr. Crabb oversees the Company's
public company administration and corporate governance, is a former Director of
Telkonet and has been involved with the Company since 1999.
5
ITEM 2. RATIFICATION OF OPTIONS GRANTED UNDER
THE AMENDED AND RESTATED TELKONET, INC. STOCK INCENTIVE PLAN
In January 2003 options to acquire a total of 7,325,000 shares of the
Telkonet's common stock were issued pursuant to the Telkonet, Inc. Stock
Incentive Plan by the Board of Directors. Among the options issued in January,
2003 were options issued to the following directors and executive officers of
Telkonet:
NUMBER SHARES SUBJECT TO
NAME PURCHASE
---- --------
David Grimes 900,000
Peter Musser 2,000,000
Howard Lubert (1) 1,000,000
Stephen Sadle 900,000
Robert Crabb 500,000
James Landry 125,000
E. Barry Smith 350,000
-------------
(1) Mr. Lubert was appointed as Chief Executive Officer on January
1, 2003. Mr. Lubert resigned effective June 16, 2003 at which
time 83,333 options vested and the remaining 916,667 options
were cancelled.
The foregoing options entitle the holder to purchase shares of Telkonet
common stock at $1.00 per share and vest ratably over twelve quarters beginning
January 1, 2003. Stockholder approval is not required for the issuance of the
options under the Stock Incentive Plan or federal securities laws. However,
stockholder ratification of the options may allow the holders of these options
to have the benefit of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934 which, among other things, exempts certain grants of options to officers
and directors of Telkonet from the provisions of Section 16(b) of the Exchange
Act.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
ITEM 3. RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Russell, Bedford, Stefanou and
Mirchandani, LLP as Telkonet's independent public accountants for 2003. Although
ratification by stockholders is not required, the Board of Directors requests
that stockholders ratify this appointment. If ratification is not obtained, the
Board of Directors will reconsider this appointment. Telkonet has been advised
that representatives of Russell, Bedford, Stefanou and Mirchandani will be
present at the annual meeting. They will be afforded the opportunity to make a
statement, should they desire to do so, and respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
6
OTHER MATTERS
The Board of Directors is not aware of any other matter that may be
presented for action at the annual meeting. If any other matter comes before the
annual meeting, the persons named in the enclosed proxy will vote the proxy with
respect thereto in accordance with their best judgment, pursuant to the
hdiscretionary authority granted by the proxy.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following tables set forth, as of March 26, 2003, the number of
shares of Telkonet's common stock beneficially owned by each director and
executive officer of Telkonet, by all directors and executive officers as a
group, and by each person known by Telkonet to own beneficially more than 5.0%
of the outstanding common stock.
SHARES BENEFICIALLY
BENEFICIAL OWNER (1) OWNED PERCENT OF CLASS
---------------- ----- ----------------
Howard Lubert
435 Devon Park Drive
Building 500
Wayne, PA 19087 83,333 (2) 0.5%
E. Barry Smith
435 Devon Park Drive
Building 500
Wayne, PA 19087 29,167 (3) 0.2%
Stephen Sadle,
902-A Commerce Road
Annapolis, MD 21401 3,796,600 (4) 24.0%
James Landry
902-A Commerce Road
Annapolis, MD 21401 118,429 (5) 0.7%
Robert P. Crabb
902-A Commerce Road
Annapolis, MD 21401 41,667 (6) 0.3%
Warren V. Musser
435 Devon Park Drive
Building 500
Wayne, PA 19087 166,667 (7) 1.0%
Ronald W. Pickett
902-A Commerce Road
Annapolis, MD 21401 2,658,964 16.9%
7
SHARES BENEFICIALLY
BENEFICIAL OWNER (1) OWNED PERCENT OF CLASS
---------------- ----- ----------------
David Grimes
902-A Commerce Road
Annapolis, MD 21401 1,373,000 (8) 8.7%
L. Peter Larson
902-A Commerce Road
Annapolis, MD 21401 2,505,285 (9) 15.0%
Hugo DeCesaris
902-A Commerce Road
Annapolis, MD 21401 1,375,000 (10) 8.3%
Jenson and Associates,
5525 South 900 East
Suite 110
Salt Lake City, Utah 84117 1,980,000 12.6%
All directors and executive
officers as a group 12,148,112 67.0%
--------------------
(1) Unless otherwise indicated, each person has sole power to vote and
dispose, or direct the disposition of, all shares of common stock
beneficially owned, subject to applicable community property and
similar laws.
(2) Includes immediately exercisable options to purchase 83,333 shares of
Telkonet common stock at $1.00 per share.
(3) Includes immediately exercisable options to purchase 29,167 shares of
Telkonet common stock at $1.00 per share.
(4) Includes immediately exercisable options to purchase 75,000 shares of
Telkonet common stock at $1.00 per share.
(5) Includes immediately exercisable options to purchase 118,429 shares of
Telkonet common stock at $1.00 per share.
(6) Includes immediately exercisable options to purchase 41,667 shares of
Telkonet common stock at $1.00 per share.
(7) Includes immediately exercisable options to purchase 166,667 shares of
Telkonet common stock at $1.00 per share.
(8) Includes immediately exercisable options to purchase 75,000 shares of
Telkonet common stock at $1.00 per share.
(9) Includes immediately exercisable options to purchase 1,000,000 shares
of Telkonet common stock at $1.00 per share.
(10) Includes an immediately exercisable warrant to purchase 815,000 shares
of Telkonet common stock at $0.50 per share.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to Telkonet for the fiscal
year ended December 31, 2002 for each of the three highest paid persons who are
officers or directors of Telkonet.
8
ANNUAL COMPENSATION
-------------------
NAME AND BASE OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY($) BONUS ($) COMPENSATION($)
------------------ ---- --------- --------- ---------------
J. Gregory Fowler (1)
Chief Executive Officer 2002 $ 114,000 $ 0 $ 0
James Landry
Vice President, Engineering 2002 $ 116,000 $ 0 $ 0
Stephen L. Sadle
Chief Operating Officer 2002 $ 130,000 $ 0 $ 0
---------------------
(1) On January 30, 2002, Mr. Fowler was appointed Chief Executive Officer
of Telkonet. Mr. Fowler resigned as Chief Executive Officer of Telkonet
on December 12, 2002.
OPTION/SAR GRANTS
The following table sets forth information concerning stock options
granted in the fiscal year ended December 31, 2002, to the persons listed on the
Summary Compensation Table.
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS GRANTED EXERCISE OF
UNDERLYING TO EMPLOYEE IN BASE PRICE EXPIRATION
NAME OPTIONS/SARS GRANTED FISCAL YEAR ($/SH) DATE
---- -------------------- ----------- ------ ----
J. Gregory Fowler 650,000 22.9% $ 1.00 1/29/2012
James Landry 100,000 3.5% $ 1.00 2/15/2012
Stephen L. Sadle 1,000,000 35.5% $ 1.00 1/12/2012
AGGREGATED OPTION/SAR EXERCISES
The following table summarizes information relating to stock option
exercises during the year ended December 31, 2002 by those persons listed on the
Summary Compensation Table.
9
AGGREGATE OPTION EXERCISES IN 2002 AND
OPTION VALUES AS OF DECEMBER 31, 2002
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 2002 DECEMBER 31, 2002 (1)
----------------- ---------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
J. Gregory Fowler 0 $ 0 200,000 0 $ 0 $ 0
James Landry 0 $ 0 78,845 0 $ 0 $ 0
Stephen L. Sadle 1,000,000(2) $ 8,330 0 0 $ 0 $ 0
-----------------------
(1) Based on a stock price of $0.55, which was the average of the high
asked and low bid prices reported on December 31, 2002.
(2) Mr. Sadle sold 166,600 shares in a private sale in 2002 and returned
the remaining 833,400 shares to the Company as part of a
recapitalization. See, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
on page 13 of this proxy statement.
COMPENSATION PLANS
Telkonet maintains and administers the Telkonet, Inc. Stock Incentive
Plan to advance the interests of Telkonet by encouraging and enabling
acquisition of a financial interest in Telkonet by its officers, directors,
consultants and key personnel. The Stock Incentive Plan is intended to aid
Telkonet in attracting and retaining key employees, to stimulate the efforts of
such personnel and to strengthen their desire to remain with Telkonet. The Stock
Incentive Plan was adopted by the Board of Directors on April 24, 2002 and
approved by Telkonet's stockholders in July 2002 at the annual meeting of
stockholders. The Stock Incentive Plan was amended by the Board of Directors on
June 23, 2003 to increase the number of shares of Telkonet common stock subject
to the Stock Incentive Plan from 7,000,000 to 15,000,000 shares. Shares of the
common stock subject to purchase pursuant to exercise of the options granted
under this plan were registered on a Form S-8 Registration Statement Under The
Securities Act of 1933 filed with the Securities and Exchange Commission on
October 16, 2000 and amended on April 17, 2002. The material terms of this plan
are summarized below.
The Stock Incentive Plan may be administered by the Board of Directors
or a committee designated by the Board of Directors which, if designated, would
have full power and authority to determine when and to whom awards will be
granted and the type, amount, form of payment and other terms and conditions of
each award, consistent with the provisions of the Stock Incentive Plan. Subject
to the provisions of the Stock Incentive Plan, the Board of Directors may amend
the terms and conditions of an outstanding award, with the consent of the
optionee. The Board of Directors has full authority to interpret the Stock
Incentive Plan and establish, amend or rescind rules and regulations for the
administration of the Stock Incentive Plan.
10
Any employee, officer, consultant, or director of Telkonet and its
subsidiaries is eligible to receive awards under the Stock Incentive Plan.
The Stock Incentive Plan provides for the issuance of up to 15,000,000
shares of Telkonet common stock, subject to adjustment in the event of stock
dividends, recapitalization, stock splits, reorganizations, mergers,
consolidations or other similar changes in the corporate or capital structure of
Telkonet. If an option issued under the Stock Incentive Plan expires, or for any
reason is terminated or unexercised with respect to any shares of Telkonet
common stock, such shares shall again be available for issuance of options under
the Stock Incentive Plan. The shares of common stock issued under the Stock
Incentive Plan will be authorized but unissued shares or issued shares that have
been reacquired by Telkonet.
The types of awards that may be granted under the Stock Incentive Plan
are stock options, restricted stock and stock appreciation rights. Options
granted pursuant to the Stock Incentive Plan will not be transferable without
the approval of the Board of Directors, other than by will or by the laws of
descent and distribution. During the lifetime of a participant, an award may be
exercised only by the participant to whom such award is granted.
Non-qualified options may be granted under the Stock Incentive Plan.
The Board of Directors will determine the exercise price of any option granted
under the Stock Incentive Plan. Stock options will be exercisable at such times
as the Board of Directors determines. Stock options may be exercised in whole or
in part by payment in full of the exercise price in cash or, at the Board of
Directors' discretion, (i) by delivery of shares of Telkonet common stock having
a fair market value on the date of exercise equal to the exercise price; (ii) by
withholding from the option shares of Telkonet common stock in satisfaction of
all or part of the exercise price; (iii) by delivery of the optionee's full
recourse promissory note in the amount of the exercise price; or (iv) by
delivery of irrevocable instructions to a broker to deliver promptly to
Telkonet, from the sale or loan proceeds with respect to the sale of Telkonet
common stock or a loan secured by Telkonet common stock, the amount necessary to
pay the exercise price.
Unless earlier discontinued or terminated by the Board of Directors, no
awards may be granted under the Stock Incentive Plan after September 14, 2010.
The Stock Incentive Plan permits the Board of Directors to amend, alter,
suspend, discontinue or terminate the Stock Incentive Plan at any time, except
that no amendment to the Stock Incentive Plan shall (i) increase the maximum
number of shares under the Stock Incentive Plan; (ii) materially modify the
eligibility requirements for participation in the Stock Incentive Plan; or (iii)
materially increase the benefits accruing to participants under the Stock
Incentive Plan, except in accordance with Telkonet's certificate of
incorporation.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Larson, former Chief Executive Officer, was employed pursuant to an
employment agreement for a three-year term that commenced June 19, 2000 and
provided for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. Mr. Larson resigned from his employment on January
12, 2002.
Mr. Sadle, Chief Operating Officer, is employed pursuant to an
employment agreement for a three-year term that commenced June 19, 2000 and
provides for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. On April 24, 2002, Mr. Sadle's employment
agreement was amended to, among other things, extend the term through December
31, 2004.
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Mr. Fowler, former Chief Executive Officer, was employed pursuant to an
employment agreement for a three-year term that commenced January 30, 2002 and
provided for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. Mr. Fowler resigned effective December 12, 2002.
Dr. Yaney, former Chief Technology Officer, was employed pursuant to an
employment agreement for a three-year term that commenced February 15, 2002 and
provided for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. Dr. Yaney resigned effective September 3, 2002.
Mr. Landry, Vice President--Engineering, has been employed since
September 24, 2001 with an annual salary of $160,000 with bonuses and benefits
based upon Telkonet's internal policies.
Mr. Pickett, President, is employed pursuant to an employment agreement
that commenced January 30, 2003 and provides for an annual salary $100,000 and
bonuses and benefits based upon Telkonet's internal policies.
Mr. Smith, Chief Financial Officer, is employed pursuant to an
employment agreement for a one-year term that commenced February 17, 2003 and
provides for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies.
Mr. Lubert, former Chief Executive Officer, was employed pursuant to an
employment agreement for a two-year term that commenced January 1, 2003 and
provided for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. Mr. Lubert resigned effective June 16, 2003,
however, Telkonet has agreed to pay Mr. Lubert's salary through December 17,
2004.
In addition, under the Stock Incentive Plan, stock options are
periodically granted to employees at the discretion of the Board of Directors.
Executives of Telkonet are eligible to receive stock option grants, based upon
individual performance and the performance of Telkonet as a whole.
AUDIT FEES
The aggregate fees billed to Telkonet by its accountants for
professional services rendered for the audit of Telkonet's annual financial
statements for the fiscal year ended December 31, 2002 and the reviews of the
financial statements included in Telkonet's Forms 10-QSB for the periods ending
March 31, 2002, June 30, 2002 and September 31, 2002, respectively, were
$36,438.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
During the fiscal year ended December 31, 2002, Telkonet's accountants
did not engage in the direct or indirect operation or supervision of Telkonet's
information system or manage Telkonet's local area network, the design or
implementation of a hardware or software system that aggregates source data
underlying the financial statements or generates information that is significant
to Telkonet's financial statements.
12
ALL OTHER FEES
The aggregate fees billed for services rendered by the principal public
accountant other than those disclosed under audit fees and financial information
systems design and implementation fees were $19,662 for the fiscal year ended
December 31, 2002. This amount consists of fees associated with the preparation
of Telkonet's tax returns. The Board of Directors has determined that the
provision of these services is compatible with maintaining the principal
accountant's independence.
The Board of Directors has reviewed and discussed the audited financial
statements with Telkonet management and has discussed the matters pertaining to
SAS 61 with Telkonet's independent accountants. The Board of Directors has also
received the written disclosures and the letter from Telkonet's independent
accountants required by Independent Standards Board Standard No. 1 and has
discussed with the independent accountants the independent accountant's
independence. Based upon its review of the foregoing materials and its
discussions with Telkonet's management and independent accountants, the Board of
Directors determined that the audited financial statements be included in
Telkonet's Annual Report on Form 10-KSB for the year ended December 31, 2002.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Exchange Act, Telkonet's directors,
executive officers and any person holding 10.0% or more of its common stock are
required to report their beneficial ownership and any changes therein to the
United States Securities and Exchange Commission. Specific due dates for these
reports have been established and Telkonet is required to report herein any
failure to file such reports by those due dates. Based solely on review of the
copies of such reports furnished to Telkonet or written representations that no
other reports were required, Telkonet believes that, during 2002, its executive
officers, directors and greater than 10.0% beneficial owners complied with all
applicable Section 16(a) reporting requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK REPURCHASES
On January 12, 2002, the Board of Directors approved a plan authorizing
the repurchase of certain shares of, and options to purchase, Telkonet common
stock owned by Messrs. Grimes, Larson and Sadle. Each of Messrs. Grimes, Larson
and Sadle, at the time of the stock repurchase, owned in excess of five percent
of the issued and outstanding shares of Telkonet common stock. and were
directors and executive officers of Telkonet.
As part of the stock repurchase, Mr. Grimes surrendered 3,721,918
shares of Telkonet common stock and options to purchase 160,000 shares of
Telkonet common stock owned by him. In consideration of the surrender of these
shares and options, Telkonet retained Mr. Grimes as a consultant for a period of
three years and issued to Mr. Grimes fully vested options to purchase 1,000,000
shares of Telkonet common stock at fair market value on the date of exercise,
but not less than $1.00 per share. In addition, Mr. Grimes agreed that certain
shares of Telkonet common stock owned by him would be subject to a 36-month
13
lock-up agreement under which 50,000 shares would be released on each of
December 1, 2002 and December 1, 2003 and the remaining shares would be released
on January 1, 2005. On April 24, 2002, the terms of Mr. Grimes' lock-up
agreement were amended to permit the immediate release of 139,280 shares of
Telkonet common stock, the release of 50,000 shares of Telkonet common stock on
December 1, 2002, the release of 50,000 shares of Telkonet common stock on
December 1, 2003 and the release of the remaining Telkonet common stock on
January 1, 2005. The revised lock-up agreement also provided for the release of
common stock in proportion to the number of options to purchase Telkonet common
stock exercised by Mr. Grimes from time to time during the term of the lock-up
agreement. As of December 31, 2002, Mr. Grimes had exercised all of the options
issued to Mr. Grimes in the repurchase. Consequently, all of the shares subject
to Mr. Grimes' revised lock-up agreement were released as of December 31, 2002.
Notwithstanding the release of Mr. Grimes' shares of common stock pursuant to
the terms of the lock-up agreement, since Mr. Grimes is an "affiliate" of the
Company within the meaning of Rule 144 promulgated under the Securities Act of
1933, his shares will be subject to certain restrictions on transfer pursuant to
Rule 144(e)(1).
Mr. Larson surrendered 705,000 shares of Telkonet common stock and
options to purchase 200,000 shares of Telkonet common stock owned by him. In
consideration of the surrender of these shares and options, Telkonet retained
Mr. Larson as a consultant for a period of three years and issued to Mr. Larson
fully vested options to purchase 1,000,000 shares of Telkonet common stock at
fair market value on the date of exercise, but not less than $1.00 per share. In
addition, Mr. Larson agreed that certain shares of Telkonet common stock owned
by him would be subject to a 36-month lock-up agreement under which 50,000
shares would be released on each of December 1, 2002 and December 1, 2003 and
the remaining shares would be released on January 1, 2005. On April 24, 2002,
the terms of Mr. Larson's lock-up agreement were amended to permit the immediate
release of 139,280 shares of Telkonet common stock, the release of 50,000 shares
of Telkonet common stock on December 1, 2002, the release of 50,000 shares of
Telkonet common stock on December 1, 2003 and the release of the remaining
Telkonet common stock on January 1, 2005. The revised lock-up agreement also
provides for the release of common stock in proportion to the number of options
to purchase Telkonet common stock exercised by Mr. Larson from time to time
during the term of the lock-up agreement.
Mr. Sadle surrendered 2,147,694 shares of Telkonet common stock and
options to purchase 200,000 shares of Telkonet common stock owned by him. In
consideration of the surrender of these shares and options, the Board of
Directors granted Mr. Sadle options to purchase 1,000,000 shares of Telkonet
common stock at fair market value on the date of exercise, but not less than
$1.00 per share. In addition, Mr. Sadle agreed that certain shares of Telkonet
common stock owned by him would be subject to a 36-month lock-up agreement under
which 50,000 shares would be released on each of December 1, 2002 and December
1, 2003 and the remaining shares would be released on January 1, 2005. On April
24, 2002, the terms of Mr. Sadle's lock-up agreement were amended to permit the
immediate release of 139,280 shares of Telkonet common stock, the release of
50,000 shares of Telkonet common stock on December 1, 2002, the release of
50,000 shares of Telkonet common stock on December 1, 2003 and the release of
the remaining Telkonet common stock on January 1, 2005. The revised lock-up
agreement also provides for the release of common stock in proportion to the
number of options to purchase Telkonet common stock exercised by Mr. Sadle from
time to time during the term of the lock-up agreement. As of December 31, 2002,
Mr. Sadle had exercised all of the options issued to Mr. Sadle in the
repurchase. Consequently, all of the shares subject to Mr. Sadle's revised
lock-up agreement were released as of December 31, 2002.
Mr. Sadle's employment agreement was also amended to include a
provision by which Mr. Sadle would be required to forfeit shares of Telkonet
common stock owned by him, up to an aggregate of 1,500,000 shares of common
stock, in the event he voluntarily terminated his employment prior to the end of
14
its 36-month term. Pursuant to the amended employment agreement, Mr. Sadle was
required to forfeit 40,000 shares for each month following the month in which he
resigned until the expiration of the amended employment agreement. The amended
employment agreement also extended the term of Mr. Sadle's employment until
December 31, 2004. On January 30, 2003, the Board of Directors approved an
amendment to Mr. Sadle's employment agreement that permits the release of the
1,500,000 shares of common stock subject to forfeiture upon Mr. Sadle's
resignation in proportion to the number of options to purchase Telkonet common
stock exercised by Mr. Sadle from time to time during the term of the employment
agreement. As of December 31, 2002, Mr. Sadle had exercised all of the options
issued to Mr. Sadle in the repurchase. Consequently, all of the shares subject
to forfeiture pursuant to Mr. Sadle's revised employment agreement were released
from such forfeiture restriction as of January 30, 2003. Notwithstanding the
release of Mr. Sadle's shares of common stock pursuant to the terms of the
lock-up agreement and the amended employment agreement, since Mr. Sadle is an
"affiliate" of the Company within the meaning of Rule 144, his shares will be
subject to certain restrictions on transfer pursuant to Rule 144(e)(1).
LOANS BY OFFICERS AND SIGNIFICANT STOCKHOLDERS
In 2001 and 2002, Ronald W. Pickett and Stephen Sadle, each of whom is
a director of Telkonet and owns in excess of 5.0% of the issued outstanding
Telkonet common stock, loaned $200,000 and $4,830, respectively, to Telkonet for
working capital purposes. At the time of such loan, no formal repayment terms or
arrangements were agreed to by the parties. On December 30, 2002, the aggregate
remaining principal balance owed by Telkonet to Mr. Pickett was forgiven in
exchange for Telkonet Series B Senior Notes. On January 31, 2003, the aggregate
principal balance owed by Telkonet to Mr. Sadle was repaid in full, without
interest.
On June 1, 2001, Hugo DeCesaris, a director of Telkonet and a
stockholder owning in excess of 5.0% of Telkonet's issued and outstanding common
stock, loaned $7,500 to Telkonet for working capital purposes. At the time of
such loan, no formal repayment terms or arrangements were agreed to by the
parties. As of December 31, 2002, the aggregate remaining principal balance owed
by Telkonet to Mr. DeCesaris was $7,500.
PURCHASE OF CONVERTIBLE DEBENTURES
During the third quarter of 2001, the Company commenced an offering of
up to $1,689,100 of Series A Debentures. The Series A Debentures each accrue
interest at 8.0% per annum and mature three years from the date of purchase.
Each Series A Debenture is convertible at any time following the six month
anniversary of the date of issuance of such Series A Debenture into shares of
Telkonet common stock at a conversion price equal to $0.50 per share for each
$10,000 principal amount plus interest of the Series A Debenture converted. In
connection with the placement of the Series A Debentures, the Company issues
non-detachable warrants granting holders the right to acquire 1,689,100 share of
the Company's common stock at $1.00 per share.
During the fourth quarter of 2002, the Company commenced an offering of
up to $2,500,000 of Series B Debentures. The Series B Debentures each accrue
interest at 8.0% per annum and mature three years from the date of purchase.
Each Series B Debenture is convertible at any time following the six month
anniversary of the date of issuance of such Series B Debenture into shares of
Telkonet common stock at a conversion price equal to $0.55 per share for each
$10,000 principal amount plus interest of the Series B Debenture converted. In
connection with the placement of the Series B Debentures, the Company also
issued non-detachable warrants granting holders the right to acquire 2,500,000
shares of the Company's common stock at $1.00 per share.
15
The Series A and Series B Debentures sold in these offerings were sold
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder.
As of March 26, 2003, Telkonet sold Series A and Series B Debentures
having an aggregate principal value of $4,189,100, of which $824,000 was
attributable to sales to the following Telkonet directors, officers and 5.0%
shareholders, and members of their immediate family:
NAME PURCHASE PRICE SERIES
---- -------------- ------
Stephen L. Sadle $ 65,000 Series A
David Grimes $ 65,000 Series A
Hugo DeCesaris $ 20,000 (1) Series A
$ 22,000 (2) Series B
Ronald W. Pickett $ 200,000 Series B
E. Barry Smith $ 20,000 Series B
Howard E. Lubert $ 100,000 Series B
Robert P. Crabb $ 7,000 Series B
Peter V. Musser $ 325,000 (3) Series B
-----------------
(1) Includes Series A Debentures having an aggregate principal
value of $20,000 purchased by a members of Mr. DeCesaris'
immediate family.
(2) Includes Series B Debentures having an aggregate principal
value of $22,000 purchased by a member of Mr. DeCesaris'
immediate family.
(3) Includes Series B Debentures having an aggregate principal
value of $25,000 purchased by Mr. Musser's wife, and Series B
Debentures having an aggregate principal value of $200,000
purchased by The Musser Foundation, of which Mr. Musser is
Managing Director.
OTHER INFORMATION
Brokers and other persons holding Telkonet's common stock in their
names, or in the names of a nominee, will be requested to forward this proxy
statement and the accompanying materials to the beneficial owners of the common
stock and to obtain proxies, and Telkonet will defray reasonable expenses
incurred in forwarding such material.
Telkonet's Annual Report to Stockholders, including audited financial
statements and schedules, accompanies this proxy statement.
16
STOCKHOLDER PROPOSALS
Stockholders may submit written proposals to be considered for
stockholder action at Telkonet's 2004 Annual Meeting of Stockholders. To be
eligible for inclusion in Telkonet's Proxy Statement for the 2004 Annual
Meeting, stockholder proposals must be received by Telkonet by May 7, 2004 and
must otherwise comply with applicable Securities and Exchange Commission
regulations. Stockholder proposals should be addressed to Telkonet at 902-A
Commerce Road, Annapolis, Maryland 21401, Attention: Secretary.
By order of the Board of Directors,
/s/ Robert P. Crabb
-----------------------
Robert P. Crabb
Secretary
17
TELKONET, INC.
The Annual Meeting of the Stockholders of Telkonet, Inc. will be held on
Thursday, September 4, 2003, at 5:00 p.m., local time, at the Radisson Hotel,
511 Lexington Avenue, New York, New York, Dynasty Restaurant, 2nd Floor.
TEAR AT PERFORATION
--------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS - NOMINEES:
WARREN V. MUSSER RONALD W. PICKETT
DAVID W. GRIMES STEPHEN L. SADLE A. HUGO DECESARIS
[ ] FOR ALL NOMINEES
[ ] WITHHELD AS TO ALL NOMINEES
[ ] FOR ALL EXCEPT VOTE WITHHELD FROM THE FOLLOWING
NOMINEE(S):_________________________________________
2. RATIFICATION OF OPTIONS GRANTED UNDER THE TELKONET, INC. AMENDED AND
RESTATED STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of a Notice of Annual
Meeting of Stockholders of Telkonet, Inc. called for September 4, 2003,
and a Proxy Statement for the Meeting prior the signing of this proxy.
______________________________________________ Dated: __________, 2003
______________________________________________ Dated: __________, 2003
Please sign exactly as your name(s) appears(s) on this proxy.
When signing in a representative capacity, please give title.
(continued)
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD
USING THE ENCLOSED ENVELOPE.
TELKONET, INC.
902-A COMMERCE ROAD
ANNAPOLIS, MARYLAND 21401
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF TELKONET, INC.
FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 4,
2003 AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
The undersigned, being a stockholder of TELKONET, INC. ("TELKONET"),
hereby authorizes Robert P. Crabb, Barry Smith and Stephen L. Sadle , and each
of them, with the full power of substitution, to represent the undersigned at
the Annual Meeting of Stockholders of Telkonet to be held at the Radisson Hotel,
511 Lexington Avenue, New York, New York, Dynasty Restaurant, 2nd Floor, on
Friday, September 4, 2003 at 5:00 pm local time, and at any adjournment or
postponement thereof, with respect to all votes that the undersigned would be
entitled to cast, if then personally present, as appears on the reverse side of
this proxy.
In their discretion, the proxies are authorized to vote with respect to
matters incident to the conduct of the meeting and upon such other matters as
may properly come before the meeting. This proxy may be revoked at any time
before it is exercised.
Shares of the Common Stock of Telkonet will be voted as specified. If
no specification is made, shares will be voted FOR the nominees for director
named on the reverse side, FOR ratification of options granted under the
Telkonet, Inc. Amended and Restated Stock Option Plan, FOR ratification of the
appointment of the independent accountants and IN ACCORDANCE WITH THE DISCRETION
OF THE PROXIES as to any other matter which may properly come before the annual
meeting.