telkonet_prer14a-1.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A
(RULE
14a-101)
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 o
Filed by
a Party other than the Registrant o
Check the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for use of the Commission only (as permitted by Rule
14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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o
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Soliciting
Material Under § 240.14a-12
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Telkonet,
Inc.
(Name of
Registrant as Specified in its Charter)
(Name of
Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
þ No
fee required.
o Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction
applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
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(4)
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Proposed
maximum aggregate value of
transaction:
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o Fee
paid previously with preliminary materials.
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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.
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(1)
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Amount
previously paid:
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(2)
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Form,
Schedule or Registration Statement
No.:
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PRELIMINARY
COPY
SUBJECT TO
COMPLETION, DATED APRIL 23,
2010
TELKONET,
INC.
10200
Innovation Drive
Suite
300
Milwaukee,
WI 53226
414-223-0473
[●] [●],
2010
Dear
Stockholder:
You are
cordially invited to attend the 2010 Annual Meeting of Stockholders of Telkonet,
Inc. (the “Company”) to be held on [●], [●], 2010 at [●]:00 a.m., local time, at
[●].
The
accompanying notice of annual meeting of stockholders outlines the matters to be
brought before the meeting, and the accompanying proxy statement discusses these
matters in greater detail. The notice and the proxy statement have
been made a part of this invitation. Please read
carefully.
Whether
or not you plan to attend the meeting, we urge you to complete, date and sign
the enclosed proxy card and return it at your earliest
convenience. No postage need be affixed if you use the enclosed
envelope and it is mailed in the United States. You may also vote
electronically via the Internet. If you have any questions or need
assistance in completing the proxy card, please contact Investor Relations at
ir@telkonet.com or call 414-223-0473.
We are
mailing this proxy statement and a form of proxy on or about [●],
2010.
Only
holders of record of our common stock, par value $0.001 per share, and our
Series A Preferred Stock, par value $0.001 per share, at the close of business
on [●], 2010 are entitled to notice of, and to vote at, the meeting or any
adjournment or postponement thereof.
Our proxy
statement and proxy are enclosed along with our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, which is being provided as our Annual
Report to Stockholders. These materials are also available on our web
site at http://www.telkonet.com.
YOUR
VOTE IS IMPORTANT.
PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IMMEDIATELY,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
Our Board
of Directors and management look forward to seeing you at the
meeting.
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Sincerely
yours,
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/s/
Jason L. Tienor.
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Chief
Executive Officer
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TELKONET,
INC.
10200
Innovation Drive
Suite
300
Milwaukee,
WI 53226
414-223-0473
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
[●],
2010
Notice is
hereby given that the annual meeting (the “Meeting”) of stockholders of
Telkonet, Inc., a Utah corporation (the “Company”), will be held on [●], [●],
2010 at [●]:00 a.m., local time, at [●] for the following purposes:
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1.
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To
elect [four] ([4]) directors, each to serve until the next annual
meeting of stockholders and until his successor has been elected and
qualified;
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2.
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To
approve an amendment to the Telkonet, Inc. Amended and Restated Articles
of Incorporation, as amended, to increase the number of authorized shares
of our common stock from 155,000,000 to 575,000,000;
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3.
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To
ratify the appointment of independent accountants for 2010;
and
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4.
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To
transact such other business as may properly come before the
Meeting.
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Only
holders of record of the Company’s common stock, par value $0.001 per share, and
the Company’s Series A Preferred Stock, par value $0.001 per share, at the close
of business on [●], 2010, the record date, are entitled to notice of and to vote
at the Meeting.
Your
vote is important. Even if you plan to attend the Meeting in
person, the Company requests that you sign and return the enclosed proxy, or
vote over the Internet as instructed in these materials, as promptly as possible
to ensure that your shares will be represented at the Meeting if you are unable
to attend. If you sign, date and mail your proxy card without
indicating how you wish to vote, your proxy will be counted as a vote FOR each
of the nominees for director listed in “Proposal No. 1 – Election of Directors”
and FOR “Proposal No. 2 – Approval of Increase in the Number of
Authorized Shares of Common Stock.” If you do attend the Meeting and
wish to vote in person, you may withdraw your proxy and vote in
person. Please note, however, that if your shares are held of record
by a broker, bank, or other nominee and you wish to vote at the Meeting, you
must obtain from the record holder a proxy issued in your name.
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By
order of the Board of Directors,
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/s/
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Richard
Leimbach
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Acting
Secretary
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THE
BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT THE PROPOSALS OUTLINED ABOVE
ARE ADVISABLE TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS
AND HAS APPROVED SUCH PROPOSALS. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” EACH OF THE NOMINEES FOR DIRECTOR LISTED
IN PROPOSAL NO. 1 AND “FOR” PROPOSAL NO. 2.
YOU CAN
VOTE IN ONE OF TWO WAYS:
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(1)
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Visit
the Web site noted on your proxy card to vote via the Internet,
OR
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(2)
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Sign,
date and return your proxy card in the enclosed envelope to vote by
mail.
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TELKONET,
INC.
10200
Innovation Drive
Suite
300
Milwaukee,
WI 53226
414-223-0473
PROXY
STATEMENT
This
proxy statement contains information related to the annual meeting (the
“Meeting”) of stockholders of Telkonet, Inc., a Utah corporation, to be held on
[●], [●], 2010 at [●]:00 a.m., local time, at [●], and at any postponements or
adjournments thereof.
This proxy statement and the enclosed proxy card are being mailed to our
stockholders on or about [●], 2010.
In this
proxy statement, “Telkonet”, “Company”, “we”, “us” and “our” refer to Telkonet,
Inc.
Our
proxy statement and proxy are enclosed along with our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, which is being provided as our
Annual Report to Stockholders.
Important
Notice Regarding the Availability of Proxy Materials for
the
Annual Meeting of Stockholders to Be Held on [●], 2010.
This
proxy statement and accompanying notice, proxy card and Annual Report on Form
10-K for the fiscal year ended December 31, 2009, are available on our web site
at http://www.telkonet.com.
VOTING
AT THE ANNUAL MEETING
Revocability
of Proxies
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 Meeting will not, in
and of itself, revoke a proxy. Proxies may be revoked
by:
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Filing
with the Secretary of Telkonet, at or before the taking of the vote at the
Meeting, a written notice of revocation dated later than the
proxy;
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Executing
a later dated proxy relating to the same shares of capital stock and
delivering it to the Secretary of Telkonet, including by facsimile, before
the taking of the vote at the Meeting; or
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Attending
the 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., 10200 Innovation Drive, Suite 300, Milwaukee,
WI 53226, Attention: Corporate Secretary, or hand delivered to the
Secretary of Telkonet or his representative at or before the taking of the vote
at the Meeting.
If the
Meeting is postponed or adjourned, proxies given pursuant to this solicitation
will be utilized at any subsequent reconvening of the 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.
Voting
Rights
Only
holders of record of our common stock, par value $0.001 per share (“common
stock”), and holders of record of our Series A Preferred Stock, par value $0.001
per share (“Series A Preferred Stock”), at the close of business on [●], 2010,
the record date (the “Record Date”) are entitled to notice of and to vote at the
Meeting, and at any postponements or adjournments thereof. Holders of our Series A
Preferred Stock will vote on an as converted basis together with holders of our
common stock as a single class in connection with Proposal Nos. 1 and
2. Each share of common stock is entitled to one vote on all matters
to be voted upon at the Meeting and each share of Series A Preferred Stock is
entitled to [●] vote[s] on all matters to be voted upon at the
Meeting. At least a majority of our shares outstanding on the Record
Date and entitled to vote (counting our Series A Preferred Stock on an as
converted basis, representing an aggregate of [●] shares of common stock
for such purposes) must be represented at the Meeting, either in person or by
proxy, in order to constitute a quorum for the transaction of
business. Abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. Broker
non-votes occur when a nominee holding shares for a beneficial owner does not
have discretionary voting power on a matter and has not received instructions
from the beneficial owner.
How
to Vote; How Proxies Work
Our Board
of Directors is asking for your proxy. Whether or not you plan
to attend the Meeting, we urge you to vote by proxy as you can always change
your vote at the Meeting.
Please complete the proxy card by voting on the Internet or complete,
date and sign the enclosed proxy card and return it at your earliest
convenience. We
will bear the costs incidental to the solicitation and obtaining of proxies,
including the costs of reimbursing banks, brokers and other nominees for
forwarding proxy materials to beneficial owners of our capital stock. Proxies may be
solicited by our officers and employees, without extra compensation, by mail,
telephone, facsimile, personal interviews and other methods of
communication.
At the
Meeting, and at any postponements and adjournments thereof, all shares entitled
to vote and represented by properly executed proxies received prior to the
Meeting and not revoked will be voted as instructed on those proxies. If no instructions are
indicated on a properly executed proxy, the shares will be voted FOR each of the
nominees for director listed in Proposal No. 1 and FOR Proposal No. 2 and in the
discretion of management on any other matter which may properly come before the
Meeting.
Questions and
Answers
Q. What
am I voting on?
You are
voting on three proposals:
Proposal No.
1: For the election of four (4) nominees to our board of
directors, each to serve until the next annual meeting of stockholders and until
his successor has been elected and qualified.
Proposal No. 2: Approval of
an amendment to our Amended and Restated Articles of Incorporation, as amended
(the “Restated Articles”), to increase the number of authorized shares of our
common stock from 155,000,000 to 575,000,000.
Proposal No.
3: For ratification of the selection of RBSM, LLP,
independent registered public accounting firm, as our independent auditors for
the year ending December 31, 2010.
Q. Who
is entitled to vote?
Only
holders of record of our common stock and holders of record of our Series A
Preferred Stock at the close of business on [●], 2010, the Record Date, are
entitled to vote shares held by such stockholders on that date at the
Meeting.
Q. How
do I vote?
Vote By Internet: Visit the
Web site noted on your proxy card to vote via the Internet.
Vote By Mail: Sign
and date the proxy card you receive and return it in the enclosed stamped,
self-addressed envelope.
Vote in
Person: Sign and date the proxy you receive and return it in
person at the Meeting. If your shares are held in the name of a bank,
broker or other holder of record (i.e., in “street name”), you will receive
instructions from the holder of record that you must follow in order for your
shares to be voted. Internet voting will be offered to stockholders
owning shares through most banks and brokers.
Q. How
many votes do I have?
On each
matter to be voted upon, each share of common stock is entitled to one vote on
all matters to be voted upon at the Meeting and each share of Series A Preferred
Stock is entitled to [●] vote[s] on all matters to be voted upon at the
Meeting.
Q. How
many shares were outstanding on the Record Date?
At the
close of business on [●], 2010, the Record Date, there were [●] shares
outstanding (counting our Series A Preferred Stock on an as converted basis,
representing an aggregate of [●] shares of common stock for such purposes).
Q. What
is a “quorum” for purposes of the Meeting?
In order
to conduct business at the Meeting, a quorum of stockholders is necessary to
hold a valid meeting. Holders of our Series A Preferred Stock will
vote on an as converted basis together with holders of our common stock as a
single class in connection with each of the proposals contained in this proxy
statement. At least a majority of our shares outstanding on the
Record Date and entitled to vote (counting our Series A Preferred Stock on an as
converted basis, representing an aggregate of [●] shares of common stock
for such purposes) must be represented at the Meeting, either in person or by
proxy, in order to constitute a quorum for the transaction of business. At
the close of business on the Record Date, there were [●] shares outstanding and
entitled to vote (counting our Series A Preferred Stock on an as converted
basis, representing an aggregate of [●] shares of common stock for such
purposes) and, accordingly, the presence, in person or by proxy, of at least [●]
shares is necessary to meet the quorum requirement.
Your
shares will be counted towards the quorum only if you submit a valid proxy (or
one is submitted on your behalf by your broker, bank or other nominee) or if you
vote in person at the Meeting. Abstentions and broker non-votes will be
counted towards the quorum requirement. If there is no quorum, the holders
of a majority of shares present at the Meeting in person or represented by proxy
may adjourn the Meeting to another date.
Q. Who
is paying for this proxy solicitation?
We will
pay for the entire cost of soliciting proxies, including the printing and filing
of this proxy statement, the proxy card and any additional information furnished
to stockholders. In addition to these mailed proxy materials, our directors and
employees may also solicit proxies in person, by telephone, or by other means of
communication. Directors and employees will not be paid any additional
compensation for soliciting proxies. We may also reimburse brokerage firms,
banks and other agents for the reasonable out-of-pocket expenses they incur to
forward proxy materials to beneficial owners.
Q. What
if I return a proxy card but do not make specific choices?
If you
return a signed and dated proxy card without marking any voting selections, your
shares will be voted “for” each of the nominees for director set forth in
Proposal No. 1 and “for” Proposal No. 2 discussed in this proxy
statement.
If any
other matter is properly presented at the Meeting, your proxy (one of the
individuals named on your proxy card) will vote your shares using his best
judgment.
Q. Can
I access the proxy materials electronically?
This proxy statement, the proxy card,
and our Annual Report on Form 10-K for the period ended December 31, 2009
are available on our website at http://www.telkonet.com.
Q. Can
I change my vote or revoke my proxy?
Yes. You
may change your vote or revoke your proxy at any time before the proxy is
exercised. Proxies may be revoked by:
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Filing
with the Secretary of Telkonet, at or before the taking of the vote at the
Meeting, a written notice of revocation dated later than the
proxy;
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Executing
a later dated proxy relating to the same shares of capital stock and
delivering it to the Secretary of Telkonet, including by facsimile, before
the taking of the vote at the Meeting; or
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●
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Attending
the 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., 10200 Innovation Drive, Suite 300, Milwaukee,
WI 53226, Attention: Corporate Secretary, or hand delivered to the
Secretary of Telkonet or his representative at or before the taking of the vote
at the Meeting. Attendance at the Meeting will not have the effect of
revoking a proxy unless you give written notice of revocation to the Corporate
Secretary before the proxy is exercised or you vote by written ballot at the
Meeting.
Q. What
is the process for admission to the Meeting?
If you
are a record owner of your shares (i.e., your shares are held in
your name), you must show government issued identification. Your name will be
verified against the stockholder list. If you hold your shares through a bank,
broker or trustee, you must also bring a copy of your latest bank or broker
statement showing your ownership of your shares as of the Record
Date.
Q. What
vote is required to approve each proposal?
Proposal No. 1: The
affirmative vote of a majority of the shares of our common stock and Series A
Preferred Stock, voting together as a single class on an as-converted basis,
represented at the annual meeting, either in person or by proxy, is
required to elect each of the four (4) nominees for director listed in this
proxy statement requires the affirmative vote of the holders of at least a
majority of the outstanding capital stock entitled to vote thereon.
Proposal No. 2: Proposal No.
2 to approve an amendment to our Restated Articles to increase the number of
authorized shares of our common stock from 155,000,000 to 575,000,000 requires
the affirmative vote of the holders of at least a majority of the outstanding
stock entitled to vote thereon.
Proposal No.
3: Proposal No. 3 to ratify the appointment of RBSM, LLP,
independent registered public accounting firm, as our independent auditors for
the year ending December 31, 2010 requires the affirmative vote of the holders
of at least a majority of the outstanding stock entitled to vote
thereon.
Our
Series A Preferred Stock is entitled to vote on Proposal Nos. 1, 2 and 3 on
an as
converted
basis with our common stock as a single
class. Each share of common stock is entitled to one vote, and each
share of Series A Preferred Stock is entitled to 13,774 votes on each of the
proposals contained in this proxy statement. With regard to the
election of directors set forth in Proposal No. 1, votes may be cast in favor of
a nominee or withheld. Because directors are elected by plurality,
abstentions from voting and broker non-votes will be excluded from the vote on
this proposal and will have no effect on its outcome. If a quorum is
present at the meeting, the nominees receiving the greatest number of votes, up
to four directors will be elected. Because approval of Proposal Nos. 2 and 3
require the affirmative vote of at least a majority of the outstanding stock
entitled to vote thereon, abstentions and broker non-votes will have the same
effect as a vote “Against” each proposal.
Q. How
will my shares held in street name be voted if I do not provide voting
instructions?
If you are a beneficial owner of
shares held in street name and do not provide the organization that holds your
shares with specific voting instructions, under the rules of various national
and regional securities exchanges, the organization that holds your shares may
generally vote on routine matters but cannot vote on non-routine
matters. Accordingly, if you are a street-name holder and do not
provide instructions to your broker on Proposal No. 1 or No. 2, your broker may
not vote your shares on such proposals. Your broker is permitted to vote your
shares on Proposal No. 3, the ratification of the appointment of the independent
registered public accounting firm, even if your broker does not receive
instructions from you.
Q. What
effect will Proposal No. 2 have on the Company’s authorized shares of common
stock?
Currently, we have
155,000,000 shares of authorized common stock. If Proposal No. 2 is
approved,
the number of authorized
shares of common stock will be increased to 575,000,000.
Q. What
are the recommendations of the Board of Directors?
The Board
of Directors unanimously recommends that the stockholders vote:
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FOR
each of the nominees for director listed in Proposal No.
1;
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FOR
the adoption of an amendment to our Restated Articles, to increase the
number of authorized shares of our common stock from 155,000,000 to
575,000,000; and
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·
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FOR
ratification of the appointment of RBSM, LLP, independent registered
public accounting firm, as our independent auditors for the year ending
December 31, 2010.
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With
respect to any other matter that properly comes before the Meeting, the proxy
holders will vote as recommended by our Board of Directors or, if no
recommendation is given, in their own discretion.
PROPOSAL NO.
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 four. At the annual
meeting, the shares represented by properly executed proxies, unless otherwise
specified, will be voted for the election of the four nominees named herein,
each to serve until the next annual meeting and until his successor is duly
elected and qualified. Proxies cannot be voted for more than four
nominees.
If for
any reason any nominee 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
affirmative vote of a majority of the shares of Telkonet’s common stock and
Series A Preferred Stock, voting together as a single class on an as-converted
basis, represented at the annual meeting, either in person or by proxy, is
required to elect the following nominees as Telkonet directors.
THE BOARD
OF DIRECTORS RECOMMENDS THAT
STOCKHOLDERS
VOTE FOR THE
ELECTION OF EACH NOMINEE
Nominees
for Election at the Annual Meeting
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Director
Name
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Age
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Position
With Telkonet
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Director Since
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Warren
V. Musser
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82
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Director
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2003
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Anthony
J. Paoni
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64
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Chairman
of the Board (1) (2)
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2007
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Thomas
C. Lynch
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67
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Director
(1) (2)
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2003
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Jason
L. Tienor
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35
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Director
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2009
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(1)
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Member
of the Audit Committee
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(2)
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Member
of the Compensation Committee
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ANTHONY J. PAONI, Chairman of
the Board, has served as a director since April 2007. Professor Paoni was
elected Chairman of the Board following Warren V. Musser’s resignation from that
position in November 2009. He has been a faculty member at Northwestern
University’s Kellogg School of Management since 1996. Previously, he
spent 28 years in the information technology industry with market leading
organizations that provided computer hardware, software and consulting
services. For the first 15 years of his career, Professor Paoni
managed sales and marketing organizations and in the later stages of his career
he moved into general management positions starting with PANSOPHIC Systems
Incorporated. This Lisle, Illinois based firm was the world’s fifth
largest international software company prior to its acquisition by Computer
Associates, Incorporated. Subsequently, he became chief operating
officer of Cross Access, a venture capital funded software firm that provided
industry-leading solutions to the heterogeneous database connectivity market
segment. In addition, he has been president of two wholly-owned U.S.
subsidiaries of Ricardo Consulting, a U.K.-based international engineering
consulting firm focused on computer based automotive powertrain design. Prior to
joining the Kellogg faculty, Professor Paoni was chief executive officer of
Eolas, an Internet software company with patent pending Web technology that was
one of the key technology drivers responsible for the rapid adoption of the
Internet platform. We believe Mr. Paoni’s qualifications to sit on our Board of
Directors include his 15-year career managing sales and marketing organizations
followed by his 28-year career in information technology.
WARREN V. MUSSER, Director,
has served as a director since January 2003 and most recently served as Chairman
of the Board until his resignation from that position in November 2009. He has
taken over 50 companies public during his distinguished and successful career as
an entrepreneur. He is the founder and Chairman Emeritus of Safeguard
Scientifics, Inc. (a high-tech venture capital company, formerly Safeguard
Industries, Inc.). Since January 2003, Mr. Musser has been
the President and CEO of The Musser Group (a business consulting
firm). In addition, Mr. Musser is Chairman of InfoLogix, Inc. (a
provider of enterprise mobility solutions for the healthcare and commercial
industries), a Director of Internet Capital Group, Inc. (a
business-to-business venture capital company), NutriSystem, Inc. (a weight
management company) and Health Benefits Direct Corp. (a direct marketing/sales
company of health/life insurance). Mr. Musser serves on a variety of
civic, educational and charitable boards of directors, and serves
as Chairman of the Eastern Technology Council, Economics PA, and
Vice President of Development of Cradle of Liberty Council, Boy Scouts
of America. We believe Mr. Musser’s qualifications to serve on our Board of
Directors include his expertise in the venture capital and private equity
arena.
THOMAS C. LYNCH, Director, has
served as a director since October 2003. Mr. Lynch is a
Managing Partner of Jones Lang LaSalle (prior to the merger between Jones Lang
LaSalle and The Staubach Company, Mr. Lynch served as Senior Vice President of
The Staubach Company, a real estate management and advisory services firm) in
the Washington, D.C. area. Mr. Lynch joined The Staubach Company
in November 2001 after six years as Senior Vice President at Safeguard
Scientifics, Inc. (NYSE: SFE) (a high-tech venture capital company). While at
Safeguard, he served nearly two years as President and Chief Operating Officer
at CompuCom Systems, a Safeguard subsidiary. After a 31-year career
of naval service, Mr. Lynch retired in the rank of Rear
Admiral. Mr. Lynch’s naval service included Chief, Navy
Legislative Affairs, command of the Eisenhower Battle Group during Operation
Desert Shield, Superintendent of the United States Naval Academy from 1991 to
1994 and Director of the Navy Staff in the Pentagon from 1994 to
1995. Mr. Lynch presently serves as a Director of Armed
Forces Benefit Association, Mikros Systems, Buckeye Insurance Company, PRWT
Services and Infologix systems. We believe Mr. Lynch’s qualifications to
sit on our Board of Directors include his extensive executive leadership and
management experience.
JASON L. TIENOR, Director, has
served as our President and Chief Executive Officer since December 2007 and,
from August 2007 until December 2007, he served as our Chief Operating
Officer. In November 2009, he was appointed by our Board of Directors
to fill the vacancy created by the resignation of Seth D. Blumenfeld as a
director. Mr. Tienor has also served as Chief Executive Officer of
EthoStream, LLC, our wholly-owned subsidiary, since March 2007. From
2002 until his employment with us, Mr. Tienor served as Chief Executive Officer
of EthoStream, LLC, the company that he co-founded. Mr. Tienor received a
bachelor of business administration in management information systems and
marketing from the University of Wisconsin – Oshkosh and a masters of business
administration with an emphasis on computer science from Marquette
University. We believe Mr. Tienor’s qualifications to sit on our Board
of Directors include his experience as the founder of our wholly-owned
subsidiary, EthoStream, LLC, including the leadership he has provided to the
Company, first as Chief Operating Officer and then as President and Chief
Executive Officer.
Meetings
of the Board and Committees
The Board
of Directors held [●] meetings in 2009. Each member of the Board of Directors
attended at least 75 percent of the meetings of the Board of Directors and the
committees of which such director was a member. The Company has not established
a formal policy requiring director attendance at all Board meetings, but the
Company expects each director to attend such meetings, absent unusual
circumstances. The Company also expects its directors to attend the Annual
Meeting of Stockholders (which is usually held the same day as a meeting of the
Board of Directors). [●] of the Company’s directors attended the 2009 Annual
Meeting of Stockholders.
Code
of Ethics
The Board
has approved, and the Company has adopted, a Code of Ethics that applies to all
directors, officers and employees of the Company. This Code of Ethics was
included as an Exhibit to the Company’s Form 10-KSB filed with the Securities
and Exchange Commission on March 30, 2004.
Director
Independence
The Board
of Directors has determined that Messrs. Lynch and Paoni are “independent” under
the listing standards of the NYSE AMEX (formerly, the American Stock
Exchange) (NYSE AMEX). Each of Messrs. Lynch and Mr. Paoni serve on,
and are the only members of, the Company’s Audit and Compensation
Committees.
Board
Leadership Structure and Role in Risk Oversight
One
person does not serve as both principal executive officer and chairman of the
board. Anthony J. Paoni currently serves as Chairman of the Board of
Directors while Jason L. Tienor serves as our principal executive officer.
Management of risk is the direct responsibility of the Company’s CEO and the
senior leadership team. The Board has oversight responsibility, focusing
on the adequacy of the Company’s enterprise risk management and risk mitigation
processes.
Communications
with the Board of Directors
Stockholders
can communicate directly with the Board, with any Committee of the Board, or
specified directors by writing to: The Board of Directors of the Company, at the
Company’s principal business address or by calling at 414-223-0473. All
communications will be reviewed by management and then forwarded to the
appropriate director, directors, committee, or to the full Board of
Directors.
Committees
of the Board of Directors
The Board
has an Audit Committee and a Compensation Committee, but the Board does not
presently have a Nominating Committee because the Board has concluded that a
Nominating Committee is unnecessary due to the nomination procedures in effect
as described below.
Director
Nominations
Due to
its small size, the Board does not maintain a standing Nominating Committee.
Nominees for election as directors are considered and nominated by a majority of
the Company’s independent directors in accordance with the NYSE AMEX listing
standards. “Independence” for these purposes is determined in accordance with
Section 121(A) of the NYSE AMEX Rules and Rule 10A-3 under the Securities
Exchange Act of 1934. Since the Company does not maintain a standing
Nominating Committee, it has not adopted a formal Nominating Committee
charter.
Our Board
is a collection of individuals with a variety of complimentary skills derived
from their diverse backgrounds and experiences. When considering
potential candidates for election to the Company’s Board of Directors, the
independent directors evaluate various criteria, including, but not limited to,
each candidate’s business and professional skills, experience serving as
management or on the board of directors of companies such as the Company,
financial literacy and personal integrity in judgment. The Company does not have
a specific policy regarding diversity and believes that the backgrounds and
qualifications of the directors, considered as a group, should provide a diverse
mix of experiences, knowledge, attributes and abilities that will allow the
Board to fulfill its responsibilities. Candidates for vacant board
seats will be considered if they are able to read and understand fundamental
financial statements; have no identified conflicts of interest; have not been
convicted in a criminal proceeding other than traffic violations during the ten
years before the date of selection; and are willing to comply with the Company’s
Code of Ethics. One or more directors must have requisite financial expertise to
qualify as an “audit committee financial expert” as defined by Item 401 of
Regulation S-K promulgated under the Securities Exchange Act of 1934. The
independent directors reserve the right to modify these minimum qualifications
from time to time. Exceptional candidates who do not meet all of these criteria
may still be considered.
The
independent directors review the qualifications and backgrounds of the
directors, as well as the overall composition of the Board from time to time
without assigning specific weights to particular experiences or
qualifications. In addition the independent directors consider
whether the Board as a whole possesses the right skills and background to
address the issues facing our Company at that time. In the case of any candidate
for a vacant Board seat, the independent directors will consider whether such
candidate meets the applicable independence standards and the level of the
candidate’s financial expertise. Any new candidates will be interviewed by the
independent directors, and the full Board will approve the final nominations.
The Chairman of the Board, acting on behalf of the full Board, will extend the
formal invitation to become a nominee of the Board of Directors.
Stockholders
may nominate director candidates for consideration by the Board of Directors by
writing to the Chairman and providing to the Chairman the candidate’s name,
biographical data and qualifications, including five-year employment history
with employer names and a description of the employer’s business; whether such
individual can read and understand fundamental financial statements; other board
memberships (if any); and such other information as is reasonably available and
sufficient to enable the Board to evaluate the minimum qualifications described
above. The submission must be accompanied by the written consent of the
individual to stand for election if nominated by the Board of Directors and to
serve if elected by the stockholders. If a stockholder nominee is eligible, and
if the nomination is proper, the independent directors then will deliberate and
make a decision as to whether the candidate will be submitted to the Company’s
stockholders for a vote. The Board will not change the manner in which it
evaluates candidates, including the applicable minimum criteria set forth above,
based on whether the candidate was recommended by a stockholder.
Audit
Committee
The Audit
Committee is currently comprised of Messrs. Lynch and Paoni. Dr. Thomas Hall was
a member of the Committee until his resignation from the Company’s Board of
Directors on November 13, 2009. The Company’s Board of Directors has determined
that each of Messrs. Lynch and Paoni is an “audit committee financial expert” as
defined by Item 401 of Regulation S-K promulgated under the Securities
Exchange Act of 1934. The Board of Directors also has determined that each of
Dr. Hall and Messrs. Lynch and Paoni are “independent” as such term is
defined in Section 121(A) of the NYSE AMEX Rules and Rule 10A-3 promulgated
under the Securities Exchange Act of 1934.
The Audit
Committee recommends annually to the Board of Directors the selection of
independent auditors for each fiscal year, confirms and assures their
independence and approves the fees and other compensation to be paid to the
auditors. The Audit Committee recommends to the Board the advisability of having
the independent auditors make specified studies and reports as to auditing
matters, accounting procedures, tax or other matters. The Audit Committee also
reviews, prior to its filing with the SEC, the Company’s Form 10-K and annual
report to stockholders. The Audit Committee provides an open avenue of
communication among the independent auditors, management and the Board of
Directors and will review any significant disagreement among management and the
independent auditors in connection with the preparation of any of the Company’s
financial statements. The Audit Committee reviews, with the Company’s legal
counsel, legal and regulatory matters that may have a significant impact on the
Company’s financial statements. The Audit Committee held 6 meetings in 2009 and
[all of members of the Audit Committee attended each of these
meetings.
The Board
of Directors has adopted an Audit Committee Charter, which was ratified by the
stockholders at the 2004 Annual Meeting of Stockholders. A copy of the Audit
Committee Charter is attached as Appendix A hereto.
REPORT
OF THE AUDIT COMMITTEE
Notwithstanding
anything to the contrary set forth in any of the Company’s previous filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934 that
might incorporate future filings or this proxy statement, the following report
shall not be deemed to be incorporated by reference into any such filings. In
addition, the following report shall not be deemed to be “soliciting material”
or “filed” with the SEC.
The Audit
Committee for the year ended December 31, 2009, whose members are
identified below, has reviewed and discussed the audited financial statements as
of and for the year ended December 31, 2009 with the Company’s management
and has discussed the matters required to be discussed by SAS 61 with the
Company’s independent auditors. The Audit Committee has also received the
written disclosures and the letter from the Company’s independent auditors
required by applicable requirements of the Public Accounting Oversight Board
regarding the independent auditors’ communications with the Audit Committee
concerning independence and has discussed with the independent auditors the
independent auditors’ independence. Based upon its review of the foregoing
materials and its discussions with the Company’s management and independent
auditors, 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, 2009. The Audit Committee also
considered whether the provision of other non-audit services by the independent
auditor to the Company is compatible with maintaining the independence of the
independent auditor and concluded that the independence of the independent
auditor is not compromised by the provision of such services.
The Audit
Committee has a written charter which was adopted by the Board of Directors on
October 3, 2003 and ratified at the 2004 Annual Meeting of Stockholders.
The Audit Committee has established procedures for the receipt, retention and
treatment of any complaints received by the Company regarding accounting,
internal accounting controls or auditing matters and the confidential, anonymous
submission by the Company’s employees of any concerns regarding questionable
accounting or auditing matters.
By the
Audit Committee.
Thomas C.
Lynch
Anthony
J. Paoni
Compensation
Committee
Messrs.
Lynch and Paoni currently serve on the Company’s Compensation
Committee. Dr. Thomas Hall was a member of the Committee until his
resignation from the Company’s Board of Directors on November 13, 2009. The
Compensation Committee oversees the Company’s compensation programs, which are
designed specifically for the Company’s most senior executive officers,
including the Chief Executive Officer, Chief Financial Officer and the other
executive officers named in the Summary Compensation Table. Additionally, the
Compensation Committee is charged with the review and approval of all annual
compensation decisions relating to named executive officers. The
Board of Directors has adopted a Compensation Committee charter. A
copy of the Compensation Committee charter is attached as Appendix B
hereto.
The
Compensation Committee met one time in 2009, and all members of the
Compensation Committee attended the meetings.
Compensation
Discussion and Analysis
Oversight of Executive
Compensation Program
The
Compensation Committee of the Board of Directors oversees the Company’s
compensation programs, which are designed specifically for the Company’s most
senior executive officers, including the Chief Executive Officer, Chief
Financial Officer and the other executive officers named in the Summary
Compensation Table (collectively, the “named executive officers”). Additionally,
the Compensation Committee is charged with the review and approval of all annual
compensation decisions relating to named executive officers.
The
Compensation Committee is currently composed of 2 independent, non-management
members of the Board of Directors. Each year the Company reviews any and all
relationships that each director has with the Company and the Board of Directors
subsequently reviews these findings.
The
responsibilities of the Compensation Committee, as stated in its charter,
include the following:
|
|
·
|
annually
review and approve for the CEO and the executive officers of the Company
the annual base salary, the annual incentive bonus, including the specific
goals and amount, equity compensation, employment agreements, severance
arrangements, and change in control agreements/provisions, and any other
benefits, compensation or
arrangements.
|
|
|
·
|
make
recommendations to the Board with respect to incentive compensation plans,
including reservation of shares for issuance under employee benefit
plans.
|
|
|
·
|
annually
review and recommend to the Board of Directors for its approval the
compensation, including cash, equity or other compensation, for members of
the Board of Directors for their service as a member of the Board of
Directors, a member of any committee of the Board of Directors, a Chair of
any committee of the Board of Directors, and the Chairman of the Board of
Directors.
|
|
|
·
|
annually
review the performance of the Company’s Chief Executive
Officer.
|
|
|
·
|
make
recommendations to the Board of Directors on the Company’s executive
compensation practices and policies, including the evaluation of
performance by the Company’s executive officers and issues of management
succession.
|
|
|
·
|
review
the Company’s compliance with employee benefit
plans.
|
|
|
·
|
make
regular reports to the Board.
|
|
|
·
|
annually
review and reassess the adequacy of the Compensation Committee charter and
recommend any proposed changes to the Board for
approval.
|
The Compensation Committee is also
responsible for completing an annual report on executive compensation for
inclusion in the Company's proxy statement. In addition to such annual report,
the Compensation Committee maintains written minutes of its meetings, which
minutes are filed with the minutes of the meetings of the
Board.
Overview of Compensation
Program
In order
to recruit and retain the most qualified and competent individuals as senior
executives, the Company strives to maintain a compensation program that is
competitive in the global labor market. The purpose of the Company’s
compensation program is to reward exceptional organizational and individual
performance.
The
following compensation objectives are considered in setting the compensation
programs for our named executive officers:
|
|
·
|
drive
and reward performance which supports the Company’s core
values;
|
|
|
·
|
provide
a percentage of total compensation that is “at-risk,” or variable, based
on predetermined performance
criteria;
|
|
|
·
|
design
competitive total compensation and rewards programs to enhance the
Company’s ability to attract and retain knowledgeable and experienced
senior executives; and
|
|
|
·
|
set
compensation and incentive levels that reflect competitive market
practices.
|
Compensation Elements and
Rationale
Compensation
for Named Executive Officers Other than the CEO
Compensation
for the named executive officers, other than the CEO, is made in the CEO’s sole
and exclusive discretion. While the Compensation Committee provides its
recommendations with respect to compensation for the named executive officers
(other than the CEO) as described in greater detail below, the CEO is only
required to consider the Compensation Committee’s recommendations, but is not
bound by its findings.
Compensation
for the Company’s CEO
To reward
both short and long-term performance in the compensation program and in
furtherance of the Company’s compensation objectives noted above, the Company’s
compensation program for the CEO is based on the following
objectives:
The
Compensation Committee believes that a significant portion of the CEO’s
compensation should be tied not only to individual performance, but also to the
Company’s performance as a whole measured against both financial and
non-financial goals and objectives. During periods when performance meets or
exceeds these established objectives, the CEO should be paid at or more than
expected levels. When the Company’s performance does not meet key objectives,
incentive award payments, if any, should be less than such levels.
|
|
(ii)
|
Incentive
Compensation
|
A large
portion of compensation should be paid in the form of short-term and long-term
incentives, which are calculated and paid based primarily on financial measures
of profitability and stockholder value creation. The CEO has the incentive of
increasing Company profitability and stockholder return in order to earn a major
portion of his compensation package.
|
|
(iii)
|
Competitive Compensation
Program
|
The
Compensation Committee reviews the compensation of chief executive officers at
peer companies to ensure that the compensation program for the CEO is
competitive. The Company believes that a competitive compensation program will
enhance its ability to retain a capable CEO.
Financial Metrics Used in
Compensation Programs
Several
financial metrics are commonly referenced in defining Company performance for
the CEO’s executive compensation. These metrics include quarterly metrics to
target cash flow break even and specific revenue goals to define Company
performance for purposes of setting the CEO’s compensation.
Compensation Benchmarking
Relative to Market
The
Company sets the CEO’s compensation by evaluating peer group companies. Peer
group companies are chosen based on size, industry, annual revenue and whether
they are publicly or privately held. Based on these criteria, the Compensation
Committee has identified 29 companies in the Company’s peer group. These peer
group companies include Catapult Communications Corp., Endwave Corp., Carrier
Access Corp., Crystal Technology, Echelon Corp. and FiberTower Corp. The
Compensation Committee has concluded that the CEO’s compensation falls within
the 50th
percentile of compensation for chief executive officers within the peer group
companies.
Review of Senior Executive
Performance
The
Compensation Committee reviews, on an annual basis, each compensation package
for the named executive officers. In each case, the Compensation Committee takes
into account the scope of responsibilities and experience and balances these
against competitive salary levels. The Compensation Committee has the
opportunity to meet with the named executive officers at least once per year,
which allows the Compensation Committee to form its own assessment of each
individual’s performance. As indicated above, with the exception of the CEO,
recommendations with respect to compensation packages for the named executive
officers must be considered by the CEO in connection with establishing
compensation for those named executive officers. However, the recommendations of
the Compensation Committee with respect to the compensation paid to the named
executive officers (other than the CEO) will not be binding on the
CEO.
Components of the Executive
Compensation Program
The
Compensation Committee believes the total compensation and benefits program for
named executive officers should consist of the following:
|
|
·
|
base
salary;
|
|
|
·
|
stock
incentive plan;
|
|
|
·
|
retirement,
health and welfare benefits;
|
|
|
·
|
perquisites
and perquisite allowance payments; and
|
|
|
·
|
termination
benefits.
|
Base Salaries
With the
exception of the CEO, whose compensation is set by the Compensation Committee
and approved by the Board of Directors, base salaries and merit increases for
the named executive officers are determined by the CEO in his discretion after
consideration of a competitive analysis recommendation provided by the
Compensation Committee. The Compensation Committee’s recommendation is
formulated through the evaluation of the compensation of similar executives
employed by companies in the Company’s peer group.
Stock Incentive
Plan
Under the
Company’s Stock Incentive Plan (the “Plan”) incentive stock options and
non-qualified options to purchase shares of the Company’s common stock may be
granted to key employees. An important objective of the long-term incentive
program is to strengthen the relationship between the long-term value of the
Company’s stock price and the potential financial gain for employees as well as
the retention of senior management and key personnel. Stock options provide
named executive officers with the opportunity to purchase the Company’s common
stock at a price fixed on the grant date regardless of future market price.
Stock options generally vest ratably on a quarterly basis and become exercisable
over a five-year vesting period. A stock option becomes valuable only if the
Company’s common stock price increases above the option exercise price (at which
point the option will be deemed “in-the-money”) and the holder of the option
remains employed during the period required for the option to “vest,” thus
providing an incentive for an option holder to remain employed by the Company.
In addition, stock options link a portion of an employee’s compensation to the
stockholders’ interests by providing an incentive to increase the market price
of the Company stock.
The
Company practice is that the exercise price for each stock option is equal to
the fair market value on the date of grant. Under the terms of the Plan, the
option price will not be less than the fair market value of the shares on the
date of grant or, in the case of a beneficial owner of more than 5.0% of the
Company’s outstanding common stock on the date of grant, the option price will
not be less than 110% of the fair market value of the shares on the date of
grant.
There is
a limited term in which Plan participants can exercise stock options, known as
the “option term.” The option term is generally ten years from the date of
grant. At the end of the option term, the right to exercise any unexercised
options expires. Option holders generally forfeit any unvested options if their
employment with the Company terminates.
Certain key executives may be a party
to option agreements containing clauses that cause their options to become
immediately and fully vested and exercisable upon a Change of Control, as
defined in the Plan. Additionally, death or disability of the executive during
his or her employment period may cause certain stock options to immediately vest
and become exercisable per the terms outlined in the stock option award
agreement.
The
Compensation Committee awards options to named executive officers upon
commencement of their employment with the Company and for successfully achieving
or exceeding predetermined individual and Company performance goals. In
determining whether to award stock options and the number of stock options
granted to a named executive officer, the Compensation Committee reviews the
compensation of executives at peer group companies to ensure that the
compensation program is competitive.
Retirement, Health and
Welfare Benefits
The
Company offers a variety of health and welfare and retirement programs to all
eligible employees. The named executive officers generally are eligible for the
same benefit programs on the same basis as the rest of the broad-based
employees. The Company’s health and welfare programs include medical, dental,
vision, life, accidental death and disability, and short and long-term
disability insurance. In addition to the foregoing, the named executive officers
are eligible to participate in the Company’s 401(k) Retirement Savings
Plan.
401(k) Retirement
Savings Plan
The
Company maintains a tax-deferred savings plan for employees (the “Telkonet
401(k)”) that is administered by a committee of trustees appointed by the
Company. All Company employees are eligible to participate upon the completion
of six months of employment, subject to minimum age requirements.
Contributions by employees under the Telkonet 401(k) are immediately vested and
each employee is eligible for distributions upon retirement, death or disability
or termination of employment. Depending upon the circumstances, these payments
may be made in installments or in a single lump sum.
Directors’
Compensation
We
reimburse 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 our behalf. We compensate each
non-management director at a rate of $4,000 per month, 10,000 vested stock
options per quarter and $1,000 for each committee meeting of the Board of
Directors such director attends.
In
addition to the non-management directors’ compensation plan described above, Mr.
Paoni is compensated in the amount of $4,000 per month for executive consulting
services.
Until his
resignation as Chairman of the Board of Directors in November 2009,
Mr. Musser was compensated $8,333 per month (consisting of monthly payments
in the amount of $4,000, which payments were consistent with the monthly
payments made to the other non-management directors, and $4,333 per month, which
payments were in lieu of the 10,000 vested stock options per quarter and $1,000
for each committee meeting that the other non-management directors
receive). Payments to Mr. Musser for Board services were made to
The Musser Group pursuant to a September 2003 consulting
agreement. Mr. Musser is the sole principal and owner of The Musser
Group. Mr. Musser currently serves on the Board of Directors
according to the terms of Telkonet’s non-management directors’ compensation
plan.
The
following table summarizes all compensation paid to our directors in the year
ended December 31, 2009.
|
Name
|
|
Fees
Earned
or
Paid
in Cash
|
|
|
Option
Awards
($)(1)
|
|
|
All
Other
Compensation
|
|
|
Total($)
|
|
|
Warren
V. Musser
|
|
$ |
48,000 |
|
|
$ |
0 |
|
|
$ |
52,000 |
(2) |
|
$ |
100,000 |
|
|
Thomas
M. Hall (4)
|
|
$ |
48,000 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
60,196 |
|
|
Thomas
C. Lynch
|
|
$ |
48,000 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
60,196 |
|
|
Seth
D. Blumenfeld (5)
|
|
$ |
48,000 |
|
|
$ |
12,196 |
(3) |
|
$ |
0 |
|
|
$ |
60,196 |
|
|
Anthony
J. Paoni
|
|
$ |
48,000 |
|
|
$ |
12,196 |
(3) |
|
$ |
48,000 |
(7) |
|
$ |
108,196 |
|
_____________________________
|
(1)
|
Amounts
reflect the compensation cost associated with stock option grants,
calculated in accordance with FASB ASC Topic 718 (formerly SFAS 123R) and
using a Black-Scholes valuation method.
|
|
(2)
|
Fees
for director services performed by Mr. Musser and paid to The Musser Group
pursuant to a September 2003 consulting
agreement.
|
|
(3)
|
Stock
options granted pursuant to the 2009 non-management director compensation
plan. The following assumptions were used to determine the fair
value of stock option awards: historical volatility of 81%, expected
option life of 5.0 years and a risk-free interest rate of
3.5%.
|
|
(4)
|
Dr.
Hall resigned from our Board of Directors on November 13,
2009.
|
|
(5)
|
Mr.
Blumenfeld resigned from our Board of Directors on November 16,
2009.
|
|
(6)
|
Compensation
earned by non-employee directors for services rendered during 2009 was
accrued and unpaid as of December 31, 2009.
|
|
(7)
|
Fees
for consulting services performed by Mr. Paoni in
2009.
|
Executive
Officers
The
following table provides the information concerning the Company’s executive
officers as of March 30, 2010.
|
Name
|
|
Age
|
|
Title
|
|
Jason
L. Tienor
|
|
35
|
|
President
& Chief Executive Officer
|
|
Richard
J. Leimbach
|
|
41
|
|
Chief
Financial Officer
|
|
Jeffrey
J. Sobieski
|
|
34
|
|
Chief
Operating Officer
|
Jason
L. Tienor—President and Chief Executive Officer
Mr.
Tienor has served as the Company’s President and Chief Executive Officer since
December 2007 and, from August 2007 until December 2007, he served as the
Company’s Chief Operating Officer. Mr. Tienor has also served as
Chief Executive Officer of EthoStream, LLC, a wholly-owned subsidiary of the
Company, since March 2007. From 2002 until his employment with the
Company, Mr. Tienor served as Chief Executive Officer of Ethostream, LLC, the
company that he co-founded. Mr. Tienor received a bachelor of business
administration in management information systems and marketing from the
University of Wisconsin – Oshkosh and a masters of business administration with
an emphasis on computer science from Marquette University.
Richard
J. Leimbach—Chief Financial Officer
Mr.
Leimbach has served as the Company’s Chief Financial Officer since December 2007
and, from June 2006 until December 2007, he served as the Vice President of
Finance. He also served as the Company’s Controller from January 2004 until June
2006. Mr. Leimbach is a certified public accountant with over fifteen
years of public accounting and private industry experience. Prior to joining the
Company, Mr. Leimbach was the Controller with Ultrabridge, Inc., an applications
solution provider. Mr. Leimbach also served as Corporate Accounting Manager for
Snyder Communications, Inc., a global provider of integrated marketing
solutions.
Jeffrey
J. Sobieski—Chief Operating Officer
Mr.
Sobieski was named the Company's Chief Operating Officer in June
2008. Prior to this appointment, Mr. Sobieski served as the Company’s
Executive Vice President, Energy Management since December 2007 and from March
2007 until December 2007, he served as Chief Information Officer of EthoStream,
LLC, wholly-owned subsidiary of the Company. From 2002 until his
employment with the Company, Mr. Sobieski served as Chief Information Officer of
EthoStream, LLC, the company he co-founded. Mr. Sobieski is also the
co-founder of Interactive Solutions, a consulting firm providing support to the
Insurance and Telecommunications Industries.
Executive
Compensation
The
following table sets forth certain information with respect to compensation for
services in all capacities for the years ended December 31, 2009 and 2008
paid to our Chief Executive Officer (principal executive officer) and the two
other most highly compensated executive officers who were serving as such as of
December 31, 2009.
Summary
Compensation Table
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
|
Option
Awards
($)(1)(2)
|
|
|
All
Other Compensation
($)(6)
|
|
|
Total
($)
|
|
|
Jason
L. Tienor
|
|
2009
|
|
$
|
200,770
|
(3)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,400
|
|
|
$
|
209,170
|
|
|
President
and Chief Executive Officer
|
|
2008
|
|
$
|
194,421
|
(3)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,431
|
|
|
$
|
201,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard.
J. Leimbach
|
|
2009
|
|
$
|
190,731
|
(4)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
190,731
|
|
|
Chief
Financial Officer
|
|
2008
|
|
$
|
180,039
|
(4)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
180,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
J. Sobieski
|
|
2009
|
|
$
|
190,731
|
(5)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,400
|
|
|
$
|
199,131
|
|
|
Chief
Operating Officer
|
|
2008
|
|
$
|
186,421
|
(5)
|
|
$
|
0
|
|
|
$
|
31,180
|
|
|
$
|
7,431
|
|
|
$
|
225,032
|
|
_____________________________
|
(1)
|
Amounts
reflect the compensation cost associated with stock option grants,
calculated in accordance with FASB ASC Topic 718 and using a Black-Scholes
valuation method.
|
|
(2)
|
In
2008, the following assumptions were used to determine the fair value of
stock option awards granted: historical volatility of 74%, expected option
life of 5.0 years and a risk-free interest rate of
3.0%.
|
|
(3)
|
Includes
accrued and unpaid salary to Jason Tienor for the years ended December 31,
2008 and 2009 of $10,687 and $13,062, respectively.
|
|
(4)
|
Includes
accrued and unpaid salary to Richard Leimbach for the years ended December
31, 2008 and 2009 of $9,744 and $24,868,
respectively.
|
|
(5)
|
Includes
accrued and unpaid salary to Jeffrey Sobieski for the years ended December
31, 2008 and 2009 of $10,175 and $11,628, respectively.
|
|
(6)
|
Other
compensation represents monthly car allowance paid to certain Telkonet
executives.
|
Employment
Agreements
Jason L.
Tienor, President and Chief Executive Officer, is employed pursuant to an
employment agreement with us dated March 15, 2007. Mr. Tienor’s
employment agreement has a term of three years, which may be extended by mutual
agreement of the parties thereto, and provides, among other things, for an
annual base salary of $148,000 per year and bonuses and benefits based on our
internal policies and participation in our incentive and benefit
plans. Additional terms of the employment agreement are described
under "Potential Payments upon Termination or Change in Control"
below. On August 20, 2007, Mr. Tienor’s annual salary was increased
to $200,000. Notwithstanding his employment agreement’s expiration,
Mr. Tienor continues to be employed and to perform services pursuant to the
terms of his employment agreement pending completion of a replacement
agreement.
Jeffrey
J. Sobieski, Chief Operating Officer, is employed pursuant to an employment
agreement with us dated March 15, 2007. Mr. Sobieski’s employment
agreement has a term of three years, which may be extended by mutual agreement
of the parties thereto, and provides for a base salary of $148,000 per year and
bonuses and benefits based upon our internal policies and participation in our
incentive and benefit plans. Additional terms of the employment
agreement are described under "Potential Payments upon Termination or Change in
Control" below. On December 11, 2007, Mr. Sobieski’s salary was
increased to $190,000. Notwithstanding his employment agreement’s expiration,
Mr. Sobieski continues to be employed and to perform services pursuant to the
terms of his employment agreement pending completion of a replacement
agreement.
In
addition to the foregoing, stock options are periodically granted to employees
under the Company’s Plan at the discretion of the Compensation Committee of the
Board of Directors. Executives of the Company are eligible to receive stock
option grants, based upon individual performance and the performance of the
Company as a whole.
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table shows outstanding stock option awards classified as exercisable
and unexercisable as of December 31, 2009 for the Named Executive
Officers.
|
|
|
Option
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exerciseable
|
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexerciseable
|
|
|
Option
Exercise Price
($)
|
|
Option
Expiration
Date
(4)
|
|
Jason
L. Tienor(5)
|
|
|
50,000
|
|
|
|
50,000
|
(1)
|
|
$
|
1.80
|
|
4/24/2012
|
|
Richard.
J. Leimbach(5)
|
|
|
87,500
|
|
|
|
0
|
|
|
|
(3
|
)
|
4/24/2012
|
|
Jeffrey
J. Sobieski(5)
|
|
|
20,000
|
|
|
|
30,000
|
(2)
|
|
$
|
1.00
|
|
4/24/2012
|
_____________________________
|
(1)
|
Mr.
Tienor’s options were granted on August 10, 2007 and vest ratably on a
quarterly basis over a five year
period.
|
|
(2)
|
Mr.
Sobieski’s options were granted on February 19, 2008 and vest ratably on a
quarterly basis over a five year
period.
|
|
(3)
|
Includes
37,500 vested options exercisable at $2.59 per share, and 50,000 vested
options exercisable at 5.08 per
share.
|
|
(4)
|
All
options granted in accordance with the Plan have an outstanding term equal
to the shorter of ten years, or the expiration of the Plan. The Plan
expires on April 24, 2012.
|
|
(5)
|
This
table does not include disclosure of outstanding warrants held by any of
our Named Executive
Officers.
|
Option
Exercises and Vesting of Stock Awards
There
were no options exercised by, or stock awards vested for the account of, the
named executive officers during 2009.
Potential
Payments upon Termination or Change in Control
Each of
Mr. Tienor’s and Mr. Sobieski’s Employment Agreements obligate the Company to
continue to pay each executive’s base salary and provide continued participation
in employee benefit plans for the duration of the term of their employment
agreements in the event such executive is terminated without “cause” by the
Company or if the executive terminates his employment for “good reason.” “Cause”
is defined as the occurrence of any of the following: (i) theft, fraud,
embezzlement, or any other act of dishonesty by the executive; (ii) any material
breach by the executive of any provision of the employment agreement which
breach is not cured within a reasonable time (but not to exceed thirty (30) days
after written notification thereof to the executive by the Company); (iii) any
habitual neglect of duty or misconduct of the executive in discharging any of
his duties and responsibilities under the employment agreement after a written
demand for performance was delivered to the executive that specifically
identified the manner in which the board believed the executive had failed to
discharge his duties and responsibilities, and the executive failed to resume
substantial performance of such duties and responsibilities on a continuous
basis immediately following such demand; (iv) commission by the executive of a
felony or any offense involving moral turpitude; or (v) any default of the
executive’s obligations under the employment agreement, or any failure or
refusal of the executive to comply with the policies, rules and regulations of
the Company generally applicable to the Company’s employees, which default,
failure or refusal is not cured within a reasonable time (but not to exceed
thirty (30) days) after written notification thereof to the executive by the
Company. If cause exists for termination, the executive shall be entitled to no
further compensation, except for accrued leave and vacation and except as may be
required by applicable law. “Good reason” is defined as the occurrence of any of
the following: (i) any material adverse reduction in the scope of the
executive’s authority or responsibilities; (ii) any reduction in the amount of
the executive’s compensation or participation in any employee benefits; or (iii)
the executive’s principal place of employment is actually or constructively
moved to any office or other location 50 miles or more outside of Milwaukee,
Wisconsin.
In the
event the Company fails to renew the employment agreements upon expiration of
the term, then the Company shall continue to pay the executive's base salary and
provide the executive with continued participation in each employee benefit plan
in which the executive participated immediately prior to expiration of the term
for a period of three months following expiration of the term. Each of Messrs.
Tienor and Sobieski have agreed not to compete with the Company or solicit
any Company employees for a period of one year following expiration or earlier
termination of the employment agreements. Assuming Mr. Tienor’s and
Mr. Sobieski’s employment agreements were terminated as of December 31, 2009,
the total estimated compensation that would have been paid under these
agreements would be $78,188 in the aggregate.
Security
Ownership of Certain Beneficial Owners and Management
The
following table provides information concerning securities authorized for
issuance pursuant to equity compensation plans approved by the Company’s
stockholders and equity compensation plans not approved by the Company’s
stockholders as of December 31, 2009.
|
|
|
Number
of securities to be issued upon exercise
of
outstanding options,
warrants
and rights
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number
of securities
remaining
available for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
6,120,883
|
|
|
$
|
1.50
|
|
|
|
4,173,329
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,120,883
|
|
|
$
|
1.50
|
|
|
|
4,173,329
|
|
The following table sets forth, as of
March 30, 2010, the number of shares of the Company’s common stock beneficially
owned by each director and executive officer of the Company, by all directors
and executive officers as a group, and by each person known by the Company to
own beneficially more than 5.0% of the Company’s outstanding common
stock.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Voting Securities
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jason
L. Tienor, President, Chief Executive Officer and
Director
|
|
|
751,803 |
|
|
|
* |
|
|
|
4 |
|
|
|
1.9% |
|
|
|
* |
(3) |
Richard
J. Leimbach, Chief Financial Officer
20374
Seneca Meadows Parkway
Germantown,
MD 20876
|
|
|
438,500 |
|
|
|
* |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
(4) |
Jeffrey
J. Sobieski, Chief Operating Officer
|
|
|
721,803 |
|
|
|
* |
|
|
|
4 |
|
|
|
1.9% |
|
|
|
* |
(5) |
Anthony
J. Paoni, Chairman
|
|
|
120,000 |
|
|
|
* |
|
|
|
5 |
|
|
|
2.3% |
|
|
|
* |
(6) |
Warren
V. Musser, Director
|
|
|
2,000,000 |
|
|
|
2.0% |
|
|
|
0 |
|
|
|
* |
|
|
|
1.9% |
(7) |
Thomas
C. Lynch, Director
|
|
|
250,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
|
|
* |
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a group (six
persons)
|
|
|
4,282,106 |
|
|
|
4.3% |
|
|
|
15 |
|
|
|
7.0% |
|
|
|
4.4% |
|
_____________________
* Less
than one percent (1%).
|
(1)
|
Unless
otherwise indicated, the address of each named holder is in care of
Telkonet, Inc., 10200 Innovation Drive, Suite 300, Milwaukee,
Wisconsin 53226.
|
|
(2)
|
According
to Securities and Exchange Commission rules, beneficial ownership includes
shares as to which the individual or entity has voting power or investment
power and any shares, which the individual or entity has the right to
acquire within 60 days of the date of this table through the exercise
of any stock option or other right.
|
|
(3)
|
Includes
701,803 shares of our common stock, options exercisable within 60 days to
purchase 50,000 shares of our common stock at $1.80 per share, 55,096
shares of common stock issuable upon conversion of shares of our Series A
convertible redeemable preferred stock, and warrants to purchase 30,304
shares of our common stock at an exercise price of $0.33 per
share.
|
|
(4)
|
Includes
351,000 shares of our common stock, options exercisable within 60 days to
purchase 37,500 and 50,000 shares of our common stock at $2.59 and $5.08
per share, respectively, 27,548 shares of common stock issuable upon
conversion of shares of our Series A convertible redeemable preferred
stock, and warrants to purchase 15,152 shares of our common stock at an
exercise price of $0.33 per share.
|
|
(5)
|
Includes
701,803 shares of our common stock, options exercisable within 60 days to
purchase 12,500 shares of our common stock at $1.00 per share, 55,096
shares of common stock issuable upon conversion of shares of our Series A
convertible redeemable preferred stock, and warrants to purchase 30,304
shares of our common stock at an exercise price of $0.33 per
share.
|
|
(6)
|
Includes
options exercisable within 60 days to purchase 80,000 and 40,000 shares of
our common stock at $1.00 and $2.30 per share, 68,870 shares of common
stock issuable upon conversion of shares of our Series A convertible
redeemable preferred stock, and warrants to purchase 37,880 shares of our
common stock at an exercise price of $0.33 per share.
|
|
(7)
|
Includes
options exercisable within 60 days to purchase 2,000,000 shares of our
common stock at $1.00 per share.
|
|
(8)
|
Includes
options exercisable within 60 days to purchase 80,000, 20,000, 70,000 and
80,000 shares of our common stock at $1.00, $2.00, $2.66 and $3.45 per
share, respectively.
|
Certain
Relationships and Related Transactions
Description
of Related Party Transactions
Several
of our officers and directors participated in our November 2009 private
placement of Series A convertible redeemable preferred stock and
warrants. On November 16, 2009, we entered into an Executive Officer
Reimbursement Agreement with each of Messrs. Tienor, Sobieski and Leimbach, our
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer,
respectively, pursuant to which these executive officers participated in the
private placement by converting a portion of our outstanding indebtedness owed
to them into shares of Series A convertible redeemable preferred stock and
warrants to purchase shares of our common stock. Mr. Tienor converted
$20,000 of outstanding indebtedness into four shares of Series A
convertible redeemable preferred stock (convertible into 55,096 shares of common
stock) and warrants to purchase 30,304 shares of common stock; Mr. Leimbach
converted $10,000 of outstanding indebtedness into two shares of Series A
convertible redeemable preferred stock (convertible into 27,548 shares of common
stock) and warrants to purchase 15,152 shares of common stock; and Mr. Sobieski
converted $20,000 of outstanding indebtedness into four shares of Series A
convertible redeemable preferred stock (convertible into 55,096 shares of common
stock) and warrants to purchase 30,304 shares of common
stock. Anthony Paoni, Chairman of our Board of Directors, also
participated in the private placement, purchasing five shares of Series A
convertible redeemable preferred stock (convertible into 68,870 shares of common
stock) and warrants to purchase 37,880 shares of common stock, for an aggregate
purchase price of $25,000.
Anthony
Paoni, Chairman of the Company’s Board of Directors, participated in the private
placement of Series A Preferred Stock, purchasing five shares of Series A
convertible redeemable preferred stock (convertible into 68,870 shares of common
stock) and warrants to purchase 37,880 shares of common stock, for an aggregate
purchase price of $25,000.
Anthony
Paoni, Chairman, also is compensated $4,000 per month for executive
consulting services.
From time
to time the Company may receive advances from certain of its officers to meet
short term working capital needs. These advances may not have formal
repayment terms or arrangements. As of December 31, 2009, the Company
owed deferred salary payments to certain executive officers in the amount of
$24,634 to Jason L. Tienor, President and Chief Executive Officer, $42,645 to
Richard J. Leimbach, Chief Financial Officer, and $30,250 to Jeffrey J.
Sobieski, Chief Operating Officer. In April 2010, Messrs. Tienor and Sobieski
each advanced the Company $25,000 to meet short term working capital
needs.
Indemnification
Agreements
On March
30, 2010, the Company entered into Indemnification Agreements with directors
Anthony Paoni, Warren Musser and Thomas Lynch, and executives Jason Tienor,
President and Chief Executive Officer and Richard Leimbach, Chief Financial
Officer.
The
Indemnification Agreements provide that the Company will indemnify the Company's
officers and directors, to the fullest extent permitted by law, relating to,
resulting from or arising out of any threatened, pending or completed action,
suit or proceeding, or any inquiry or investigation by reason of the fact that
such officer or director (i) is or was a director, officer, employee or agent of
the Company or (ii) is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.. In addition, the
Indemnification Agreements provide that the Company will make an advance payment
of expenses to any officer or director who has entered into an Indemnification
Agreement, in order to cover a claim relating to any fact or occurrence arising
from or relating to events or occurrences specified in this paragraph, subject
to receipt of an undertaking by or on behalf of such officer or director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Company as authorized under this
Agreement,.
The
foregoing summary of the Indemnification Agreements is subject to, and qualified
in its entirety by, the Form of Indemnification Agreement, which is
included as Exhibit 10.12 to this Annual Report on Form 10-K.
Company’s
Policies on Related Party Transactions
Under the
Company’s policies and procedures, related-party transactions that must be
publicly disclosed under the federal securities laws require prior approval
of the Company’s independent directors without the participation of
any director who may have a direct or indirect interest in the transaction in
question. Related parties include directors, nominees for director, principal
shareholders, executive officers and members of their immediate families. For
these purposes, a “transaction” includes all financial transactions,
arrangements or relationships, ranging from extending credit to the provision of
goods and services for value and includes any transaction with a company in
which a director, executive officer immediate family member of a director or
executive officer, or principal shareholder (that is, any person who
beneficially owns five percent or more of any class of the Company’s voting
securities) has an interest by virtue of a 10-percent-or-greater equity
interest. The Company’s policies and procedures regarding related-party
transactions are not a part of a formal written policy, but rather, represent
the Company’s historical course of practice with respect to approval of
related-party transactions.
Director
Independence
The Board
of Directors has determined that Messrs. Lynch and Paoni are “independent” under
the listing standards of the NYSE AMEX. Each of Messrs. Lynch and
Paoni serve on, and are the only members of, the Company’s Audit Committee and
Compensation Committee. Although the Company does not maintain a
standing Nominating Committee, nominees for election as directors are considered
and nominated by a majority of the Company’s independent directors in accordance
with the NYSE AMEX listing standards. “Independence” for these purposes is
determined in accordance with Section 121(A) of the NYSE AMEX Rules and Rule
10A-3 under the Securities Exchange Act of 1934.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and certain
of our officers to file reports of holdings and transactions in shares of the
Company common stock with the Securities and Exchange Commission. Based on our
records and other information, we believe that in 2009 our directors and our
officers who are subject to Section 16 met all applicable filing
requirements.
Independent
Public Accountants
The
following table sets forth fees billed to the Company by our auditors during the
fiscal years ended December 31, 2009 and 2008.
|
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
1.
Audit Fees
|
|
$
|
185,413
|
|
|
$
|
309,755
|
|
|
2.
Audit Related Fees
|
|
|
24,250
|
|
|
|
46,262
|
|
|
3.
Tax Fees
|
|
|
--
|
|
|
|
--
|
|
|
4.
All Other Fees
|
|
|
--
|
|
|
|
--
|
|
|
Total
Fees
|
|
$
|
209,663
|
|
|
$
|
356,017
|
|
Audit
fees consist of fees billed for professional services rendered for the audit of
the Company’s consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by RBSM LLP in connection with statutory and
regulatory filings or engagements.
Audit-related
fees consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Company’s
consolidated financial statements, which are not reported under “Audit
Fees.”
Tax fees
consist of fees billed for professional services for tax compliance, tax advice
and tax planning. The tax fees relate to federal and state income tax reporting
requirements.
All other
fees consist of fees for products and services other than the services reported
above.
Prior to
the Company’s engagement of its independent auditor, such engagement is approved
by the Company’s audit committee. The services provided under this engagement
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Pursuant to the Company’s Audit
Committee Charter, the independent auditors and management are required to
report to the Company’s audit committee at least quarterly regarding the extent
of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis. All
audit fees, audit-related fees, tax fees and other fees incurred by the Company
for the year ended December 31, 2009 were approved by the Company’s audit
committee.
PROPOSAL
NO. 2
APPROVAL
OF AN INCREASE IN THE AMOUNT OF THE
COMPANY’S
AUTHORIZED COMMON STOCK
Background
On
February 12, 2010, the Board of Directors unanimously approved, subject to
stockholder approval, an amendment to our Restated Articles to increase the
aggregate number of shares of common stock that we are authorized to issue from
155,000,000 shares to 575,000,000 shares. You are being
asked to consider and act upon this proposal to approve the proposed amendment
to the Restated Articles which is attached as Appendix A to this proxy
statement.
Under the
Utah law, we may only issue shares of common stock to the extent such shares
have been authorized for issuance under our Restated Articles. Our
Restated Articles currently authorize the issuance of 155,000,000 shares of
common stock, par value of $0.001 per share. As of April 21,
2010, 96,853,771 shares of common stock were issued and outstanding,
215 shares of Series A Preferred Stock convertible into
2,961,429 shares of common stock were issued and outstanding,
11,144,212 shares of common stock were reserved for issuance for
unexercised options granted pursuant to the Company’s Amended and Restated Stock
Option Plan (the “2002 Stock Option Plan”) or reserved for issuance in
connection with future grants under the 2002 Stock Option Plan, and
12,158,941 shares of the Company’s common stock were reserved for issuance
upon the exercise of warrants to purchase common stock and the conversion of our
outstanding convertible debentures, of which 4,621,212 shares reserved for
issuance cannot be issued unless the Company’s stockholders remove the 20%
limitation on the number of shares that could be issued to YA Global
Investments, L.P. pursuant to a Securities Purchase Agreement dated as of
May 30, 2008 between the Company and YA Global Investments,
L.P. This leaves approximately 31,881,647 shares of common stock
unissued and unallocated to derivative securities outstanding and our equity
incentive plan.
Purpose
and Effect of the Increase in the Number of Authorized Shares of Common
Stock
The principal purpose of the proposal
to increase the number of authorized shares of common stock available is to
enable the Company to conduct a rights offering (described
below). The Company intends to pursue a rights offering to existing
stockholders, which would allow stockholders to purchase additional shares of
common stock based on their current pro rata ownership percentage in order
to raise capital for the Company’s operations and improve the Company’s
financial condition, while giving existing stockholders the opportunity to limit
ownership dilution. Because of the current volatility in the capital
markets, the exact size, timing, terms and conditions of the rights offering
have not yet been determined by the Board of Directors. On February 12, 2010, the Company filed
with the Securities and Exchange Commission a preliminary registration statement
on Form S-1 in order to register the rights to subscribe for shares of common
stock and associated warrants to purchase shares of common stock to be
distributed pursuant to the rights offering. In connection with the
rights offering, once the increase in the number of shares of common stock that
we are authorized to issue has been approved and the registration statement
becomes effective, we expect to distribute to our shareholders a prospectus
which will set forth the material terms and conditions of the rights offering.
We urge you to read the prospectus carefully before you decide whether to
participate in the rights offering. [NTD: Any risk that the rights offering will
not be conducted]
This
proxy statement is not an offer to sell or the solicitation of an offer to buy
the Company’s securities issuable in the rights offering. Offers and
sales of securities issuable upon exercise of the rights in the rights offering
will only be made by means of a prospectus meeting the requirements of the
Securities Act of 1933, as amended, and applicable state securities laws, on the
terms and subject to the conditions set forth in the prospectus described
above.
A vote in favor of Proposal No. 2
to increase the number of authorized shares of common stock will not obligate
any stockholder to purchase shares in the rights offering. However,
failure to vote in favor of Proposal No. 2 may prevent the Company from
pursuing the rights offering and prevent the Company from raising capital on
terms that are as favorable, or at all.
The
increase in the number of authorized shares of common stock is also being
proposed to ensure that additional shares of common stock will be available in
the event the Board of Directors determines that it is necessary or appropriate
to raise additional capital through the sale of equity securities, convertible
debt securities or other equity-linked securities. The availability
of additional shares will also provide the Company with the flexibility to
structure possible acquisitions of another business or its assets, to establish
strategic relationships with corporate partners, to provide equity incentives to
employees and officers (subject to additional stockholder approvals as
required), to permit future stock dividends or for other corporate
purposes. The availability of additional shares of common stock is
particularly important in the event that the Board of Directors needs to
undertake any of the foregoing actions on an expedited basis and thus to avoid
the time and expense of seeking stockholder approval in connection with the
contemplated issuance of common stock. If the amendment is approved
by the stockholders, the Board does not intend to solicit further stockholder
approval prior to the issuance of any additional shares of common stock unless
such approval is required by law.
The
increase in the authorized shares of common stock will not have any immediate
effect on the rights of existing stockholders. However, the Board of
Directors will have the authority to issue authorized common stock without
requiring future stockholder approval of such issuances, except as may be
required by applicable law. To the extent that additional authorized
shares are issued in the future, they may decrease the existing stockholders’
percentage equity ownership and, depending on the price at which they are
issued, could be dilutive to the existing stockholders. The holders
of our common stock have no preemptive rights and the Board of Directors has no
plans to grant such rights with respect to any such shares.
The
increase in authorized common stock and the subsequent issuance of such shares
could also have the effect of delaying or preventing, a change of control of the
Company without further action by stockholders. Shares of authorized
and unissued common stock could, within the limits of applicable law, be issued
in one or more transactions which would make a takeover of the Company more
difficult or costly, and therefore less likely. Any such issuance of
additional stock could have the effect of diluting earnings per share and book
value per share of outstanding shares of common stock and such additional shares
could be used to dilute the stock ownership or voting rights of a person seeking
to obtain control of the Company.
We do not
have any arrangements, commitments or understandings to issue any shares of our
capital stock, other than in connection with the proposed rights offering, our
existing stock option plan and pursuant to the exercise of outstanding warrants
and conversion of our convertible debentures.
The Board
of Directors is not currently aware of any attempt to take over or acquire the
Company. While it may be deemed to have potential anti-takeover effects, the
proposed amendment to increase the authorized common stock is not prompted by
any specific effort or takeover threat currently perceived by
management.
As of
April 21, 2010, there were:
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●
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155,000,000 shares
of our common stock authorized;
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●
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96,853,771 shares
of our common stock issued and outstanding;
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●
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215 shares
of our preferred stock issued and outstanding and 2,961,429 shares of
our common stock reserved for issuance upon the conversion of shares of
our preferred stock;
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●
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7,440,570 shares
of our common stock reserved for issuance upon the exercise of outstanding
stock options granted under our 2002 Stock Option Plan;
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●
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3,703,642 shares
of our common stock reserved and available for future issuance or future
grant under our 2002 Stock Option Plan;
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●
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12,158,941 shares
reserved for issuance upon the exercise of warrants and conversion of our
outstanding convertible debentures, of which 4,621,612 shares
reserved for issuance cannot be issued unless the Company’s stockholders
remove the 20% limitation on the number of shares that could be issued
pursuant to the exercise of warrants and conversion of convertible
debentures issued to YA Global Investments, L.P. pursuant to a Securities
Purchase Agreement dated as of May 30, 2008 between the Company and
YA Global Investments, L.P.; and
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●
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31,881,647 shares
of our common stock which are authorized, unreserved and
unissued.
|
The
proposed amendment to our Restated Articles will not change the number of
authorized shares of preferred stock.
If the stockholders do not approve the
increase in the number of shares of common stock that the Company is authorized
to issue to, among other things, provide the Company with the flexibility to
pursue a rights offering as described below, the Company could be required to
seek alternative sources of capital to satisfy its capital needs. The
Company may not be able to obtain alternative sources of capital on commercially
reasonable terms, if at all. If the Company is unable to raise
additional capital, it could have a material adverse impact on our financial
condition and could adversely affect the price of our common stock.
We believed that the increase in the
number of authorized shares of common stock is in the best interest of the
Company and its stockholders.
The
Rights Offering
The following summary describes the
proposed principal terms of the Company’s contemplated rights offering, but is
not intended to be complete. See the information under the heading
“The Rights Offering” in the prospectus that we will deliver in connection with
the rights offering for a more detailed description of the terms and conditions
of the rights offering. We urge you to read the prospectus carefully before you
decide to participate in the rights offering.
Terms of the Rights
Offering
On February 12, 2010, we filed a
registration statement on Form S-1 with the Securities and Exchange Commission
for a proposed rights offering pursuant to which we will distribute at no charge
to holders of our common stock, other than those who hold shares of our common
stock solely as participants in the Telkonet, Inc. 401(k) plan, one transferable
subscription right for each share of common stock owned as of the Record Date
and to the holders of our Series A convertible redeemable preferred stock, one
subscription right for every share of common stock into which such shares of
Series A convertible redeemable preferred stock were convertible on the record
date. Holders of our common stock and our Series A convertible
redeemable preferred stock may exercise any number of their subscription rights,
or may choose not to exercise any subscription rights.
Each transferable subscription right
entitles the holder (including holders of subscription rights acquired during
the subscription period) to subscribe for one share of our common stock at the
subscription price to be established by the Board of Directors and to receive a
warrant to purchase one additional share of our common stock at a price to be
established by the Board of Directors, for a period of five years, which we
refer to as the basic subscription right. The subscription rights may
be transferred or assigned during the subscription period. The
warrants to be issued pursuant to this offering will be separately transferable
following their issuance and through their expiration. We intend to
apply for quotation of the subscription rights and the warrants on the OTC
Bulletin Board.
Subscription rights holders fully
exercising their basic subscription rights will be entitled, subject to
limitations, to subscribe for additional shares of our common stock and warrants
to purchase whole numbers of shares of our common stock that remain unsubscribed
as a result of any unexercised basic subscription rights at the same
subscription price per share. Unless we otherwise agree in writing,
subscription rights holders, together with related persons or entities, may not
exercise subscription rights (including over-subscription rights) to purchase
shares of our common stock that, when aggregated with their existing ownership,
would result in such person or entity, together with any related persons or
entities, owning in excess of twenty percent (20%) of our issued and outstanding
shares of common stock following the closing of the transactions contemplated by
this rights offering.
We will pay the fees and expenses
related to the rights offering, including the fees of the
dealer-manager. We have engaged Source Capital Group, Inc.,
or Source as our dealer-manager and financial advisor in connection
with the rights offering and have agreed to pay Source, as compensation for its
services on completion of the rights offering, a cash fee equal to 8% of the
gross proceeds of the rights offering.
The terms of the rights offering will
be more fully described in the prospectus related to the rights offering to be
filed with the SEC pursuant to Rule 424(b) of the Securities Act and delivered
to our shareholders after our existing registration statement on Form S-1
(Registration No. 333-164899) becomes effective.
Background of the Rights
Offering
Pursuant to Section 4.13 of the
Securities Purchase Agreement dated as of November 16, 2009 by and between the
Company and the investors named therein, the Company agreed, as soon as
practicable following the closing of the private placement, subject to approval
of the Board of Directors, to conduct a rights offering pursuant to which it
would distribute, at no charge, one (1) non-transferable subscription right for
each share of Common Stock owned by its shareholders (other
than the Private Placement purchasers (“Purchasers”) and participants in the
Company’s 401(k) Plan), entitling the holder thereof to purchase the
number of equity securities of the Company mutually determined by the Board of
Directors and the Purchasers at the price and terms mutually determined by the
Board of Directors and the Purchasers. Shareholders fully exercising
their Subscription Right were to be entitled to an over-subscription right to
purchase all or any part of the balance of any such remaining unsubscribed
equity securities of the Company.
The Board first discussed the
possibility of conducting a rights offering in late August 2009 while in
discussions with a third party about the conduct of a private placement (that
ultimately culminated in the Securities Purchase
Agreement). Based on information obtained during the due
diligence process in connection with the private placement, the Board acquired
the understanding that certain of the Company’s shareholders expressed an
interest in participating in a rights offering after the private placement to
offset the potential dilutive effect of the private
placement. Between August 2009 and November 19, 2009, when it
completed the private placement transaction as previously disclosed in Item 1.01
of the Current Report of the Company filed with the SEC on November 25, 2009,
the Board focused exclusively on the conduct and completion of the private
placement The Board began actively planning to conduct a rights offering
following the completion of the private placement transaction in November
2009. In December 2009, members of the Board and executive management
met with various investment banking organizations experienced in conducting
rights offerings to discuss both the potential for success of such an offering
and, assuming a decision to move forward, to determine which investment banking
organization would best serve the Company’s interests. The Board
selected Source Capital Group, Inc. as the dealer-manager for the Company’s
proposed rights offering, and on January 7, 2010, by resolution, approved the
Company’s conduct of a rights offering and the engagement of Source Capital
Group, Inc. as the dealer-manager for the contemplated rights
offering.
Prior to
approving the rights offering, our board of directors carefully considered
current market conditions and financing opportunities, as well as the potential
dilution of the ownership percentage of the existing holders of our common stock
that may be caused by the rights offering. After weighing the
foregoing factors, the board of directors determined that the rights offering is
in the best interests of our Company. Although we believe that the
rights offering will strengthen our financial condition, our board of directors
is not making any recommendation as to whether you should exercise your
subscription rights in the rights offering.
Pursuant to Section 4.16 of the
Securities Purchase Agreement, we agreed, as soon as practicable following the
closing of the Private Placement, subject to the approval of the Board of
Directors, to conduct a reverse stock split of our issued and outstanding common
stock. The primary objective of the reverse split was to effect an
increase in the price per share of our common stock in order to maintain the
listing of our common stock on the NYSE Amex, LLC (the
“Exchange”). The Board initially considered conducting a reverse
split beginning in May 2009, when the Exchange expressed its opinion that it was
appropriate for the Company to effect a reverse split in light of the low
selling price of our common stock. In its June 25, 2009 response to
the Exchange, the Company requested that the Exchange reconsider its request
that the Company conduct a reverse stock split to and provide the Company the
necessary time to achieve its goals and initiatives as outlined in its plan of
compliance. Management stated its belief then that, as the Company
executed on its plan and as the global economy began to recover from the current
recession, the Company’s stock price would increase. The Company also
expressed its belief that a reverse stock split, absent other positive
developments at the Company, would not, in the long term, sustain a trading
price high enough to satisfy the Exchange’s additional listing
standards. Following a hearing held on October 29, 2009 to appeal a
determination by the staff of the Exchange regarding the delisting of the
Company’s common stock from the Exchange, the Company was informed, on November
3, 2009, that the hearing panel had confirmed the staff's recommendation that
the Company’s common stock be delisted from the Exchange. After
considering the costs to the Company of compliance with the continued listing
requirements of the Exchange and other factors, the Company determined that it
was not in the best interests of the Company and its shareholders to appeal the
delisting of the Company’s securities from the Exchange and approved the
voluntary delisting of the securities. The Exchange suspended trading
in the Company’s stock effective at the open of business on November 14, 2009
and delisting of the Company’s stock became effective on March 29,
2010.
After
further considering a reverse stock split pursuant to the terms of the
Securities Purchase Agreement, the Board concluded again in January 2010
that the conduct of a reverse split was not in the Company’s best
interests. The Board was significantly concerned that a reverse
split, without a contemporaneous change in the Company’s finances would be
perceived negatively, and that the desired effect, i.e., an increase in the
price per share, would be short lived. The Board considered the
history of company share prices following a reverse split and found that the
majority eventually trade lower post-split. The Board also believes
that the conduct of a reverse split in order to effect a temporary increase in
stock price would be inconsistent with the Company’s longer term objectives of
building shareholder value through positive business development.
Vote
Required and Recommendation of the Board of Directors
The affirmative vote of a majority of
the outstanding shares of our common stock voting is required to approve the
proposed amendment of our Restated Articles, Abstentions have the same effect as
a vote against the proposal.
THE
BOARD OF DIRECTORS HAS APPROVED THE AMENDMENT OF OUR RESTATED ARTICLES AS SET
FORTH IN PROPOSAL ONE. THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE
“FOR” THE APPROVAL OF PROPOSAL ONE.
Effective
Date of the Amendment
If the proposed amendment is adopted by the
required vote of stockholders, it will become effective when the appropriate
Articles of Amendment to the Company’s Restated Articles are filed with the Utah
Department of Commerce, Division of Corporations. The Company anticipates that
this filing will be made promptly following receipt of requisite stockholder
approval, or as soon as practicable thereafter.
PROPOSAL 3.
RATIFICATION OF APPOINTMENT OF
INDEPENDENT
PUBLIC ACCOUNTANTS
RBSM, LLP
served as the Company’s independent public accountants in 2009 and are expected
to be retained to do so in 2010. The Board of Directors has directed that
management submit the selection of RBSM, LLP for ratification by the
stockholders at the annual meeting. A representative of RBSM, LLP is expected to
be present at the annual meeting, will have an opportunity to make a statement,
should the representative desire to do so, and will be available to respond to
appropriate questions.
Stockholder
ratification of the selection of RBSM, LLP as the Company’s independent public
accountants is not required. However, the Board of Directors is submitting the
selection of RBSM, LLP to the stockholders for ratification as a matter of good
corporate practice. If the stockholders do not ratify the selection, the Audit
Committee will reconsider whether to retain the firm. In such event, the Audit
Committee may retain RBSM, LLP, notwithstanding the fact that the stockholders
did not ratify the selection, or select another accounting firm without
re-submitting the matter to the stockholders. Even if the selection is ratified,
the Audit Committee reserves the right in its discretion to select a different
accounting firm at any time during the year if it determines that such a change
would be in the best interests of the Company and its stockholders.
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Aggregate
fees for professional services rendered to us by RBSM, LLP for the years ended
December 31, 2008 and 2009 were:
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Category
of Service
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2008
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2009
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Audit
fees
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$
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309,755 |
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$
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185,413 |
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Audit-related
fees
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46,262
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24,250 |
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Tax
fees
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— |
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— |
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All
other fees
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—
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—
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Total
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$
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356,017 |
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$
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209,663 |
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The audit
fees for 2008 and 2009 were for professional services rendered in connection
with the audits of our consolidated financial statements and reviews of our
quarterly consolidated financial statements within such years. These
fees also include the issuance of comfort letters, consents and assistance with
review of various documents filed with the SEC in 2008 and 2009.
THE BOARD
OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE
FOR THIS
PROPOSAL
OTHER
MATTERS
The Board
of Directors does not know of any other matter that may be brought before the
Meeting. However, if any such other matters are properly brought before Meeting
or any adjournment thereof, the Meeting, the proxies may use their own judgment
to determine how to vote your shares.
HOUSEHOLDING
Some banks, brokers and other nominee
record holders may be participating in the practice of “householding” proxy
statements and annual reports. This means that only one copy of our
proxy statement or annual report on Form 10-K, as amended, may have been sent to
multiple stockholders in your household. We will promptly deliver a
separate copy of either document to you if you write or call us at the following
address or telephone number: 10200 Innovation Drive, Suite 300, Milwaukee,
WI 53226, (414) 223-0473. If you want to receive separate
copies of the annual report on Form 10-K and proxy statement in the future, or
if you are receiving multiple copies and would like to receive only one copy for
your household, you should contact your bank, broker or other nominee record
holders, or you may contact us at the above address and phone
number.
STOCKHOLDER
PROPOSALS
The
Company intends to hold its 2011 Annual Meeting of Stockholders in June of
2011. Stockholders may submit written proposals to be considered for stockholder
action at the Company’s 2011 Annual Meeting of Stockholders. To be
eligible for inclusion in the Company’s Proxy Statement for the 2011 Annual
Meeting of Stockholders, stockholder proposals must be received by the Company
by [●], 2011 and must otherwise comply with applicable Securities and
Exchange Commission regulations and the Company’s Bylaws. Stockholder
proposals should be addressed to the Company at 10200 Innovation Drive,
Suite 300, Milwaukee, WI 53226, Attention: Corporate
Secretary. In addition, if a stockholder intends to present a
proposal at the Company’s 2011 Annual Meeting of Stockholders without the
inclusion of the proposal in the Company’s proxy materials and written notice of
the proposal is not received by the Company on or before [●], 2011, proxies
solicited by the Board of Directors for the 2011 Annual Meeting of Stockholders
will confer discretionary authority to vote on the proposal if presented at the
Meeting. The Company reserves the right to reject, rule out of order
or take other appropriate action with respect to any proposal that does not
comply with these and other applicable requirements.
Brokers
and other persons holding the Company’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 the Company will defray reasonable expenses incurred in
forwarding such material.
INCORPORATION
BY REFERENCE
The SEC
allows us to “incorporate by reference” information into this proxy statement.
The information incorporated by reference is considered to be part of this proxy
statement. We are incorporating by reference the following portions of our
annual report on Form 10-K for the year ended December 31, 2009, a copy of which
accompanies this proxy statement:
● Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”
● Part
II, Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk”
● Part
II, Item 8, “Financial Statements”
● Part
II, Item 9, “Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure”
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By
order of the Board of Directors,
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/s/ JASON
L. TIENOR
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Jason
L. Tienor
Chief
Executive Officer
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Dated:
April 23, 2010
TELKONET,
INC.
The
Annual Meeting of the Stockholders of Telkonet, Inc. will be held on [●], [●]
2010 at [●]:00 a.m. local time, at [●].
|
1.
|
Election
of Directors -- Nominees
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01-Anthony J.
Paoni 02-Jason L.
Tienor
03-Thomas C.
Lynch 04-Warren V.
Musser
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o FOR
all nominees
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o WITHHELD
as to all nominees
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o FOR
all nominees except vote withheld from the following
nominee(s):__________________
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2.
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TO
APPROVE THE AMENDMENT TO TELKONET, INC.’S AMENDED AND RESTATED ARTICLES OF
INCORPORATION, AS AMENDED, TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
OUR COMMON STOCK FROM 155,000,000 TO
575,000,000.
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o FOR
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o AGAINST
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o ABSTAIN
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2.
|
IN
THEIR DISCRETION, TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING.
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o FOR
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o AGAINST
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o ABSTAIN
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cut
here
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SEE
REVERSE SIDE
|
SEE
REVERSE SIDE
|
(CONTINUED
AND TO BE SIGNED ON REVERSE SIDE)
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 [●], [●], 2010, AND ANY
ADJOURNMENT OR POSTPONEMENT THEREOF.
The
undersigned, being a stockholder of Telkonet, Inc. (“Telkonet”), hereby
authorizes Richard J. Leimbach and Jason L. Tienor, 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 [●], on [●], [●], 2010 at [●]:00 a.m.,
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
common stock and Series A Preferred Stock of Telkonet will be voted as
specified. If no specification
is made, shares will be voted FOR each of the nominees for director listed above
and FOR approval of the amendment to Telkonet’s Amended and Restated Articles of
Incorporation, as amended, and IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES
as to any other matter which may properly come before the annual
meeting.
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The
undersigned hereby acknowledges receipt of a Notice of Annual Meeting of
Stockholders of Telkonet, Inc. called for [●], [●], 2010, and a Proxy
Statement for the Meeting prior to the signing of this proxy.
____________________________
Dated:
___________, 2010
____________________________
Dated:
___________, 2010
Please
sign exactly as your name(s) appears(s) on this proxy. When signing in a
representative capacity, please give
title.
|
PLEASE
MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING THE ENCLOSED
ENVELOPE.
cut
here
YOUR
VOTE IS IMPORTANT
VOTE
TODAY IN ONE OF TWO WAYS:
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1.
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VOTE
BY INTERNET:
Log-on
to www.votestock.com
Enter
your control number printed below
Vote
your proxy by checking the appropriate boxes
Click
on “Accept Vote”
OR
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|
2.
|
VOTE BY MAIL: If you do
not wish to vote by Internet, please complete, sign, date and return the
above proxy card in the pre-paid envelope
provided.
|
YOUR
CONTROL NUMBER IS:
You may
vote by Internet 24 hours a day, 7 days a week.
Your
Internet vote authorizes the named proxies to vote in the same
manner as
if you
marked,
signed and returned your proxy card.
ANNEX
A
ARTICLES
OF AMENDMENT
OF
THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
TELKONET,
INC.
Telkonet,
Inc. (the “Corporation”), a Utah corporation, pursuant to the Utah Revised
Business Corporation Act, hereby adopts the following Articles of Amendment of
the Amended and Restated Articles of Incorporation of the Corporation, as
amended.
1.
Article III (Capital Stock) of the Amended and Restated Articles of
Incorporation of the Corporation is hereby amended so as henceforth to read in
its entirety as follows:
The
Corporation is authorized to issue two classes of shares to be designated,
respectively, “Common Stock” and “Preferred Stock.” The total number of shares
of Common Stock authorized to be issued is five hundred seventy five
million (575,000,000) and the total number of shares of Preferred Stock
authorized to be issued is fifteen million (15,000,000). All shares of stock
authorized hereunder shall have a par value of 1/10th of one cent ($.001) per
share.
The
preferences, limitations and relative rights of each class of shares (to the
extent established hereby), and the express grant of authority to the Board of
Directors to amend these Restated Articles of Incorporation to divide the
Preferred Stock into series, to establish and modify the preferences,
limitations and relative rights of each share of Preferred Stock, and to
otherwise impact the capitalization of the Corporation, subject to certain
limitations and procedures and as permitted by Section 602 of the Utah Act, are
as follows:
A. Common
Stock.
1. Voting
Rights. Except as otherwise expressly provided by law or in this Article III,
each outstanding share of Common Stock shall be entitled to one (1) vote on each
matter to be voted on by the shareholders of the Corporation.
2. Liquidation
Rights. Subject to any prior or superior rights of liquidation as may be
conferred upon any shares of Preferred Stock, and after payment or provision for
payment of the debts and other liabilities of the Corporation, upon any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of Common Stock then outstanding shall be
entitled to receive all of the assets and funds of the Corporation remaining and
available for distribution. Such assets and funds shall be divided among and
paid to the holders of Common Stock, on a pro-rata basis, according to the
number of shares of Common Stock held by them.
3. Dividends.
Dividends may be paid on the outstanding shares of Common Stock as and when
declared by the Board of Directors, out of funds legally available therefor,
provided; however, that no dividends shall be made with respect to the Common
Stock until any preferential dividends required to be paid or set apart for any
shares of Preferred Stock have been paid or set apart.
4. Residual
Rights. All rights accruing to the outstanding shares of the Corporation not
expressly provided for to the contrary herein or in any amendment hereto or
thereto shall be vested in the Common Stock.
5. Preemptive
Rights. No holder of shares of Common Stock shall be entitled to any preemptive
or preferential rights of subscription to any shares of any class of capital
stock of the Corporation, whether now or hereafter authorized, or to any
obligations convertible into capital stock of the Corporation issued or sold.
The term “obligations convertible into capital stock” shall include any notes,
bonds or other evidences of indebtedness to which are attached or with which are
issued warrants or other rights to purchase capital stock of the
Corporation.
B.
Preferred Stock.
1. The
Board of Directors, without shareholder action, may amend the Corporation’s
Restated Articles, pursuant to the authority granted to the Board of Directors
by Subsection 1002(1)(e) and within the limits set forth in Section 602 of the
Utah Act, to do any of the following:
(i) designate and determine, in whole
or in part, the preferences, limitations and relative rights of the Preferred
Stock before the issuance of any shares of Preferred Stock;
(ii)
create on or more series of Preferred Stock, fix the number of shares of each
such series (within the total number of authorized shares of Preferred Stock
available for designation as part of such series), and designate and determine,
in whole or in part, the preferences, limitations and relative rights of each
series of Preferred Stock all before the issuance of any share of such
series;
(iii)
alter or revoke the preferences, limitations and relative rights granted to or
imposed upon the Preferred Stock (before the issuance of any shares of Preferred
Stock), or upon any wholly-unissued series of Preferred Stock); or
(iv)
increase or decrease the number of shares constituting any series of Preferred
Stock, the number of shares of which was originally fixed by the Board of
Directors, either before or after the issuance of shares of the series, provided
that the number may not be decreased below the number of shares of such series
then outstanding, or increased above the total number of authorized shares of
Preferred Stock available for designation as part of such series.
2. The number of shares of the
Corporation outstanding at the time of the adoption of the foregoing Articles of
Amendment and entitled to vote thereon was [●] shares of common stock, par value
$0.001 per share, and 215 shares of Series A Preferred Stock, par value $0.001
per share. The Series A Preferred Stock was entitled to vote on the
foregoing Articles of Amendment on an as converted basis with the common stock
as a single class. Each share of common stock was entitled to one
(1) vote and each share of Series A Preferred Stock was entitled to 13,774
votes for an aggregate of [●] shares entitled to vote on the adoption of the
foregoing Articles of Amendment.
3.
The foregoing Articles of Amendment has been duly adopted by the Corporation’s
Board of Directors and stockholders in accordance with the provisions of the
Corporation’s Amended and Restated Articles of Incorporation, as amended, and
the Utah Revised Business Corporation Act.
4.
The total number of undisputed votes cast for the foregoing Articles of
Amendment by the holders of common stock and Series A Preferred Stock, voting as
a single class, was [●] which was sufficient under the Corporation’s Amended and
Restated Articles of Incorporation, as amended, and the Utah Revised Business
Corporation Act for approval of the foregoing Articles of
Amendment.
IN WITNESS WHEREOF, said
Corporation has caused this Articles of Amendment to be signed Jason Tienor, its
President and Chief Executive Officer, this [●] day of [●], 2010.
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TELKONET,
INC.
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By:
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Name:
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Jason
Tienor
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Title:
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President
and Chief Executive Officer
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APPENDIX
A
CHARTER
OF THE AUDIT COMMITTEE
OF THE
BOARD OF DIRECTORS
OF
TELKONET,
INC.
The
primary function of the Audit Committee is to assist the Board of Directors (the
"Board") of Telkonet, Inc. (the "Corporation") in fulfilling its oversight
responsibilities by reviewing the financial reports and other financial
information provided by the Corporation to any governmental body or the public;
the Corporation's systems of internal controls regarding finance, accounting,
legal compliance and ethics that management and the Board have established or
may establish; and the Corporation's auditing, accounting and financial
reporting processes generally. Consistent with this function, the Audit
Committee should encourage continuous improvement of, and should foster
adherence to, the Corporation's policies, procedures and practices at all
levels. The Audit Committee's primary duties and responsibilities are
to:
o Serve as an
independent and objective party to monitor the Corporation's financial reporting
process and internal control system.
o Review and
appraise the audit efforts of the Corporation's independent
accountants.
o Provide an
open avenue of communication among the independent accountants, financial and
senior management and the Board.
The Audit
Committee will fulfill these responsibilities by carrying out the activities
enumerated in Section IV of this Charter and such other activities consistent
with this Charter as may from time to time be necessary or
appropriate.
While the
Audit Committee has the responsibilities and powers set forth in this Charter,
it is not the duty of the Audit Committee to plan or conduct audits or to
determine that the Company's financial statements are complete and accurate and
are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the duty of
the Audit Committee to conduct investigations, to resolve disagreements, if any,
between management and the independent auditor or to assure compliance with laws
and regulations and the Company's business guidelines.
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II.
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COMPOSITION
OF THE AUDIT COMMITTEE
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The Audit
Committee shall be comprised of two or more members of the Board as determined
by the Board. The members of the Audit Committee shall be independent directors,
and free from any relationship that, in the opinion of the Board, would
interfere with the exercise of his or her independent judgment as a member of
the Audit Committee. For purposes of this Charter, the definition of independent
directors will be based on the rules of the American Stock Exchange for audit
committees, as amended, modified or supplemented from time to time. All members
of the Audit Committee must be able to read and understand fundamental financial
statements, including a balance sheet, income statement and cash flow statement
or will become able to do so within a reasonable period of time after his or her
appointment to the Audit Committee, and at least one member of the Committee
must have past employment experience in finance or accounting, requisite
professional certification in accounting, or other comparable experience or
background which results in such member's financial sophistication, including
being or having been a chief executive officer, chief financial officer or other
senior officer with financial oversight responsibilities.
The
members of the Audit Committee shall be elected by the Board at the annual
organizational meeting of the Board and shall serve at the pleasure of the Board
or until their successors shall be duly elected and qualified. Unless a chairman
of the Audit Committee (the "Chairman") is elected by the Board, the members of
the Committee may designate a Chairman by majority vote of the full Audit
Committee membership.
The Audit
Committee shall meet from time to time as called by the Chairman or as requested
by the independent accountants. The Audit Committee may ask members of
management or others to attend meetings of the Audit Committee and provide
pertinent information as necessary. As part of its responsibility to foster open
communication, the Audit Committee shall meet at least annually with management
and the independent accountants in separate executive sessions to discuss any
matters that the Audit Committee or any of these groups believe should be
discussed privately. In addition, the Audit Committee or its Chairman shall
discuss with management the Corporation's quarterly financial statements
consistent with Section IV.3. below. The Audit Committee shall maintain minutes
or other records of meetings and activities of the Audit Committee.
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IV.
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RESPONSIBILITIES
AND DUTIES
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The
duties of the Audit Committee shall include the following:
Documents/Reports
Review
1. Review this
Charter periodically, but at least annually, and update this Charter as
conditions dictate.
2. Review, prior to its
filing or prior to its release, as the case may be, the Corporation's Form 10-K
and annual report to stockholders.
3. Review the
Corporation's Form 10-Q prior to its filing. The Chairman may represent the
entire Audit Committee for purposes of this review.
4. Review such
other reports or other financial information submitted to the Securities and
Exchange Commission or the public as the Audit Committee shall deem appropriate.
The Chairman may represent the entire Audit Committee for purposes of this
review.
Independent
Accountants
5. Recommend to
the Board the selection of the independent accountants for each fiscal year,
confirm and assure their independence and approve the fees and other
compensation to be paid to the independent accountants. On an annual basis, the
Audit Committee should review and discuss with the accountants all significant
relationships which effect the accountants' independence and should receive the
written statement from the independent accountants required by Independence
Standards Board Standard No. 1, as amended, modified or supplemented from time
to time.
6. Select,
evaluate and, where appropriate, replace the independent accountants (or
nominate the independent accountants to be proposed for shareholder approval in
any proxy statement), as representatives of the shareholders, since the
independent accountants are ultimately accountable to the Board and the Audit
Committee.
7. Recommend to
the Board the advisability of having the independent public accountants make
specified studies and reports as to auditing matters, accounting procedures, tax
or other matters.
8. Review the
performance of the independent accountants and approve any proposed discharge of
the independent accountants when circumstances warrant.
9. Periodically
consult with the independent accountants out of the presence of management about
internal controls and the completeness and accuracy of the Corporation's
financial statements.
Financial Reporting
Processes
10. Consider the
independent accountants' judgments about the quality and appropriateness of the
Corporation's accounting principles as applied in its financial
reporting.
11. Review with the
independent accountants and management major changes to the Corporation's
auditing and accounting principles and practices.
Process
Improvement
12. Establish regular
and separate systems of reporting to the Audit Committee by each of management
and the independent accountants regarding any significant judgments made in
management's preparation of the financial statements and the view of each as to
appropriateness of such judgments.
13. Following
completion of the annual audit, review separately with each of management and
the independent accountants any significant difficulties encountered during the
course of the audit, including any restrictions on the scope of work or access
to required information.
14. Review any
significant disagreement among management and the independent accountants in
connection with the preparation of any of the Corporation's financial
statements.
15. Review with the
independent accountants and management the extent to which changes or
improvements in financial or accounting practices, as approved by the Audit
Committee, have been implemented.
Legal
Compliance
16. Review, with the
Corporation's counsel, legal and regulatory matters that may have a significant
impact on the Corporation's financial statements, including corporate securities
trading policies.
Other
Responsibilities
17. Perform any other
activities consistent with this Charter, and the Corporation's Certificate of
Incorporation, By-laws and governing law, as the Audit Committee or the Board
deems necessary or appropriate.