SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
TELKONET, INC.
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TELKONET, INC.
20374 SENECA MEADOWS PARKWAY
GERMANTOWN, MARYLAND 20876-7004
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders:
The 2004 Annual Meeting of Stockholders of Telkonet, Inc. will be held
at The Hampton Inn Germantown, located at 20260 Goldenrod Lane, Germantown,
Maryland 20876, on Friday, October 22, 2004 at 3:00 p.m., local time, for the
following purposes:
1. To elect seven (7) directors, each to serve until the next
annual meeting of stockholders and until his successor has
been elected and qualified;
2. To ratify options granted under Telkonet's Amended and
Restated Stock Incentive Plan;
3. To ratify Telkonet's Audit Committee Charter;
4. To ratify the appointment of independent accountants for 2004;
and
5. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only stockholders of record at the close of business on August
31, 2004 are entitled to notice of, and to vote at, the meeting or any
adjournment thereof.
All stockholders are cordially invited to attend the meeting
in person. However, to assure your representation at the meeting, we urge you to
complete, sign, date and return the enclosed proxy card in the enclosed envelope
as promptly as possible.
By order of the Board of Directors,
/s/ Ronald W. Pickett
----------------------------
Ronald W. Pickett
Chief Executive Officer
Dated: September __, 2004
YOUR VOTE IS IMPORTANT.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IMMEDIATELY, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
TELKONET, INC.
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation
of proxies by and on behalf of the Board of Directors of Telkonet, Inc. for use
at Telkonet's 2004 Annual Meeting of Stockholders, to be held at The Hampton Inn
Germantown, located at 20260 Goldenrod Lane, Germantown, Maryland 20876 on
Friday, October 22, 2004 at 3:00 p.m., local time, and at any adjournment or
postponement of the annual meeting. This proxy statement, the accompanying proxy
card and Telkonet's Annual Report to Stockholders for the fiscal year ended
December 31, 2003 are first being sent to stockholders on or about September __,
2004.
The solicitation of proxies is made by and on behalf of Telkonet's
Board of Directors. The cost of the solicitation of proxies will be borne by
Telkonet. In addition to solicitation of proxies by mail, employees of Telkonet
or its affiliates may solicit proxies by telephone or facsimile.
The Board of Directors has fixed the close of business on August 31,
2004 as the record date for determining the holders of shares of common stock
who are entitled to notice of, and to vote at, the annual meeting. At the close
of business on August 31, 2004, Telkonet had outstanding 44,728,394 shares of
common stock, par value $0.001 per share. Each stockholder is entitled to one
vote per share of Telkonet's common stock registered in such stockholder's name
on Telkonet's books as of the close of business on August 31, 2004.
Shares of common stock represented by properly executed proxies
received at or prior to the annual meeting that have not been revoked will be
voted at the annual meeting in accordance with the instructions indicated on the
proxies. Stockholders are requested to complete, sign, date and promptly return
the enclosed proxy card in the enclosed postage-prepaid envelope to ensure that
their shares are voted. If the enclosed proxy is signed and returned, the shares
represented thereby will be voted in accordance with any specification made
therein by the stockholder. In the absence of any such specification, the shares
will be voted to elect each of the director nominees set forth under "Election
of Directors" below, for each proposal set forth under "Ratification of Options
Granted Under the Telkonet, Inc. Amended and Restated Stock Incentive Plan,"
"Ratification of the Audit Committee Charter" and "Ratification of Appointment
of Independent Public Accountants," and in the discretion of management on any
other matter which may properly come before the annual meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Attendance at the annual
meeting will not, in and of itself, revoke a proxy. Proxies may be revoked by:
o Filing with the Secretary of Telkonet, at or before the taking
of the vote at the annual meeting, a written notice of
revocation dated later than the proxy;
o Executing a later dated proxy relating to the same shares of
common stock and delivering it to the Secretary of Telkonet,
including by facsimile, before the taking of the vote at the
annual meeting; or
o Attending the annual meeting and voting in person.
Any written revocation or subsequent proxy should be sent so as to be
delivered to Telkonet, Inc., 20374 Seneca Meadows Parkway, Germantown, Maryland
20876, Attention: Corporate Secretary, or hand delivered to the Secretary of
Telkonet or his representative at or before the taking of the vote at the annual
meeting.
If the annual meeting is postponed or adjourned, proxies given pursuant
to this solicitation will be utilized at any subsequent reconvening of the
annual meeting, except for any proxies that previously have been revoked or
withdrawn effectively, and notwithstanding that proxies may have been
effectively voted on the same or any other matter previously.
1
Telkonet's bylaws provide that the holders of a majority of the
outstanding Telkonet shares, present in person or by proxy, will constitute a
quorum, and that the affirmative vote of a majority of the shares represented at
the annual meeting and constituting a quorum is required for approval of any
proposal brought before the annual meeting, unless a greater proportion or
number of votes is required by law or by Telkonet's certificate of incorporation
or bylaws. The election of directors will require the affirmative vote of a
majority of the shares present at the annual meeting and constituting a quorum.
Abstentions and broker non-votes will be deemed present for purposes of
constituting a quorum and will have the same legal effect as a vote "against"
each nominee for the Board of Directors and all proposals presented at the
annual meeting.
ITEM 1. ELECTION OF DIRECTORS
Telkonet's bylaws establish the number of directors at not less than
three members. Pursuant to the bylaws, the Board of Directors may increase or
decrease the number of members of the Board of Directors. The Board of Directors
has established the number of directors at seven. At the annual meeting, the
shares represented by properly executed proxies, unless otherwise specified,
will be voted for the election of the seven nominees named herein, each to serve
until the next annual meeting and until his successor is duly elected and
qualified.
If for any reason any of the nominees is not a candidate when the
election occurs (which is not expected), the Board of Directors expects that
proxies will be voted for the election of a substitute nominee designated by the
Board of Directors. The following information is furnished concerning each
nominee for election as a director.
The affirmative vote of a majority of the shares of Telkonet's common
stock 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
DIRECTOR NAME AGE POSITION SINCE
------------- --- -------- -----
Warren V. Musser 77 Chairman of the Board 2003
Ronald W. Pickett 57 Chief Executive Officer & Director 2003
David W. Grimes 66 Director 2000
Stephen L. Sadle 58 Senior Vice President & Director 2000
Thomas C. Lynch 64 Director 2003
James L. Peeler 70 Director 2004
Thomas M. Hall 52 Director 2004
WARREN V. MUSSER, Chairman of the Board of Directors, has taken over 50
companies public during his distinguished and successful career as an
entrepreneur. A partial list of his accomplishments include: Managing Director,
The Musser Group, Chairman Emeritus, Safeguard Scientifics, Inc. (formerly
Safeguard Industries, Inc.), Chairman of the Board and Chief Executive Officer,
Safeguard Scientifics, Inc., Founder, Chairman of the Board and President,
Lancaster Corporation (became Safeguard Industries, Inc.), Founder & President,
Musser and Company, Inc. (Investment Banking Firm). In addition, Mr. Musser is a
Director of CompuCom Systems, Inc. and Internet Capital Group, Inc., Vice
Chairman of Nutri/System, Inc. and Co-Chairman of Eastern Technology Council and
Chairman of Economics, PA. He also serves as the Vice President/Development,
Cradle of Liberty Council of the Boy Scouts of America.
RONALD W. PICKETT, Director and Chief Executive Officer, fostered the
development of Telkonet since 1999 as Telkonet's principal investor. He also was
the founder, and for twenty years served as Chairman of the Board of Directors
and President, of Medical Advisory Systems, Inc., which is now named Digital
Angel Corporation (AMEX: "DOC"). A graduate of Gordon College, Mr. Pickett has
engaged in various entrepreneurial activities for 35 years.
2
DAVID W. GRIMES, Director, is a co-founder of Telkonet. He served as
principal officer of Telkonet during its early development and retired in 2001
as Chief Technology Officer. From 1963 to 1982, Mr. Grimes was with NASA,
serving as Project Manager for the Atmosphere Explorer Project, Project
Manager/Senior Executive for the Shuttle/Spacelab Payloads Project, and Project
Manager/Senior Executive for the $200 million per year Delta Program. He also
was founder, and from 1982 to 1989 served as Chief Executive Officer, of
Transpace Carriers Inc., a venture to commercialize the Delta launch vehicle.
From 1989 to 1992, he was the Engineering Division Director at EER Inc., with
supervisory responsibility for more than 100 engineers and technicians on
electrical mechanical and thermal tasks for Goddard Space Flight Center. From
1992 to 1999, Mr. Grimes served as Chief Engineer for Final Analysis, Inc. and
led the design and development of the Low Earth Orbit constellation of 38
satellites for use in global store and forward communications. Mr. Grimes is a
recognized expert in space and ground communications systems. He received a
Bachelor of Science degree in electrical Engineering from West Virginia
University.
STEPHEN L. SADLE, Director and Senior Vice President, is a co-founder
of Telkonet. From 1970 to 1986 Mr. Sadle was president of a successful
infrastructure construction and development company in the Washington, D.C.
metro area. From 1986 to 1999, he was Vice President of Business Development and
Sales for The Driggs Corporation, a major heavy and infrastructure firm
interfacing with both government and the private sectors. From 1999 to 2000, Mr.
Sadle was Vice President and General Sales Manager of Internos, a provider of
web-based vertical intranet applications, and developed operating extranets in
the transportation and construction industries.
THOMAS C. LYNCH, Director, is Senior Vice President, Director of The
Staubach Company's Federal Sector in the Washington, D.C. area. Mr. Lynch joined
The Staubach Company in November 2002 after 6 years as Senior Vice President at
Safeguard Scientifics, Inc. (NYSE: SFE). 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 Pennsylvania Eastern Technology Council, Armed
Forces Benefit Association, Catholic Leadership Institute, National Center for
the American Revolution at Valley Forge, Mikros Systems, Epitome Systems and the
U.S. Naval Academy Foundation.
JAMES L. PEELER, Director, was a founder and member of the board of
Digital Communications Corporation (DCC), which evolved into Hughes Network
Systems (HNS), a provider of global broadband, satellite, and wireless
communications products for home and business, such as DirecTV and DIRECWAY. Mr.
Peeler retired as executive vice president of operations in 1999 after 27 years
of service and is presently a member of the Advisory Council to Hughes Network
Systems. Mr. Peeler also served on the Board of Directors of Hughes Software
Systems (HSS). Prior to the founding of DCC, he was vice president of
Engineering for Washington Technological Associates (WTA), where he was
instrumental in the development of rocket and satellite communications and
instrumentation equipment. Mr. Peeler received a bachelor of science degree in
electrical engineering from Auburn University.
DR. THOMAS M. HALL, Director, is the Executive Director of Digital
Angel Corporation and the Managing Member of Marrell Enterprises LLC, a company
that specializes in international business development. Dr. Hall serves on the
board of directors of Coris International SA, a Paris-based insurance services
company with subsidiaries in 36 countries. For 12 years, Dr. Hall was the chief
executive officer of Medical Advisory Systems, Inc., a company providing
international medical services and pharmaceutical distribution. Dr. Hall holds a
bachelor of science and a medical degree from the George Washington University
and a master of international management degree from the University of Maryland.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 2003, the Board of Directors
held 3 regular and 5 special meetings, which all directors attended. The Board
has approved, and Telkonet has adopted, a Code of Ethics that applies to all
directors, officers and employees of Telkonet. This Code of Ethics was included
as an Exhibit to Telkonet's Form 10-KSB filed with the Securities and Exchange
Commission on March 30, 2004.
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COMMITTEES OF THE BOARD OF DIRECTORS
The Board has an Audit Committee, but does not presently have a
Compensation Committee or a Nominating Committee.
DIRECTOR NOMINATIONS
Although Telkonet does not maintain a standing Nominating Committee,
nominees for election as directors are considered and nominated by a majority of
Telkonet's independent directors in accordance with the Rules of the American
Stock Exchange (AMEX). "Independence" for these purposes is determined in
accordance with Section 121(A) of the AMEX Rules and Rule 10A-3 under the
Securities Exchange Act of 1934. Since Telkonet does not maintain a standing
Nominating Committee it has not adopted a formal Nominating Committee charter.
When considering potential candidates for election to Telkonet'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 Telkonet, financial literacy and personal integrity in judgment. 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 five years before the date of selection; and are willing
to comply with Telkonet's Code of Ethics. 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. 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 a 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 Telkonet'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.
Stockholders can communicate directly with the Board, or with any
Committee of the Board, by writing to E. Barry Smith, Telkonet's Chief Financial
Officer, or by calling Mr. Smith at (240) 912-1800. All communications will be
reviewed by management and then forwarded to the appropriate director or
directors or to the full Board, as appropriate.
AUDIT COMMITTEE
For the year ended December 31, 2003, Messrs. Sadle, Lynch and McGinnis
served on the Audit Committee. Effective March 5, 2004, Mr. McGinnis resigned
from the Telkonet Board of Directors and Mr. Musser agreed to serve on the Audit
Committee until Mr. McGinnis' replacement was appointed. Mr. Sadle resigned from
the Audit Committee on April 20, 2004. On April 20, 2004, Mr. Peeler and Dr.
Hall we appointed as independent directors and each agreed to serve on the Audit
Committee.
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As of August 31, 2004, the Audit Committee was comprised of Messrs.
Lynch and Peeler and Dr. Hall. Telkonet's Board of Directors has determined that
Dr. Hall and each of Messrs. Musser, McGinnis, Lynch and Peeler is an "audit
committee financial expert" as defined by Item 401 of Regulation S-B promulgated
under the Securities Act of 1933 and the Securities Exchange Act of 1934. The
Board of Directors also has determined that Dr. Hall and each of Messrs. Musser,
McGinnis, Lynch and Peeler are "independent" as such term is defined in Section
121(A) of the 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
engagement of independent auditors, approves professional services provided by
the independent auditors, considers the range of audit and any non-audit fees,
and reviews the adequacy of Telkonet's internal accounting controls and major
accounting and financial reporting matters. The Audit Committee also reviews all
reports and financial information submitted to the Securities and Exchange
Commission and resolves any significant disagreements between management and the
independent auditors in connection with the preparation of Telkonet's financial
statements. The Audit Committee reviews with Telkonet's legal counsel all legal
and regulatory matters that may have a significant impact on Telkonet's
financial statements. The Audit Committee was formed at the end of 2003 and,
therefore, held no meetings in 2003. The first Audit Committee meeting was held
on March 25, 2004 to, among other things, review the financial statements for
the year ended December 31, 2003 and all members of the Audit Committee were in
attendance at such meeting.
The Board of Directors has adopted an Audit Committee Charter, a copy
of which has been filed with this proxy statement as Appendix A for ratification
by Telkonet's stockholders.
DIRECTORS' COMPENSATION
Telkonet reimburses non-management directors for costs and expenses in
connection with their attendance and participation at Board of Directors
meetings and for other travel expenses incurred on Telkonet's behalf. Telkonet
compensates each non-management director $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.
EXECUTIVE OFFICERS
The following table furnishes the information concerning Telkonet's
executive officers as of August 31, 2004.
NAME AGE TITLE
---- --- -----
Ronald W. Pickett 57 Chief Executive Officer
E. Barry Smith 53 Chief Financial Officer
Stephen L. Sadle 58 Senior Vice President
E. BARRY SMITH, Chief Financial Officer, is a CPA and senior financial
executive with diversified experience in both public and private companies. Mr.
Smith's background includes big-four public accounting experience with the firm
of Deloitte & Touche, Senior Financial Partner with over 15 years executive
management experience with Safeguard Scientifics, Inc. and their partner
companies including: ThinAirApps, Inc. (Wireless Application Provider-sold to
Palm, Inc.) and Tangram Enterprise Solutions (Software/Hardware for PC/LAN
Mainframe Connectivity and Enterprise Software Management). Mr. Smith's
experience also includes, Vice President of Finance & Administration for US Golf
Management (Public/Private Golf Course & Restaurant Management), Vice President
of Finance for International Communications Research (Market Research & Database
Services) and Treasurer for The Chilton Company (Publishing).
5
ITEM 2. RATIFICATION OF OPTIONS GRANTED UNDER
THE AMENDED AND RESTATED TELKONET, INC. STOCK INCENTIVE PLAN
As of August 31, 2004, options to acquire a total of 945,000 shares of
Telkonet's common stock were issued pursuant to the Telkonet, Inc. Stock
Incentive Plan by the Board of Directors. Among these options were options
issued to the following directors and executive officers of Telkonet:
NUMBER OF SHARES SUBJECT TO
NAME PURCHASE
---- --------
James L. Peeler 10,000
Thomas C. Lynch 30,000
Thomas M. Hall 10,000
The foregoing options entitle Mr. Lynch to purchase 20,000 and 10,000
shares of Telkonet common stock at $2.00 and $3.45, respectively. Mr. Peeler and
Dr. Hall are each entitled to purchase 10,000 shares of Telkonet common stock at
$3.45 per share. Stockholder approval is not required for the issuance of the
options under Telkonet's Amended and Restated Stock Incentive Plan or federal
securities laws. However, stockholder ratification of the options may permit the
holders of these options to have the benefit of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 which, among other things, exempts certain
grants of options to officers and directors of Telkonet from the provisions of
Section 16(b) of the Exchange Act.
The affirmative vote of a majority of the shares of Telkonet's common
stock represented at the Annual Meeting, either in person or by proxy, is
required to ratify the options granted under the Stock Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
ITEM 3. RATIFICATION OF THE
AUDIT COMMITTEE CHARTER
On October 3, 2003, the Board of Directors approved an Audit Committee
Charter for the Audit Committee of the Board of Directors. The material terms of
the Audit Committee Charter are summarized below. The summary is qualified in
its entirety by reference to the full text of the Audit Committee Charter,
attached hereto as Appendix A, which is incorporated herein by reference.
Telkonet's Audit Committee Charter sets forth the composition and
functions of the Audit Committee. The Audit Committee Charter provides that the
Audit Committee shall be comprised of two or more independent members of the
Board of Directors, as determined by the Board. All members of the Audit
Committee must be able to read and understand fundamental financial statements
and at least one member of the Audit Committee must have past employment
experience or a background in finance or accounting. Audit Committee meetings
shall occur when they are called by the Chairman of the Committee, or as
requested by Telkonet's independent accountants. In addition, the Audit
Committee shall meet at least annually with Telkonet's management and
independent accountants to discuss any relevant financial matters or issues.
As defined by the Audit Committee Charter, the primary duties and
responsibilities of the Audit Committee are to:
o serve as an independent and objective party and monitor
Telkonet's financial reporting process and internal controls
system;
o review and appraise the audit efforts of Telkonet's
independent accountants; and
o facilitate communication among Telkonet's independent
accountants, financial and senior management and the Board of
Directors with respect to Telkonet's auditing, accounting and
financial reporting processes.
The affirmative vote of a majority of the shares of Telkonet's common
stock represented at the Annual Meeting, either in person or by proxy, is
required to ratify the Audit Committee Charter.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
6
ITEM 4. RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Russell, Bedford, Stefanou and
Mirchandani, LLP as Telkonet's independent public accountants for 2004. Although
ratification by stockholders is not required, the Board of Directors requests
that stockholders ratify this appointment. If ratification is not obtained, the
Board of Directors will reconsider this appointment. Telkonet has been advised
that representatives of Russell, Bedford, Stefanou and Mirchandani will be
present at the annual meeting. They will be afforded the opportunity to make a
statement, should they desire to do so, and respond to appropriate questions.
The affirmative vote of a majority of the shares of Telkonet's common
stock represented at the Annual Meeting, either in person or by proxy, is
required to ratify the appointment of Telkonet's independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
OTHER MATTERS
The Board of Directors is not aware of any other matter that
may be presented for action at the annual meeting. If any other matter comes
before the annual meeting, the persons named in the enclosed proxy will vote the
proxy with respect thereto in accordance with their best judgment, pursuant to
the discretionary authority granted by the proxy.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following tables set forth, as of August 31, 2004, the
number of shares of Telkonet's common stock beneficially owned by each director
and executive officer of Telkonet and by all directors and executive officers as
a group. As of August 31, 2004, to the knowledge of Telkonet, no person other
than Stephen L. Sadle, Telkonet's Senior Vice President, beneficially owned more
than 5.0% of the outstanding shares of Telkonet common stock.
BENEFICIAL OWNER (1) SHARES BENEFICIALLY OWNED PERCENT OF CLASS
---------------- ------------------------- ----------------
DIRECTORS & EXECUTIVE OFFICERS
------------------------------
Ronald W. Pickett
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 2,141,205 4.8%
E. Barry Smith
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 325,246 (2) 0.7%
Stephen L. Sadle
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 3,795,514 (3) 8.4%
Warren V. Musser
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 1,401,694 (4) 3.1%
David Grimes
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 1,330,405 (5) 2.9%
Thomas C. Lynch
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 40,000 (6) 0.1%
James L. Peeler
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 20,000 (7) 0.0%
Thomas M. Hall
20374 Seneca Meadows Parkway
Germantown, Maryland 20876 29,468 (8) 0.1%
All Directors and Executive Officers
as a Group 9,083,531 19.2%
---------------------------
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(1) Unless otherwise indicated, each person has sole power to vote and
dispose, or direct the disposition of, all shares of common stock
beneficially owned, subject to applicable community property and
similar laws.
(2) Includes options exerciseable within 60 days to purchase 291,667 shares
of Telkonet common stock at $1.00 per share.
(3) Includes options exerciseable within 60 days to purchase 525,000 shares
of Telkonet common stock at $1.00 per share.
(4) Includes options exerciseable within 60 days to purchase 1,166,667
shares of Telkonet common stock at $1.00 per share.
(5) Includes options exerciseable within 60 days to purchase 525,000 shares
of Telkonet common stock at $1.00 per share.
(6) Includes options exerciseable within 60 days to purchase 20,000 shares
of Telkonet common stock at $2.00 per share and 20,000 shares of
Telkonet common stock at $3.45 per share.
(7) Includes options exerciseable within 60 days to purchase 20,000 shares
of Telkonet common stock at $3.45 per share.
(8) Includes options exerciseable within 60 days to purchase 20,000 shares
of Telkonet common stock at $3.45 per share.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to Telkonet for the fiscal
year ended December 31, 2003 for Telkonet's Chief Executive Officer, and each of
the four most highly compensated executive officers other than the Chief
Executive Officer who were serving as executive officers as of the end of the
last completed fiscal year.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- ---------------------------------------
AWARDS PAYOUTS
----------------------------- ---------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARs PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) (#) ($) ($)
---------------------- -------- ---------- --------- ------------ ------------- --------------- ---------- -----------
Ronald W. Pickett, 2003 $91,538 $0 $0 36,000 0 $0 $0
Chief Executive 2002 $0 $0 $0 0 0 $0 $0
Officer 2001 $0 $0 $0 0 0 $0 $0
---------------------- -------- ---------- --------- ------------ ------------- --------------- ---------- -----------
E. Barry Smith, 2003 $115,539 $0 $0 0 500,000 $0 $0
Chief Financial 2002 $0 $0 $0 0 0 $0 $0
Officer 2001 $0 $0 $0 0 0 $0 $0
---------------------- -------- ---------- --------- ------------ ------------- --------------- ---------- -----------
Stephen L. Sadle, 2003 $130,000 $0 $0 0 900,000 $0 $0
Senior Vice President 2002 $130,000 $0 $0 0 0 $0 $0
2001 $160,484 $0 $0 0 0 $0 $0
---------------------- -------- ---------- --------- ------------ ------------- --------------- ---------- -----------
8
OPTION/SAR GRANTS
The following table sets forth information concerning stock options
granted in the fiscal year ended December 31, 2003, to the persons listed on the
Summary Compensation Table.
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING EMPLOYEE EXERCISE OR
OPTIONS/SARs IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE
---- ------- ---- ------ ----
Ronald W. Pickett 0 0 n/a n/a
E. Barry Smith 500,000 6.9% $1.00 02/01/13
Stephen L. Sadle 900,000 12.5% $1.00 02/01/13
AGGREGATED OPTION/SAR EXERCISES
The following table summarizes information relating to stock option
exercises during the year ended December 31, 2003 by those persons listed on the
Summary Compensation Table.
AGGREGATE OPTION EXERCISES IN 2003 AND
OPTION VALUES AS OF DECEMBER 31, 2003
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 2003 DECEMBER 31, 2003 (1)
----------------- -----------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
Ronald W. Pickett 0 0 0 0 0 0
E. Barry Smith 0 0 166,667 333,333 $238,334 $476,666
Stephen L. Sadle 0 0 300,000 600,000 $429,000 $858,000
-----------------------
(1) Based on a stock price of $1.43, which was the average of the high
asked and low bid prices reported on December 31, 2003.
COMPENSATION PLANS
Except for the Telkonet, Inc. Amended and Restated Stock Incentive
Plan, the material terms of which are summarized below, Telkonet does not
maintain or administer any compensation plans for the benefit of its officers,
directors or employees.
Telkonet maintains and administers the Stock Incentive Plan to advance
the interests of Telkonet by encouraging and enabling acquisition of a financial
interest in Telkonet by its officers, directors, consultants and key personnel.
The Stock Incentive Plan is intended to aid Telkonet in attracting and retaining
key employees, to stimulate the efforts of such personnel and to strengthen
their desire to remain with Telkonet. The Stock Incentive Plan was adopted by
the Board of Directors on April 24, 2002 and approved by Telkonet's stockholders
in July 2002 at the annual meeting of stockholders. The Stock Incentive Plan was
amended by the Board of Directors on June 23, 2003 to increase the number of
shares of Telkonet common stock subject to the Stock Incentive Plan from
7,000,000 to 15,000,000 shares. Shares of the common stock subject to purchase
pursuant to exercise of the options granted under the Stock Incentive Plan were
registered on Form S-8 Registration Statements filed with the Securities and
Exchange Commission on October 16, 2000 and April 17, 2002, respectively.
9
The Stock Incentive Plan may be administered by the Board of Directors
or a committee designated by the Board of Directors which, if designated, would
have full power and authority to determine when and to whom awards will be
granted and the type, amount, form of payment and other terms and conditions of
each award, consistent with the provisions of the Stock Incentive Plan. Subject
to the provisions of the Stock Incentive Plan, the Board of Directors may amend
the terms and conditions of an outstanding award, with the consent of the
optionee. The Board of Directors has full authority to interpret the Stock
Incentive Plan and establish, amend or rescind rules and regulations for the
administration of the Stock Incentive Plan. Any employee, officer, consultant,
or director of Telkonet and its subsidiaries is eligible to receive awards under
the Stock Incentive Plan.
The Stock Incentive Plan provides for the issuance of up to 15,000,000
shares of Telkonet common stock, subject to adjustment in the event of stock
dividends, recapitalization, stock splits, reorganizations, mergers,
consolidations or other similar changes in the corporate or capital structure of
Telkonet. If an option issued under the Stock Incentive Plan expires, or for any
reason is terminated or unexercised with respect to any shares of Telkonet
common stock, such shares shall again be available for issuance of options under
the Stock Incentive Plan. The shares of common stock issued under the Stock
Incentive Plan will be authorized but unissued shares or issued shares that have
been reacquired by Telkonet.
The types of awards that may be granted under the Stock Incentive Plan
are stock options, restricted stock and stock appreciation rights. Options
granted pursuant to the Stock Incentive Plan will not be transferable without
the approval of the Board of Directors, other than by will or by the laws of
descent and distribution. During the lifetime of a participant, an award may be
exercised only by the participant to whom such award is granted.
Non-qualified options may be granted under the Stock Incentive Plan.
The Board of Directors will determine the exercise price of any option granted
under the Stock Incentive Plan. Stock options will be exercisable at such times
as the Board of Directors determines. Stock options may be exercised in whole or
in part by payment in full of the exercise price in cash or, at the Board of
Directors' discretion, (i) by delivery of shares of Telkonet common stock having
a fair market value on the date of exercise equal to the exercise price; (ii) by
withholding from the option shares of Telkonet common stock in satisfaction of
all or part of the exercise price; (iii) by delivery of the optionee's full
recourse promissory note in the amount of the exercise price; or (iv) by
delivery of irrevocable instructions to a broker to deliver promptly to
Telkonet, from the sale or loan proceeds with respect to the sale of Telkonet
common stock or a loan secured by Telkonet common stock, the amount necessary to
pay the exercise price.
Unless earlier discontinued or terminated by the Board of Directors, no
awards may be granted under the Stock Incentive Plan after September 14, 2010.
The Stock Incentive Plan permits the Board of Directors to amend, alter,
suspend, discontinue or terminate the Stock Incentive Plan at any time, except
that no amendment to the Stock Incentive Plan shall (i) increase the maximum
number of shares under the Stock Incentive Plan; (ii) materially modify the
eligibility requirements for participation in the Stock Incentive Plan; or (iii)
materially increase the benefits accruing to participants under the Stock
Incentive Plan, except in accordance with Telkonet's certificate of
incorporation.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Pickett, Telkonet's Chief Executive Officer, is employed pursuant
to an employment agreement that commenced January 30, 2003 and provides for an
annual salary $100,000 and bonuses and benefits based upon Telkonet's internal
policies.
Mr. Smith, Chief Financial Officer, is employed pursuant to an
employment agreement for a one-year term that commenced February 17, 2003 and
provides for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies.
Mr. Sadle, Telkonet's Senior Vice President, is employed pursuant to an
employment agreement for a three-year term that commenced June 19, 2000 and
provides for an annual salary of $130,000 and bonuses and benefits based upon
Telkonet's internal policies. On April 24, 2002, Mr. Sadle's employment
agreement was amended to, among other things, extend the term through December
31, 2004.
10
In addition, under the Stock Incentive Plan, stock options are
periodically granted to employees at the discretion of the Board of Directors.
Executives of Telkonet are eligible to receive stock option grants, based upon
individual performance and the performance of Telkonet as a whole.
REPORT OF THE AUDIT COMMITTEE
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF TELKONET'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, 2003, whose members
are identified below, has reviewed and discussed the audited financial
statements as of and for the year ended December 31, 2003 with Telkonet's
management and has discussed the matters required to be discussed by SAS 61 with
Telkonet's independent auditors. The Audit Committee has also received the
written disclosures and the letter from Telkonet's independent auditors required
by Independent Standards Board Standard No. 1 and has discussed with the
independent auditors the independent auditors' independence. Based upon its
review of the foregoing materials and its discussions with Telkonet's management
and independent auditors, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in Telkonet's Annual
Report on Form 10-KSB for the year ended December 31, 2003. The Audit Committee
also considered whether the provision of other non-audit services by the
independent auditor to Telkonet 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 on October 3, 2003, a copy of which has been filed with this proxy
statement as Appendix A for ratification by Telkonet's stockholders. The Audit
Committee has established procedures for the receipt, retention and treatment of
any complaints received by Telkonet regarding accounting, internal accounting
controls or auditing matters and the confidential, anonymous submission by
Telkonet's employees of any concerns regarding questionable accounting or
auditing matters.
By the Audit Committee.
Warren V. Musser
Thomas C. Lynch
Stephen L. Sadle
AUDIT FEES
The aggregate fees billed to Telkonet by its principal
accountant for professional services rendered for the audit of Telkonet's annual
financial statements for the fiscal years ended December 31, 2003 and 2002 and
the reviews of the financial statements included in Telkonet's Forms 10-QSB for
the periods ending March 31, 2003 and 2002, June 30, 2003 and 2002 and September
31, 2003 and 2002 were $53,992 and $60,200, respectively.
AUDIT-RELATED FEES
During the fiscal years ended December 31, 2003 and 2002, no fees were
billed to Telkonet by its principal accountant for assurance and related
services that were reasonably related to the performance of the audit or review
of Telkonet's financial statements and not reported under the caption "Audit
Fees."
TAX FEES
During the fiscal years ended December 31, 2003 and 2002, the aggregate
fees billed to Telkonet by its principal accountant for tax compliance, tax
advice and tax planning were $3,000 and $10,613, respectively.
ALL OTHER FEES
During the fiscal years ended December 31, 2003 and 2002, no fees were
billed to Telkonet by its principal accountant for products and services
provided by the principal account and not reported under the captions "Audit
Fees," "Audit-Related Fees" and "Tax Fees."
11
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Exchange Act, Telkonet's directors,
executive officers and any person holding 10.0% or more of its common stock are
required to report their beneficial ownership and any changes therein to the
United States Securities and Exchange Commission. Specific due dates for these
reports have been established and Telkonet is required to report herein any
failure to file such reports by those due dates. Based solely on review of the
copies of such reports furnished to Telkonet or written representations that no
other reports were required, Telkonet believes that, during 2003, its executive
officers, directors and greater than 10.0% beneficial owners complied with all
applicable Section 16(a) reporting requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASE OF CONVERTIBLE DEBENTURES
During the fourth quarter of 2002, Telkonet commenced an offering of up
to $2,500,000 of Series B Debentures. The Series B Debentures each accrue
interest at 8.0% per annum and mature three years from the date of purchase.
Each Series B Debenture is convertible at any time following the six month
anniversary of the date of issuance of such Series B Debenture into shares of
Telkonet common stock at a conversion price equal to $0.55 per share for each
$10,000 principal amount plus interest of the Series B Debenture converted. In
connection with the placement of the Series B Debentures, Telkonet also issued
non-detachable warrants granting holders the right to acquire 2,500,000 shares
of Telkonet's common stock at $1.00 per share. The Series B Debentures sold in
this offering were sold in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
promulgated thereunder.
As of August 31, 2004, Telkonet sold Series B Debentures having an
aggregate principal value of $2,500,000, of which $345,000 was attributable to
sales to the following Telkonet directors, officers and 5.0% shareholders, and
members of their immediate family:
NAME PURCHASE PRICE
---- --------------
Ronald W. Pickett $200,000
E. Barry Smith $ 20,000
Warren V. Musser $125,000 (1)
----------------------
(1) Includes Series B Debentures having an aggregate principal value of
$25,000 purchased by Mr. Musser's wife, and Series B Debentures having
an aggregate principal value of $100,000 purchased by The Musser
Foundation, of which Mr. Musser is Managing Director.
CONSULTING ARRANGEMENT
In September 2003, Telkonet entered into a consulting agreement, with
The Musser Group for certain services. The consulting agreement provides for an
annual consulting fee of $100,000, which is payable monthly during the term of
the consulting agreement. As of August 31, 2004, $66,667 had been expensed, of
which $58,333 was paid. Warren Musser, Chairman of the Board of Directors, is a
principal of the Musser Group.
OTHER INFORMATION
Brokers and other persons holding Telkonet's common stock in their
names, or in the names of a nominee, will be requested to forward this proxy
statement and the accompanying materials to the beneficial owners of the common
stock and to obtain proxies, and Telkonet will defray reasonable expenses
incurred in forwarding such material.
Telkonet's Annual Report to Stockholders, including audited financial
statements and schedules, accompanies this proxy statement.
12
STOCKHOLDER PROPOSALS
Stockholders may submit written proposals to be considered for
stockholder action at Telkonet's 2005 Annual Meeting of Stockholders. To be
eligible for inclusion in Telkonet's Proxy Statement for the 2005 Annual
Meeting, stockholder proposals must be received by Telkonet by June 24, 2005 and
must otherwise comply with applicable Securities and Exchange Commission
regulations. Stockholder proposals should be addressed to Telkonet at 20374
Seneca Meadows Parkway, Germantown, Maryland 20876-7004, Attention: Corporate
Secretary.
By order of the Board of Directors,
/s/ Ronald W. Pickett
----------------------------------
Ronald W. Pickett
Chief Executive Officer
13
TELKONET, INC.
The Annual Meeting of the Stockholders of Telkonet, Inc. will be held on Friday,
October 22, 2004, at 3:00 p.m., local time, at The Hampton Inn Germantown,
located at 20260 Goldenrod Lane, Germantown, Maryland 20876.
TEAR AT PERFORATION
1. ELECTION OF DIRECTORS - NOMINEES:
WARREN V. MUSSER RONALD W. PICKETT DAVID W. GRIMES
STEPHEN L. SADLE THOMAS C. LYNCH JAMES L. PEELER
THOMAS M. HALL
[ ] FOR ALL NOMINEES
[ ] WITHHELD AS TO ALL NOMINEES
[ ] FOR ALL EXCEPT VOTE WITHHELD FROM THE FOLLOWING
NOMINEE(S):_______________________________________
2. RATIFICATION OF OPTIONS GRANTED UNDER THE TELKONET, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF AUDIT COMMITTEE CHARTER
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of a Notice of Annual
Meeting of Stockholders of Telkonet, Inc. called for October 22, 2004,
and a Proxy Statement for the Meeting prior the signing of this proxy.
______________________________________________ Dated: __________, 2004
______________________________________________ Dated: __________, 2004
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.
TELKONET, INC.
20374 SENECA MEADOWS PARKWAY
GERMANTOWN, MARYLAND 20876
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF TELKONET, INC.
FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 22,
2004 AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
The undersigned, being a stockholder of TELKONET, INC. ("TELKONET"), hereby
authorizes E. Barry Smith and Stephen L. Sadle , and each of them, with the full
power of substitution, to represent the undersigned at the Annual Meeting of
Stockholders of Telkonet to be held at The Hampton Inn Germantown, located at
20260 Goldenrod Lane, Germantown, Maryland 20876, on Friday, October 22, 2004 at
3:00 p.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 the Common Stock of Telkonet will be voted as specified. If no
specification is made, shares will be voted FOR the nominees for director named
on the reverse side, FOR ratification of options granted under the Telkonet,
Inc. Amended and Restated Stock Incentive Plan, FOR ratification of the Audit
Committee Charter, FOR ratification of the appointment of the independent
accountants and IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES as to any other
matter which may properly come before the annual meeting.
APPENDIX A
----------
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF
TELKONET, INC.
I. PURPOSE
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.
A-1
II. COMPOSITION OF THE AUDIT COMMITTEE
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.
III. MEETINGS
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.
IV. RESPONSIBILITIES AND DUTIES
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.
A-2
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.
A-3
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.
A-4