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Pursuant to Rule 424(b)(3)
Registration No. 33-58810
PROSPECTUS
POTOMAC ELECTRIC POWER COMPANY
SHAREHOLDER DIVIDEND REINVESTMENT PLAN
SHARES OF
COMMON STOCK
(PAR VALUE $1 PER SHARE)
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Potomac Electric Power Company (the "Company") is continuing to offer to
holders of its Common Stock an opportunity to reinvest their cash dividends on
Common Stock in additional shares of the Company's Common Stock. Under the
Plan, holders of the Company's Common Stock have the option of reinvesting
dividends on all shares held by them both of record and in the Plan or only on
shares held by the Plan (while continuing to receive cash dividends on all
other shares). A participant may also purchase additional shares of the
Company's Common Stock through the Plan by making a voluntary cash payment in
an amount of not less than $25 or more than $5,000 each month. IF A SHAREHOLDER
IS ALREADY A PARTICIPANT IN THE PLAN, IT IS NOT NECESSARY TO TAKE ANY ACTION IN
ORDER TO CONTINUE TO HAVE COMMON STOCK DIVIDENDS REINVESTED.
The Company at its option may elect to sell newly issued shares of its Common
Stock to meet the requirements of the Plan or, if the Company does not elect to
do so, the shares for the Plan will be purchased on the open market. The
purchase price of shares of Common Stock purchased from the Company will be the
average of the reported high and low sale prices for the Company's Common Stock
on the New York Stock Exchange, Inc. on the pricing date. The purchase price of
shares acquired on the open market will be the average purchase price.
Brokerage fees in connection with all such open market purchases will be paid
by the Company.
Participants do not pay any fees or commissions when they acquire shares
under the Plan. The Company bears the cost of administering the Plan.
Participants may be subject to charges for certain requested services. See
Question 8 under "Description of Plan."
Although the Plan contemplates the continuation of quarterly dividend
payments, the payment of dividends will depend upon future earnings, the
financial condition of the Company and other factors. The Company reserves the
right to modify, suspend or terminate the Plan at any time.
The Company acts as Administrator of the Plan.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
April 15, 1998
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, ANY
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS IS NOT AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. EXCEPT AS OTHERWISE
INDICATED HEREIN, THIS PROSPECTUS SPEAKS AS OF ITS DATE AND DOES NOT PURPORT TO
REFLECT ANY CHANGES IN THE AFFAIRS OF THE COMPANY THEREAFTER.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files periodic and current reports and other information with the Securities
and Exchange Commission (the "Commission"). Information concerning directors
and officers, their remuneration and any material interest of such persons in
transactions with the Company, as of particular dates, is disclosed in proxy
statements distributed to shareholders of the Company and filed with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
450 Fifth Street, N.W., Washington, D.C.; 500 West Madison Street, Suite 1400,
Chicago, Illinois; and 7 World Trade Center, New York, New York. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such reports, proxy statements and other information also may be
obtained from the Commission's Electronic Data Gathering and Retrieval
("EDGAR") database located at the website maintained by the Commission at
http://www.sec.gov. In addition, reports, proxy statements and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange, Inc., where certain securities of the Company are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
under the 1934 Act are incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(b) The description of the Company's Common Stock included in
registration statements and reports filed under the 1934 Act including any
amendment or report for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in an incorporated document shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained
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herein or in any other incorporated document subsequently filed or in an
accompanying prospectus supplement modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THE COMPANY HEREBY UNDERTAKES TO FURNISH, WITHOUT CHARGE, TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL
REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO
ABOVE WHICH HAVE BEEN OR MAY BE INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS (EXCEPT WHERE SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS FOR SUCH
DOCUMENTS SHOULD BE DIRECTED TO THE SECRETARY'S OFFICE, POTOMAC ELECTRIC POWER
COMPANY, 1900 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20068 (202-872-2900).
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
The Company................................................................ 3
Use of Proceeds............................................................ 3
Summary of Plan............................................................ 4
Description of Plan........................................................ 5
Description of Common Stock................................................ 15
Legal Opinions............................................................. 17
</TABLE>
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THE COMPANY
Potomac Electric Power Company, a District of Columbia and Virginia
corporation, is engaged in the generation, transmission, distribution and sale
of electric energy in the Washington, D.C. metropolitan area, including the
District of Columbia and major portions of Montgomery and Prince George's
Counties in Maryland. It also supplies, at wholesale, electric energy to the
Southern Maryland Electric Cooperative, Inc., which distributes electricity in
Calvert, Charles, Prince George's and St. Mary's Counties in southern Maryland.
The Company's wholly-owned nonutility subsidiary, Potomac Capital Investment
Corporation ("PCI") has made investments principally in aircraft and power
generation equipment, equipment leasing and marketable securities, primarily
preferred stock with mandatory redemption features. PCI is also involved with
activities which provide telecommunication and energy services. In addition,
PCI has investments in real estate properties in the Washington, D.C.
metropolitan area. The mailing address of the Company's executive offices is
1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, and its telephone
number is 202-872-2000.
USE OF PROCEEDS
Net proceeds from the sale of shares of Common Stock by the Company to the
Plan will be used to fund ongoing capital requirements of the Company including
its utility construction program and operations. The Company will receive no
proceeds from shares of Common Stock purchased for the Plan in the open market.
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SUMMARY OF PLAN
The following summary is qualified in its entirety by the detailed
information describing the Plan and the Company appearing elsewhere in this
Prospectus (which term includes any amendments or supplements thereto). Readers
should review that information with care, and it is suggested that this
Prospectus be retained for future reference. Reference numbers refer to
detailed information found in questions and answers on pages 5 through 15.
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QUESTION
REFERENCES
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Name of Plan: Potomac Electric Power Company Share-
holder Dividend Reinvestment Plan.
Purpose: The Plan provides holders of the
Company's Common Stock the opportu-
nity to reinvest quarterly dividends
and the option to purchase additional
shares of the Company's Common Stock.
The purchase of shares from the Com-
pany provides the Company cash to
support its ongoing capital require-
ments including its utility construc-
tion program and operations. The Com-
pany retains the option of meeting
share purchase requirements of the
Plan by arranging for the purchase of
shares of Common Stock on the open
market. ............................. 1, 2
Benefits: Dividends are reinvested free of
charge. Participants may elect to re-
ceive cash dividends on shares held
by them of record rather than having
such dividends reinvested (the "Lim-
ited Dividend Reinvestment" option).
An optional cash investment of not
less than $25 or more than $5,000 may
be made each month. All brokerage
fees or commissions will be paid by
the Company. Purchase transactions,
custodial service and certificate is-
suance are free to Plan participants.
..................................... 2, 8, 11, 13, 16
Eligibility: The Plan is open to any record holder
of Common Stock. .................... 3
Costs to Participant: All administrative costs of the Plan
are paid by the Company. The partici-
pant will be charged $5 plus any ap-
plicable brokerage commission if the
participant directs the Administrator
to sell Plan shares. ................ 1, 8, 22
Joining the Plan or The shareholder completes a special
Changing authorization form and delivers it to
Participation: the Administrator. The Administrator
must receive the Plan authorization
form prior to the record date for a
dividend in order for such dividend
to be reinvested under the Plan or
otherwise to effect a change in par-
ticipation. ......................... 5, 6, 7, 25
Termination of Termination of participation is per-
Participation: mitted at any time and will occur
upon abandonment of the account. .... 23, 24, 33
Limitations: The Plan invests, issues certifi-
cates, provides custodial service and
sells shares only as specified here-
in. The participant bears the risk of
market price fluctuation. ........... 13, 29, 34, 35
Voting Rights: All voting rights are retained by the
participant. ........................ 31
Administration: The Company administers the Plan. ... 4
Tax Consequences: Summarized beginning on page 13. .... 32
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SHAREHOLDER DIVIDEND REINVESTMENT PLAN
DESCRIPTION OF PLAN
PURPOSE
1. What is the purpose of the Plan?
The Plan provides the holders of Common Stock of Potomac Electric Power
Company (the "Company") a convenient method for investing their quarterly
dividends in shares of the Company's Common Stock. In addition, the Plan
permits participants to make voluntary cash payments for the purchase of
additional shares of the Company's Common Stock. Shares of Common Stock
purchased through the Plan may be newly issued shares or, at the option of the
Company, may be shares purchased on the open market. All commissions and fees
incurred in connection with the purchase of shares through the Plan will be
paid by the Company. The proceeds from the sale to the Plan of newly issued
shares will be used to fund ongoing capital requirements of the Company
including its utility construction program and operations. Dividends reinvested
under this Plan are includable in a participant's taxable income.
ADVANTAGES
2. What are the advantages of the Plan to participants?
Full Dividend Reinvestment--If this option is chosen, cash dividends on all
of the full and fractional shares of Common Stock owned by a Plan participant,
whether held in the Plan or of record, are reinvested in additional shares of
the Company's Common Stock. See Questions 10, 11 and 12.
Limited Dividend Reinvestment--If this option is chosen, only dividends on
shares held by the Plan are reinvested in additional shares of the Company's
Common Stock. Dividends on shares registered in the name of the participant and
held outside the Plan are paid to the participant. See Questions 10, 11 and 12.
Additional Investment Option--Participants may make voluntary cash payments
to purchase additional shares of Common Stock. A single voluntary cash payment
of not less than $25 or more than $5,000 may be made each month. See Questions
10, 11, 13, 17 and 26.
Custodial Services--Shares credited to a participant's account under the Plan
will be registered in the name of the Administrator or its nominee as custodian
for the participant. In addition, a participant may transfer shares held of
record to the Plan for safekeeping and convenience. Shares transferred to the
Plan will be registered in the same manner as all other Plan shares and will be
credited to the balance of shares held for the participant's account. All
shares transferred to the Plan automatically become subject to the reinvestment
of dividends. See Questions 18, 27 and 28.
Statements of Account--Regular statements of account will be mailed to each
participant as soon as practicable after each investment.
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Transaction Costs--Plan participants pay no brokerage fees or commissions
either on shares newly issued by the Company or on shares purchased through the
Plan on the open market. See Question 8.
ELIGIBILITY
3. Who is eligible to participate in the Plan?
Any holder of record of the Company's Common Stock is eligible to participate
in the Plan. Beneficial owners of Common Stock whose only shares are held for
them in registered names other than their own, such as in the names of brokers,
banks or trustees, must take such steps as are necessary to become a holder of
record in order to qualify to participate in the Plan. A shareholder who has
separately registered accounts, for example "John Smith" and "John Q. Smith,"
must complete separate authorization forms in order to enroll both accounts in
the Plan.
ADMINISTRATION
4. Who administers the Plan?
The Company as "Administrator" administers the Plan, maintains records, sends
statements of account and performs other duties relating to the Plan. See
Question 34.
The Company's address is:
POTOMAC ELECTRIC POWER COMPANY
SHAREHOLDER SERVICE DEPARTMENT
P.O. BOX 97256
WASHINGTON, D.C. 20090-7256
PARTICIPATION
5. How does an eligible shareholder become a participant?
To participate in the Plan, an eligible shareholder is required to complete
an authorization form and to send it to the Administrator. Authorization forms
are available from the Company at the address given in question 4, above, or by
telephoning the Shareholder Service Department at 1-800-527-3726 or, in the
Washington, D.C. area, at 202-872-3183.
6. What is the purpose of the authorization form?
The authorization form enables each eligible shareholder to designate for
reinvestment either:
(a) all cash dividends paid BOTH on shares of Common Stock registered in
the shareholder's name and on shares held for the shareholder in the
Plan; or
(b) all cash dividends paid ONLY on shares of Common Stock held in the
Plan, while continuing to receive in cash the dividends paid on shares
registered in the shareholder's name.
The authorization form also appoints the Administrator to receive dividends
on the shares designated by the shareholder and to apply such dividends, and
any voluntary cash payments made
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by the participant, to purchase shares of Common Stock for the participant in
accordance with the Plan's terms and conditions. See Question 34.
7. When may a shareholder join the Plan or change participation?
Eligible shareholders may join the Plan at any time. Participants also may
change their reinvestment option at any time. If a new or changed authorization
form is received by the Administrator on or before the record date for the
payment of the next dividend (approximately 20 days in advance of the payment
date), such dividend will be invested in additional shares of Common Stock for
the participant's Plan account in accordance with the shareholder's choice of
Full or Limited Dividend Reinvestment. If a new authorization form is received
after any dividend record date but before the payment date, that dividend will
be paid in cash and the shareholder's new dividend reinvestment will begin with
the following dividend. An authorization form requesting a change which is
received between a dividend record date and payment date will become effective
with the next dividend following such payment date. Voluntary cash payments may
be made when joining the Plan or at any time while participating in the Plan.
See Questions 10 and 13.
COST
8. What costs do participants pay?
The Company bears all of the costs of administering the Plan, including the
payment of all brokerage commissions incurred in the purchase of Plan shares,
except that charges will be assessed upon the sale of shares and for
replacement of certain statements of account. In addition, the Administrator
will charge a participant for additional services requested by such
participant. The expense to the Company is estimated at approximately $200,000
per year.
A participant will be assessed a charge of $5.00 plus any brokerage
commissions in connection with the sale of Plan shares at the request of the
participant.
No charge will be made for the replacement of either the most recent
statement of account or the most recent annual statement of account. However,
the Administrator will assess a charge of $5.00 for any earlier statement of
account provided at the request of the participant.
PURCHASES
9. What is the source of the shares purchased under the Plan?
Shares purchased under the Plan may be purchased either from the Company or
on the open market. Shares acquired from the Company will be legally authorized
but unissued shares of Common Stock of the Company. Shares acquired on the open
market will be purchased through a registered broker-dealer selected by the
Administrator (the "Stock Purchasing Agent"). Such purchases on the open market
may be made on any securities exchange where shares of the Company's Common
Stock are traded, in the over-the-counter market or in negotiated transactions.
10. When will the funds be invested?
Dividends will be reinvested as of each dividend payment date (which is
usually the last business day of the calendar quarter). Voluntary cash payments
will be invested as of the dividend
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payment date in any month in which a cash dividend on Common Stock is paid. In
all other months, voluntary cash payments will be invested as of the last
business day of the month. When shares are to be acquired on the open market,
instructions for such purchase will be given to the Stock Purchasing Agent by
the Administrator no later than each investment date (i.e., the dividend
payment date or the last business day of the month) and the purchase on the
open market will be completed as soon as practicable and in a manner designed
to minimize any effect on the market for the Common Stock. See Questions 11, 16
and 17.
Plan participants making voluntary cash payments to purchase additional
shares should mail such payments so that they reach the Administrator not less
than five days before the investment date when such payments are to be
invested. A participant may obtain the return of any voluntary cash payment at
any time upon written request received by the Administrator not less than two
business days prior to the investment date.
Participants' funds held by the Administrator will not earn interest.
11. What price will participants pay for shares?
The purchase price of shares of Common Stock acquired from the Company is the
average of the high and low sale prices for the Company's Common Stock on the
New York Stock Exchange, Inc. on the pricing date. The pricing date with
respect to a dividend payment date is the last business day preceding such
dividend payment date. The pricing date in months when no dividends are paid on
Common Stock is the business day preceding the last business day of the month.
If the New York Stock Exchange, Inc. is closed on the pricing date, or the New
York Stock Exchange is open on the pricing date but no trading occurs in the
Company's Common Stock, prices on the next preceding trading date will be used.
The purchase price of shares acquired on the open market is determined by
dividing the sum of the cost (excluding brokerage commissions) of all such
shares purchased to meet Plan requirements with respect to a particular
investment date (including shares purchased with both reinvested dividends and
voluntary cash contributions) by the total number of shares purchased. See
Question 10.
If for any reason funds cannot be invested in shares of Company Common Stock,
the funds will be promptly returned to the participant. See Question 33.
12. How many shares will be acquired with a participant's dividend?
The full amount of the dividend to be reinvested for each participating
shareholder, less any required tax withholding, and the full amount of each
voluntary cash payment, will be used to purchase as many full and fractional
shares (calculated to three decimal places, without rounding) as can be
acquired based upon the price of the shares purchased. See Question 11. Because
the purchase price will be based on market conditions existing at the time that
investments are made, a participant will not know the precise number of shares
to be purchased for his account either at the time a shareholder elects to
participate in the Plan or at the time a participant makes a voluntary cash
payment.
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13. What are the limitations on voluntary cash payments?
A participant may make one voluntary cash payment each month of not less than
$25 or more than $5,000. The Plan does not permit orders to purchase a specific
number of shares. Instructions that do not conform to the terms of the Plan
will not be accepted and any related funds tendered will be promptly returned.
Question 10 describes when voluntary cash payments will be invested.
STATEMENTS
14. How will participants be advised of their purchase of stock?
Following each transaction a participant will receive a statement from the
Administrator showing the latest transaction and all prior transactions for the
year. These statements are the participant's continuing record of cost
information and should be retained for tax purposes.
15. What other communications will a participant receive?
Each participant will receive a copy of this Prospectus. Each participant in
the Plan also will receive copies of the Company's annual and any interim
reports to shareholders, as well as proxy statements distributed with respect
to shares held in the Plan. Where more than one shareholder has the same
address, only one copy of certain materials will be sent to that address if
shareholders to whom such materials would otherwise be sent agree thereto in
writing.
Each participant for whom shares are purchased in the open market will
receive a tax information form with respect to the brokerage fees and
commissions referred to in Question 32 under "Special Rules Concerning Shares
Purchased on the Open Market."
DIVIDENDS
16. How will a participant's cash dividends be treated?
All dividends paid on shares held of record by each participant who elects
Full Dividend Reinvestment and all dividends paid on shares held by the Plan
will be invested in additional shares of Common Stock. See Question 11. All
such shares purchased will be promptly credited to the accounts of
participants.
Participants who have elected the Limited Dividend Reinvestment option will
receive from the Company cash dividends on shares of which the participant is
the holder of record.
17. When will dividends be earned on voluntary cash payments?
Shares purchased through voluntary cash payments made during the first or
second month of a calendar quarter will normally be entitled to any dividend
payable at the end of that quarter. Shares purchased through voluntary cash
payments made during the third month of a quarter will not be entitled to any
dividend payable at the end of that quarter since those shares will be
purchased subsequent to the record date for such dividend.
CERTIFICATES
18. Are certificates issued for the shares purchased?
Shares held in the Plan will be registered in the name of the Administrator
(or its nominee).
No certificates will be issued for shares held for a participant's account
unless a written request for a certificate is sent to the Administrator, or
until the participant's account is terminated. A
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participant may at any time request the Administrator to send a certificate for
any full shares credited to the participant's account. Certificates for
fractional shares will not be issued.
19. What happens to a fractional share when a participant requests a
certificate for whole shares but wishes to remain in the Plan, when a
participant's account is terminated, or when the Plan is terminated?
A request for a certificate for whole shares does not terminate participation
in the Plan so long as a participant remains in the Plan and owns, either
directly or under the Plan, at least one full share. Any fractional share
balance will continue to be maintained to the credit of the participant's
account.
In the case of termination of participation or termination of the Plan, a
cash payment will be made representing the proceeds from the participant's
interest in any fractional share less any applicable brokerage commission or
charge.
20. In whose name will certificates for whole shares be issued?
Each account in the Plan will be maintained in the name of the participant as
shown by the Company's shareholder records at the time the participant entered
the Plan. When issued, certificates for full shares will be registered in the
same name.
Upon written request, certificates will be registered in names other than
that of the participant subject to compliance with any applicable laws and the
payment by the participant of any applicable transfer taxes.
21. May a participant transfer shares within the Plan?
A participant may transfer (by gift, sale or otherwise) ownership of some or
all of the shares that the participant holds in the Plan to the account of
another participant in the Plan or to an account established for an
individual(s) who is not already a participant in the Plan. To effect such an
assignment, a participant must deliver appropriate documentation acceptable to
the Administrator, including a stock assignment. In addition, any such transfer
is subject to compliance with all applicable laws and to the payment, by the
transferor, of all applicable transfer taxes.
In order for a transferee of shares held in a Plan account to be enrolled in
the Plan, an authorization form must be completed and returned to the
Administrator. In the event that an authorization form, completed in a manner
acceptable to the Administrator, is not received by the Administrator from the
transferee by a dividend payment date, the Administrator will pay the dividend
in cash and terminate the Plan account. See Question 23.
SALE OF SHARES
22. Can a participant direct that shares held by the Plan be sold?
Yes. At any time, a participant may request in writing that the Plan sell
shares held by the Plan for the account of such participant (but not shares
that are held by the participant of record). Such sales will be made by the
Stock Purchasing Agent. Upon completion of such sale, the
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Administrator will distribute the proceeds to the participant, less a charge of
$5.00 and any applicable brokerage commission or charge. The participant must
separately arrange for the sale of shares held of record.
TERMINATION OF PARTICIPATION
23. How may a Plan account be terminated by a participant?
A participant may terminate participation in the Plan at any time by a notice
given in writing to the Administrator. See Question 4 for the Administrator's
address. Upon such termination, the participant will receive at no cost a
certificate for the whole number of shares, and cash for any fractional share,
held in the participant's account.
If a termination request is received by the Administrator between the record
date and the dividend payment date, the dividend attributable to the shares
will be paid in cash. If the request is received by the Administrator after a
dividend payment date, the dividend paid on such date will be reinvested in
additional shares and will be reflected in the termination distribution.
Whenever a participant no longer owns shares held of record and owns less
than one full share under the Plan, the Administrator is authorized to
terminate the participant's Plan account and send the participant a cash
settlement as outlined under Question 19 for the fractional share.
24. What happens if an account is "abandoned"?
A participant's account is deemed "abandoned," and will be terminated by the
Administrator, if shareholder material sent to the participant for five (5)
consecutive years, or sooner as required by applicable law, has been returned
to the Administrator (or a former agent for the Plan) as undeliverable, and no
communication has been received by the Administrator from the participant
during that time.
After such five-year period, or earlier as required by applicable law, the
Administrator will attempt to notify the participant by notice given in the
manner described under Question 34. If the participant does not respond to such
notice within 30 days, the participant's account will be deemed abandoned. The
account will be terminated and a certificate for the whole number of shares
formerly held in the participant's account together with any cash, will be
treated by the Administrator as Unclaimed Property in its possession and will
be surrendered to the District of Columbia, or other appropriate authority, as
required by applicable laws.
The participant may retrieve Unclaimed Property from the appropriate
jurisdiction as provided by applicable laws.
25. When may a shareholder rejoin the Plan?
Generally, an eligible shareholder who previously ceased participation in the
Plan may resume participation at any time by signing a new authorization form.
However, the Administrator reserves the right to reject any authorization form
from a previous participant on grounds of excessive joining and termination.
Such reservation is intended to minimize unnecessary administrative expense and
to encourage use of the Plan as a long-term shareholder investment service.
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OTHER INFORMATION
26. Is a participant obligated to make voluntary cash payments?
No, a participant is not required to make voluntary cash payments.
27. What is the effect on a participant's Plan account if the participant
transfers all shares held of record?
None, as long as the participant has at least one full share in the Plan
account. Dividends on Plan shares and any voluntary cash payments would
continue to be invested under the Plan in additional shares of Common Stock.
If a shareholder participating in the Plan chooses to dispose of all of his
or her Common Stock, the shareholder must make separate arrangements to dispose
of shares held in the Plan, as described under Questions 22 and 23, and shares
held of record. The transfer of shares held of record will have no effect on
shares held in a participant's Plan account, except if the Plan account has
less than one full share. See Questions 19 and 23.
A participant may elect to transfer all shares held of record to the
participant's Plan account for safekeeping and convenience.
28. What limitations are imposed on a participant with regard to the assets
held by the Administrator under the Plan?
The participant has no right to draw checks or drafts against a Plan account
or to give instructions to the Administrator with respect to any shares or cash
held therein except as expressly described in this Prospectus.
The participant may not pledge or assign as collateral any shares held by the
Plan. In order to effect a pledge of such shares or assign any such shares as
collateral, the participant must request the issuance of a certificate for the
shares as provided in Question 18.
29. If the Company has a Common Stock rights offering, how will the rights on
Plan shares be handled?
All Common Stock purchase rights issued in respect of shares held in the Plan
will be issued to the Administrator. If such rights have a market value, the
Administrator will arrange for the sale of such rights, apply the proceeds to
the purchase of additional shares of the Company's Common Stock, and credit
such Common Stock to each participant's account in proportion to the full and
fractional shares held therein as of the record date for the issuance of such
rights. Alternatively, any participant who wishes to exercise stock purchase
rights on Plan shares must request, prior to the record date for the issuance
of such rights, that the Administrator deliver to the participant a certificate
for the shares held by the Plan as provided in Question 18. Rights issued in
respect of shares held of record by a participant will be mailed directly to
the participant in the same manner as to shareholders not participating in the
Plan.
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30. What happens if the Company issues a stock dividend or effects a stock
split?
Any shares distributed by the Company in respect of shares held in the Plan
as a result of a stock dividend or stock split will be credited to the
participants' accounts. Stock dividends or stock split shares distributed on
shares held of record by a participant will be mailed directly to the
participant in the same manner as to shareholders not participating in the
Plan.
31. How will a participant's Plan shares be voted at annual or special
meetings of shareholders?
Shares held in the Plan for a shareholder will be voted as the shareholder
directs.
A proxy covering shares held of record, if any, and shares held in a
participant's Plan account will be sent to the Plan participant. Such shares
will be voted in accordance with the shareholder's proper instructions. If no
instructions are indicated on a properly signed and returned proxy, such shares
will be voted in accordance with the recommendations of the Company's
management.
32. What are the federal income tax consequences of participation in the
Plan?
The following tax information is provided solely as a guide to participants.
The rules in this area are complex and, therefore, participants are advised to
consult their own tax advisors as to the federal and state income tax effects
of participation in the Plan.
GENERAL RULES CONCERNING TAXATION OF PLAN DIVIDENDS
A participant will be treated for federal income tax purposes as having
received on each dividend payment date the full amount of the cash dividend
payable on that date with respect to shares registered in the participant's
name and shares held for the participant's account under the Plan, even though
the amount of the dividend was not actually received by the participant in
cash, but instead was applied to the purchase of shares of Common Stock for the
participant's account. See Question 11.
Participants will not realize any taxable income when they receive
certificates for whole shares of stock credited to their accounts, either upon
their requests or upon withdrawal from or termination of the Plan. Participants
will, however, realize capital gain or loss when whole shares acquired under
the Plan are sold or exchanged either by the Administrator on behalf of the
participant, or by participants themselves. Participants also realize capital
gain or loss when they receive cash payments from the sale of any fractional
share upon withdrawal from or termination of the Plan. Such gain or loss on the
sale of whole or fractional shares will be long-term or short-term depending on
the holding period of the shares. The amount of any such capital gain or loss
will be the difference between the amount realized by a participant from the
sale of the shares and the shareholder's adjusted basis in such shares.
SPECIAL RULES CONCERNING SHARES PURCHASED ON THE OPEN MARKET
If shares are purchased under the Plan in the open market, a participant will
be treated for federal income tax purposes as having received an additional
dividend in an amount equal to the
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brokerage fees or commissions paid by the Company with respect to such
purchases. For purposes of establishing the basis and holding period of shares
of stock purchased on the open market under the Plan, such shares will be
treated in the same manner as shares of stock purchased outside of the Plan.
Thus, the purchase price of the shares, plus the brokerage fees and commissions
paid by the Company with respect to such shares, will be the adjusted basis of
such shares and the holding period will begin on the day following the
investment date. (See Question 10).
33. May the Plan be modified or discontinued, or may the purchase or sale of
Common Stock be suspended by the Plan?
The Company reserves the right to suspend or terminate the Plan at any time.
It also reserves the right to make modifications to the Plan. Participating
shareholders will be informed of any such suspension, termination or material
modification.
To the extent consistent with applicable law, the Administrator may request
that the Stock Purchasing Agent suspend purchases and sales of Common Stock at
any time if such purchases or sales would contravene or be restricted by
applicable regulations, orders or interpretations of the Securities and
Exchange Commission, any other governmental agency or instrumentality, or any
court or securities exchange. Neither the Administrator nor the Stock
Purchasing Agent shall be liable for any failure to make purchases or sales at
such times or under such circumstances.
34. What is the responsibility of the Administrator under the Plan?
The Administrator receives the participants' dividends and voluntary cash
payments for the purchase of additional shares of the Company's Common Stock,
maintains records of each participant's account, holds all shares purchased for
participants and advises participants as to all transactions for, and the
status of, their accounts. The Administrator also selects the Stock Purchasing
Agent through which open market transactions under the Plan are made.
All reports and notices from the Administrator to a participant will be
addressed to the participant's last address as shown by records of the
Administrator. The participant should notify the Administrator promptly in
writing of any change of address.
Neither the Administrator nor the Stock Purchasing Agent has any
responsibility beyond the exercise of ordinary care for any actions taken or
omitted pursuant to the Plan nor shall they have any duties, responsibilities
or liabilities except as are expressly set forth in the Plan.
The Administrator may not create a lien on any funds, securities or other
property held under the Plan.
35. Who bears the risk of market price fluctuations in the Company's Common
Stock?
A participant's investment risk in shares held in the Plan is the same as the
investment risk associated with shares held of record. Participants bear the
risk of loss and the benefits of gain from market price changes with respect to
all of such shares.
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The Administrator can not guarantee that shares purchased under the Plan
will, at any particular time, be worth more or less than their purchase price
and makes no representation in this regard.
36. What has been the level of participation in the Plan?
At December 31, 1997, approximately 34,300 direct holders of Common Stock,
representing 42% of all holders of Common Stock, were participants in the Plan.
These participants owned approximately 21,400,000 shares, or 18%, of Common
Stock outstanding. In 1997, Plan participants invested approximately
$38,000,000 to purchase approximately 1,590,000 shares of Common Stock.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Company consists of Common Stock, Serial
Preferred Stock and Preference Stock. As of December 31, 1997, the Company had
a total of (i) 200,000,000 authorized shares of Common Stock, par value $1.00
per share, of which 118,500,891 shares were outstanding and 35,046 shares were
reserved for issuance upon conversion of the Company's Serial Preferred Stock,
$2.44 Convertible Series of 1966 (the "Convertible Preferred Stock"), 2,324,721
shares were reserved for issuance under the Company's Shareholder Dividend
Reinvestment Plan, 1,221,624 shares were reserved for issuance under the
Company's Savings Plans for employees, and 2,769,412 shares were reserved for
issuance upon conversion of the Company's 7% Convertible Debentures due 2018
and 3,392,500 shares were reserved for issuance upon conversion of the
Company's 5% Convertible Debentures due 2002 (together the "Debentures"), (ii)
11,095,501 authorized shares of cumulative Serial Preferred Stock, par value
$50 per share ("Serial Preferred Stock"), divided into nine outstanding series
and of which a total of 5,345,499 shares were outstanding, and (iii) 8,800,000
authorized shares of cumulative Preference Stock, par value $25 per share
("Preference Stock"), of which no shares were outstanding.
The outstanding Common Stock of the Company is, and the Common Stock into
which the Convertible Preferred Stock and the Debentures may be converted will
be upon issuance, fully paid and nonassessable.
The following statements with respect to the Common Stock are a summary of
certain rights and privileges attaching to the Common Stock under the laws of
the District of Columbia and the Commonwealth of Virginia and pursuant to the
Company's Articles of Incorporation and By-Laws.
Dividends. Dividends on the Common Stock may be declared and paid, out of
funds legally available therefor, at the discretion of the Board of Directors,
provided all dividends for the past and current quarters, and any sinking fund
requirements, with respect to outstanding Serial Preferred Stock and any
outstanding Preference Stock have been paid or provided for.
So long as Serial Preferred Stock is outstanding, if, at the end of the
calendar month preceding the declaration of a dividend on the Common Stock, the
ratio of Common Stock capital, plus surplus (less the proposed dividend), to
total capital (including long-term debt), plus such surplus, is less than 20%,
dividends on Common Stock for the year ending on the date of such declaration
(including the proposed dividend) may not exceed 50% (or 75% if the above ratio
is 20% or more but less than 25%) of net earnings (less dividends on other
stock) for the 12 calendar months
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preceding the declaration. If the above ratio exceeds 25%, any dividends on the
Common Stock may not reduce the ratio below 25% (or 20%) except in accordance
with the foregoing restrictions.
No amount of surplus is presently restricted as the result of the above
provision.
Liquidation Rights. Upon dissolution, liquidation or winding-up of the
Company, the holders of Common Stock are entitled to receive on a pro rata
basis the assets, if any, of the Company that are legally available for
distribution to stockholders, subject to the liquidation preferences and the
payment of accrued dividends, if any, on any outstanding shares of Serial
Preferred Stock and Preference Stock.
Voting Rights. The holders of Common Stock are entitled to one vote per share
on all matters submitted to a vote of stockholders. The Board of Directors is
divided into three classes, with one-third of the directors elected annually to
terms of three years. Cumulative voting for the election of directors is not
permitted. All voting power is vested in the Common Stock, except under the
following circumstances:
If four quarterly dividends on the Serial Preferred Stock are in default, the
terms of all directors terminate, and until all such defaulted dividends shall
have been paid, replacement directors are elected for one-year terms, with the
holders of Serial Preferred Stock as a class entitled to elect 25% of the Board
of Directors.
If six quarterly dividends on the Preference Stock are in default and until
all such defaulted dividends shall have been paid, the holders of the
Preference Stock as a class are entitled to elect two directors of the Company
at each annual meeting of stockholders.
The consent of more than two-thirds of the Serial Preferred Stock, or of any
specially affected series thereof, is required for certain charter amendments,
such as increasing the authorized amount of the Serial Preferred Stock or
changing the terms of the Serial Preferred Stock in a manner substantially
prejudicial to the holders thereof. Similar provisions exist with respect to
the Preference Stock. The consent of a majority of the Serial Preferred Stock
is required for (i) an increase in the number of outstanding shares thereof
unless certain earnings and capital coverage tests are met, and (ii) the
issuance or guarantee of unsecured debt unless the total of all unsecured debt
thereafter will not exceed 25% of secured indebtedness plus capital and
surplus.
The consent of a majority of the holders of Serial Preferred Stock and of the
holders of Preference Stock, each class voting separately, also is required to
approve a merger or consolidation of the Company, or the sale or lease of
substantially all of its assets, unless such action shall have been ordered or
approved by appropriate regulatory authorities.
The provisions of the Articles of Incorporation providing for a staggered
Board of Directors and certain provisions of the Company's By-Laws relating to
the conduct of meetings of the stockholders cannot be repealed or amended by
action of the stockholders unless approved by the affirmative vote of the
holders of not less than four-fifths of the outstanding shares of Common Stock.
Certain Business Combinations. Under the Company's Articles of Incorporation,
any business combination (defined to include a merger, consolidation, sale of
more than five percent of assets,
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liquidation, reclassification or similar transaction) with an interested
shareholder (defined to include any 10% shareholder of the Company) must be
approved by the affirmative vote of the holders of not less than two-thirds of
the outstanding shares of Common Stock, exclusive of those shares held by the
interested shareholder and its affiliates, unless the transaction either (i) is
approved by a majority of continuing directors (i.e., directors unaffiliated
with the interested shareholder who took office before the interested
shareholder acquired that status, or who succeed a continuing director and are
appointed, recommended or elected by a majority of such directors), or (ii)
satisfies certain minimum price and procedural criteria. Any repeal or
amendment of this provision requires the affirmative vote of the holders of not
less than four-fifths of the outstanding shares of Common Stock, unless such
repeal or amendment is recommended by a Board of Directors composed of
directors who qualify as continuing directors. This provision may have the
effect of delaying, deferring or preventing a change in control of the Company.
Preemptive Rights. The holders of Common Stock do not have preemptive rights.
Exchange Listing. The Common Stock is listed on the New York Stock Exchange.
Transfer Agent and Registrar. ChaseMellon Shareholder Services, L.L.C., New
York, N.Y., and Potomac Electric Power Company, each serve as a Transfer Agent
and Registrar for the Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-Laws of the Company provide that the Company shall indemnify each
director or officer, and each former director and officer, of the Company
against expenses actually and reasonably incurred in connection with the
defense of any action, suit or proceeding by reason of his or her being or
having been such director or officer, including liabilities incurred under the
Securities Act of 1933, as amended, except in relation to matters as to which
such director or officer shall be finally adjudged in such action, suit or
proceeding to have knowingly violated the criminal law or to be liable for
willful misconduct in the performance of his or her duty to the Company; and
that such indemnification shall be in addition to, and not exclusive of, any
other rights to which those indemnified may be entitled under any by-law,
agreement, vote of stockholders, or otherwise. The Company also has policies of
insurance which insure officers and directors against certain liabilities and
expenses incurred by them in such capacities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL OPINIONS
The legality of the Common Stock offered hereby has been passed upon for the
Company by William T. Torgerson, Esq., 1900 Pennsylvania Avenue, N.W.,
Washington, D.C. Mr. Torgerson is regularly employed by the Company as Senior
Vice President and General Counsel.
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SHAREHOLDER DIVIDEND
REINVESTMENT PLAN
[PEPCO LOGO]
SHARES OF
COMMON STOCK
PAR VALUE $1 PER SHARE
PROSPECTUS
DATED APRIL 15, 1998
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