<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED
BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Potomac Electric Power Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
Notes:
<PAGE>
[LOGO OF PEPCO APPEARS HERE]
POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N. W.
WASHINGTON, D. C. 20068
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
March 4, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Potomac
Electric Power Company will be held at 10:00 a.m. on Wednesday, April 22,
1998, at the Omni Shoreham Hotel, 2500 Calvert Street, N. W., Washington, D.
C. for the following purposes:
1. To elect four directors to serve for three years, and one director to
serve for one year;
2. To consider and take action with respect to the approval of a Long-Term
Incentive Plan;
3. To consider and take action with respect to a shareholder proposal
relating to the election of directors, if such proposal is brought before
the meeting;
4. To consider and take action with respect to a shareholder proposal
relating to cumulative voting, if such proposal is brought before the
meeting; and
5. To transact such other business as may properly be brought before the
meeting.
The holders of the Common Stock of the Company of record at the close of
business on Tuesday, March 3, 1998, will be entitled to vote on each of the
above matters.
By order of the Board of Directors,
ELLEN SHERIFF ROGERS
Secretary
----------------
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO SIGN, DATE AND MAIL THE
ENCLOSED PROXY PROMPTLY.
IF YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
PLEASE DATE AND SIGN YOUR
PROXY AND RETURN IT IN
THE ENVELOPE PROVIDED
THANK YOU FOR ACTING PROMPTLY
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
POTOMAC ELECTRIC POWER COMPANY
March 4, 1998
This statement is furnished in connection with a solicitation of proxies by
the Board of Directors of Potomac Electric Power Company (the "Company"), 1900
Pennsylvania Avenue, N. W., Washington, D. C. 20068, to be used at the Annual
Meeting of Shareholders of the Company to be held at 10:00 a.m. on Wednesday,
April 22, 1998, at the Omni Shoreham Hotel, 2500 Calvert Street, N.W.,
Washington, D. C., and at any adjournment thereof, for the purposes set forth
in the foregoing notice of meeting. Properly executed proxies received prior
to closing of the polls during the meeting will be voted in the manner set
forth on the proxy unless specifically otherwise directed by the shareholder,
in which case they will be voted as directed. If the enclosed form of proxy is
executed and returned, it may be revoked by delivering notice of revocation or
a duly executed proxy bearing a later date to the Secretary of the Company
before the proxy is voted, and shareholders who are present at the meeting may
revoke their proxies and vote in person.
At the close of business on Tuesday, March 3, 1998 (the "Record Date"), the
Company had outstanding 118,527,028 shares of Common Stock of the par value of
$1 per share (the "Common Stock"). Each holder of record on the Record Date
will be entitled to one vote for each share so held on each of the matters
submitted to a shareholder vote at the meeting.
This proxy statement and the form of proxy are first being mailed to
shareholders on or about March 6, 1998. The Annual Report to Shareholders for
the fiscal year ended December 31, 1997, including financial statements, was
mailed on or about February 20, 1998 to direct shareholders.
1. ELECTION OF DIRECTORS
At the meeting, four directors are to be elected to hold office for three-
year terms that expire in 2001, and until their respective successors shall
have been elected and qualified. In addition, one director is to be elected to
hold office for one year to fill the unexpired term of A. James Clark, a
director of the Company for the past twenty years, who has reached the
mandatory retirement age for directors. Twelve directors constitute the entire
Board of Directors.
The persons named in the enclosed proxy will vote such proxy for the
election of the nominees named below, unless such authority is withheld. The
Company does not anticipate that any of such nominees will become unavailable
for any reason, but if that should occur before the meeting, proxies will be
voted for another nominee, or other nominees, if any, to be selected by the
Board of Directors. Nominees receiving the greatest number of votes shall be
elected.
1
<PAGE>
NOMINEES FOR ELECTION AS DIRECTORS
FOR TERM EXPIRING IN 2001
JOHN M. DERRICK, JR., age 57, has been President and
Chief Executive Officer of the Company since October
1997. From 1992 to October 1997 he served as President
[PHOTO] and Chief Operating Officer of the Company. Mr.
Derrick has been a director of the Company since 1994
and is a member of the Executive Committee. Mr.
Derrick is a director of Washington Real Estate
Investment Trust. He owns 30,408 shares of the Common
Stock of the Company.
PETER F. O'MALLEY, age 58, is Of Counsel to O'Malley,
Miles, Nylen & Gilmore, P.A., a law firm in Calverton,
Maryland. He has served as Of Counsel since 1989. Mr.
O'Malley currently serves as the President of Aberdeen
Creek Corp., a privately-held company engaged in
[PHOTO] investment, business consulting and development
activities. He has been a director of the Company
since 1982 and is Chairman of the Finance Committee
and a member of the Chairman's Advisory Committee and
the Human Resources Committee. Mr. O'Malley is a
director of Giant Food Inc., Legg Mason, Inc. and
Forensic Technologies International Corp. He owns
1,828 shares of the Common Stock of the Company.
LOUIS A. SIMPSON, age 61, has been President and Chief
Executive Officer of Capital Operations (investments),
GEICO Corporation, Washington, D. C. since May 1993.
From 1985 to May 1993 he served as Vice Chairman of
GEICO Corporation. He has been a director of the
[PHOTO] Company since December 1990, and is a member of the
Audit Committee, the Chairman's Advisory Committee and
the Finance Committee. Mr. Simpson is a director of
Cohr, Inc., U S West, Inc. and Pacific American Income
Shares, Inc. He owns 2,000 shares of the Common Stock
of the Company.
DENNIS R. WRAASE, age 53, has been Senior Vice
President and Chief Financial Officer of the Company
since 1996. From 1992 until 1996, he served as Senior
[PHOTO] Vice President, Finance and Accounting. Mr. Wraase
currently does not serve as a director of the Company.
He owns 20,317 shares of the Common Stock of the
Company.
2
<PAGE>
NOMINEE FOR ELECTION AS DIRECTOR
FOR TERM EXPIRING IN 1999
EDMUND B. CRONIN, JR., age 60, has been Trustee,
President and Chief Executive Officer of Washington
Real Estate Investment Trust since 1994, based in
Kensington, Maryland which owns income-producing real
[PHOTO] estate in the Mid-Atlantic Region. From 1977 until
1994, Mr. Cronin was Chairman and Chief Executive
Officer of H.G. Smithy Company and its various
operating subsidiaries. Mr. Cronin currently does not
serve as a director of the Company. He owns 1,000
shares of the Common Stock of the Company.
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRES IN 1999
ROGER R. BLUNT, SR., age 67, is Chairman of the Board,
President and Chief Executive Officer of Blunt
Enterprises, LLC (general contracting and construction
management), a Washington-based holding company that
[PHOTO] includes Essex Construction, LLC, of which he is
Chairman of the Board and Chief Executive Officer, and
Tyroc Construction, LLC, of which he is Chairman of
the Board, President and Chief Executive Officer. Mr.
Blunt has been a director of the Company since 1984
and is Chairman of the Audit Committee and a member of
the Executive Committee and the Nominating Committee.
He owns 346 shares of the Common Stock of the Company.
ANN D. MCLAUGHLIN, age 56, is former United States
Secretary of Labor. She was President of the Federal
City Council from 1990 until 1995. She is presently
Chairman of The Aspen Institute and served as Vice
[PHOTO] Chairman of The Aspen Institute from 1993 to 1996. She
has been a director of the Company since January 1991,
and is Chairman of the Nominating Committee and a
member of the Human Resources Committee. Ms.
McLaughlin is a director of AMR Corporation/American
Airlines, Inc., Donna Karan International Inc., Fannie
Mae, General Motors Corporation, Harman International
Industries, Inc., Host Marriott Corporation, Kellogg
Company, Nordstrom, Inc., Sedgwick Group plc, Union
Camp Corporation and Vulcan Materials Company. She
owns 545 shares of the Common Stock of the Company.
A. THOMAS YOUNG, age 59, is retired Executive Vice
President of Lockheed Martin Corporation. From 1990-
1995, he was President and Chief Operating Officer of
Martin Marietta Corporation. He is a director of The
[PHOTO] B.F. Goodrich Company, The Dial Corp., and Science
Applications International Corporation. Mr. Young has
been a director of the Company since 1995 and is a
member of the Audit Committee, the Chairman's Advisory
Committee and the Finance Committee. He owns 1,000
shares of the Common Stock of the Company.
3
<PAGE>
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRES IN 2000
RICHARD E. MARRIOTT, age 59, since October 1993, has
been Chairman of the Board of Host Marriott
Corporation, a company based in Bethesda, Maryland,
which owns lodging properties throughout the world.
From 1986 to October 1993 he served as Vice Chairman
and Executive Vice President of the Marriott
[PHOTO] Corporation, a hotel and hospitality company. Mr.
Marriott has been a director of the Company since 1993
and is a member of the Human Resources Committee and
the Nominating Committee. Mr. Marriott is a director
of Marriott International, Inc. and Host Marriott
Services Corporation. He owns 100 shares of the Common
Stock of the Company.
DAVID O. MAXWELL, age 67, is retired Chairman of the
Board and Chief Executive Officer of Fannie Mae, a
position he held from 1981-1991. Mr. Maxwell has been
a director of the Company since 1993 and is a member
[PHOTO] of the Audit Committee and the Human Resources
Committee. He is a director of Financial Security
Assurance Holdings Ltd. and SunAmerica Inc. He owns
500 shares of the Common Stock of the Company.
FLORETTA D. MCKENZIE, age 62, was the founder in 1987
and is the Chairwoman and Chief Executive Officer of
The McKenzie Group, Inc. (educational consulting
firm). Dr. McKenzie has been a director of the Company
[PHOTO] since 1988 and is a member of the Audit Committee and
the Executive Committee. Dr. McKenzie is a director of
Marriott International, Inc. She owns 1,059 shares of
the Common Stock of the Company.
EDWARD F. MITCHELL, age 66, has been Chairman of the
Board of the Company since December 1992. He was Chief
Executive Officer from September 1989 until October
1997 and from 1983 to December 1992, he served as
[PHOTO] President of the Company. He has been a director of
the Company since 1980, and is Chairman of the
Executive Committee. He owns 73,647 shares of the
Common Stock of the Company.
4
<PAGE>
As of February 25, 1998, Mr. William T. Torgerson and Mr. Andrew W.
Williams, non-director officers, each of whom is listed in the Summary
Compensation Table, owned 12,151 and 17,723 shares, respectively, and all
directors, nominees, and executive officers as a group, owned 437,166 shares
of the Common Stock of the Company, representing less than 1% of the shares
outstanding.
The Board of Directors held nine meetings in 1997. The Company has standing
Audit, Human Resources and Nominating Committees of the Board of Directors.
The Company also has Executive, Finance and Chairman's Advisory Committees of
the Board of Directors. Director McKenzie attended fewer than 75% of the
meetings of the Board and Board committees of which she was a member.
The Audit Committee, composed entirely of independent, non-employee
directors, held four meetings in 1997. The Committee's duties and
responsibilities include recommending to the Board the engagement of the
independent accountant, approving the plan and scope of the audit and the fee
before the audit begins and, following the audit, reviewing the results with
the independent accountant and its comments on the Company's system of
internal accounting controls. The Committee also reviews with the Company's
General Auditor the plan, scope and results of internal audits and his
comments on the Company's system of internal accounting controls. It further
reviews with management, the independent accountant and the General Auditor
the accounting principles applied in financial reporting and the reports
relating to compliance with the Company's statements of policy relating to
conflicts of interest. The Committee reports its activities to the Board
periodically and makes such recommendations and findings concerning any audit
or related matter as it deems appropriate.
In carrying out these functions, the Audit Committee represents the Board in
discharging its responsibility of oversight, but the existence of the
Committee does not alter the traditional roles and responsibilities of the
Company's management and the independent accountant with respect to the
accounting and control functions and financial statement presentation.
The Nominating Committee, composed entirely of independent, non-employee
directors, held one meeting in 1997. The Committee recommends to the Board
candidates for nomination for election as directors. The Committee will
consider nominees recommended by shareholders upon the receipt, no later than
the deadline for receipt of shareholder proposals, of information concerning
the name, business address, occupation, qualifications and share holdings of
the proposed nominee.
The Human Resources Committee, composed entirely of independent, non-
employee directors, held three meetings in 1997. The Committee recommends to
the Board the annual salary administration program for all exempt employees,
including specific salary recommendations for senior officers and employees,
and administers the executive compensation plans. The Committee also makes
recommendations to the Board with respect to the Company's General Retirement
Plan, other benefit plans, and officer and senior management succession.
Each of the Company's directors, except directors who are employees of the
Company, is paid an annual retainer of $26,000, plus a fee of $1,250 for each
Board and committee meeting attended. Each director who is Chairman of a
committee is paid an additional annual retainer of $3,500. As of August 1,
1997, the Company terminated its Retirement Plan for non-employee directors.
Directors who had completed 10 or more years of Board service received a lump
sum payment equal to the actuarial present value of a life annuity, commencing
at age 65, in an amount equal to the annual retainer. Directors who had
completed less than 10 years of service received in a lump sum equal to the
actuarial present value of a reduced annuity benefit based on the actual
number of years of service. The Company also has a Stock Compensation Plan for
the Board of Directors under which directors may elect to receive up to 100%
of their retainers in shares of the Company's Common Stock and a deferred
compensation plan which permits directors to defer annual retainer and meeting
fee payments and the lump sum payments made under the Retirement Plan.
Deferred amounts are credited, at the election of the director, based on the
prime rate or a return on a specified group of funds or a combination of both.
5
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- LONG-TERM
OTHER ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION/1/ PAYOUTS/2/ COMPENSATION/3/,/4/
- --------------------------- ---- -------- -------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Edward F. Mitchell 1997 $670,000 $ 0 $132,042 $186,528 $77,991
Chairman of the Board 1996 600,000 263,340 115,861 79,670 55,513
1995 560,000 206,599 96,100 136,201 56,479
John M. Derrick, Jr. 1997 $410,000 $ 0 $ 13,773 $103,615 $54,444
President and 1996 373,333 152,152 11,672 44,261 36,867
Chief Executive Officer 1995 350,000 190,612 10,423 59,236 37,111
Dennis R. Wraase 1997 $250,833 $ 0 $ 3,512 $ 51,408 $28,793
Senior Vice President and 1996 222,667 84,350 3,054 21,953 24,568
Chief Financial Officer 1995 203,000 130,642 2,972 38,627 24,455
William T. Torgerson 1997 $231,667 $ 0 $ 2,949 $ 28,669 $26,579
Senior Vice President and 1996 210,667 74,300 2,565 0 23,030
General Counsel 1995 197,667 123,263 2,572 0 22,703
Andrew W. Williams 1997 $193,333 $ 0 $ 0 $ 0 $22,834
Vice President 1996 182,333 53,351 0 0 20,420
1995 173,667 61,019 0 0 20,805
</TABLE>
(1) Other Annual Compensation
Amounts in this column for each year represent above-market earnings on
deferred compensation funded by Company owned life insurance policies held in
trust, assuming the expected retirement at age 65. The amounts are reduced if
the executive terminates employment prior to age 62 for any reason other than
death, total or permanent disability or a change in control of the Company. In
the event of a change in control and termination of the participant's
employment, a lump sum payment will be made equal to the net present value of
the expected payments at age 65 discounted using the Pension Benefit Guaranty
Corporation immediate payment interest rate plus one-half of one percent. The
Company has purchased such policies on participating individuals under a
program designed so that if assumptions as to mortality experience, policy
return and other factors are realized, the compensation deferred and the death
benefits payable to the Company under such insurance policies will cover all
premium payments and benefit payments projected under this program, plus a
factor for the use of Company funds.
(2) Long-Term Incentive Plan Payouts
All amounts in this column represent the value of restricted stock vested
under the Company's Executive Restricted Stock Performance Award Program. The
amount shown for 1997 consists of 50% of the restricted stock award from the
performance cycle ended December 31, 1996 (the "1996 Cycle") and 50% of the
restricted stock award from the performance cycle ended December 31, 1995 (the
"1995 Cycle"), that vested on January 1, 1998. The amount shown for 1996
consists of 50% of the restricted stock award from the 1995 Cycle and 50% of
the restricted stock award from the performance cycle ended December 31, 1994
(the "1994 Cycle"), that vested on January 1, 1997. The amount shown for 1995
consist of 50% of the restricted stock award from the 1995 Cycle and 50% of
the restricted stock award from the performance cycle ended on December 31,
1993, that vested on January 1, 1996. The value of the restricted stock was
calculated based on the market price of the Common Stock on the day preceding
the vesting date.
(3) Restricted Stock
The number and market value of the non-vested restricted shareholdings at
December 31, 1997 for the five named executive officers are: 4,104 shares or
$105,806 for Mr. Mitchell, 2,280 shares or $58,781 for Mr. Derrick, 1,131
shares or $29,159 for Mr. Wraase, 1,113 shares or $28,695 for Mr. Torgerson
and 2,400 shares or $61,875 for Mr. Williams. In the event of change of
control and subsequent termination of employment or diminution of duties,
these restricted shareholdings would become vested immediately.
(4) All Other Compensation
Amounts in this column for 1997 consist of (i) Company contributions to the
Savings Plan for Exempt Employees of $7,375 for Messrs. Mitchell, Derrick,
Wraase and Torgerson, respectively, and $4,563 for Mr. Williams, (ii) Company
contributions to the Executive Deferred Compensation Plan due to Internal
Revenue Service limitations on maximum contributions to the Savings Plan for
Exempt Employees of $18,503, $11,325, $3,598, $3,300 and $4,388 for Messrs.
Mitchell, Derrick, Wraase, Torgerson and Williams, respectively, (iii) the
term life insurance portion of life insurance written on a split-dollar basis
of $9,573, $2,761, $1,351, $1,374 and $774 for Messrs. Mitchell, Derrick,
Wraase, Torgerson and Williams, respectively, and (iv) the interest on
employer paid premiums for split-dollar life insurance of $42,540, $32,983,
$16,469, $14,530 and $13,109 for Messrs. Mitchell, Derrick, Wraase, Torgerson
and Williams, respectively. The split-dollar life insurance contract provides
death benefits to the executive's beneficiaries of approximately three times
the executive's annual salary. The split-dollar program is designed so that,
if the assumptions made as to mortality experience, policy return and other
factors are realized, the Company will recover all plan costs, including a
factor for the use of Company funds. The split-dollar policy provides a cash
surrender value to each participant in excess of any premiums paid.
6
<PAGE>
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD THRESHOLD
UNTIL MATURATION MINIMUM NUMBER MAXIMUM
NAME OR PAYOUT NUMBER OF SHARES OF SHARES NUMBER OF SHARES
- ---- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Edward F. Mitchell...... January 1, 2000 0 2,427 18,280
John M. Derrick, Jr. ... January 1, 2000 0 1,513 11,352
Dennis R. Wraase........ January 1, 2000 0 723 5,425
William T. Torgerson.... January 1, 2000 0 676 3,071
Andrew W. Williams...... January 1, 2000 0 485 3,636
</TABLE>
The above table reflects the share awards available under the Company's
Executive Restricted Stock Performance Award Program for the three-year
performance cycle beginning January 1, 1997. The Plan provides for the award
of performance shares based on the Company's performance relative to the
companies included in the Salomon Brothers Electric Utilities index. The
awards are based on total return to shareholders over the three-year
performance cycle and market-to-book ratios for the same periods. Each of
these two performance measures is given equal weight. For a participant to
receive the maximum award, the Company must have the highest total return to
shareholders and market-to-book ratio as compared to the companies contained
in the Salomon Brothers Electric Utilities index. Generally, the Company
results must be above the median of the companies contained in the index for a
participant to receive any award. Actual grants, if any, will not be
determined until the end of the performance cycle and the shares earned based
on performance will be paid in cash. No dividends are paid on the performance
shares. Total shares granted will reflect reinvested dividends during the
performance cycle.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL RETIREMENT BENEFITS
-----------------------------------------------------
AVERAGE ANNUAL SALARY YEARS IN PLAN
IN FINAL THREE YEARS -----------------------------------------------------
OF EMPLOYMENT 15 20 25 30 35 40
------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000................. $ 39,000 $ 53,000 $ 66,000 $ 79,000 $ 92,000 $105,000
$250,000................. $ 66,000 $ 88,000 $109,000 $131,000 $153,000 $175,000
$350,000................. $ 92,000 $123,000 $153,000 $184,000 $214,000 $245,000
$450,000................. $118,000 $158,000 $197,000 $236,000 $276,000 $315,000
$550,000................. $144,000 $193,000 $241,000 $289,000 $337,000 $385,000
$650,000................. $171,000 $228,000 $284,000 $341,000 $398,000 $455,000
$750,000................. $197,000 $263,000 $328,000 $394,000 $459,000 $525,000
$850,000................. $223,000 $298,000 $372,000 $446,000 $521,000 $595,000
</TABLE>
The Company's General Retirement Plan provides participants benefits after
five years of service based on the average salary (the term salary being equal
to the amounts contained in the Salary column of the Summary Compensation
Table) for the final three years of employment and years of credited service
under the Plan at time of retirement. Normal retirement under the Plan is at
age 65. Plan benefits are subject to an offset for any Social Security
benefits. Benefits under the Plan may be reduced under certain provisions of
the Internal Revenue Code, as amended, and by salary deferrals under the
Company's deferred compensation plans (other than CODA contributions made
under the Savings Plan). Where any such limitations occur, the Company will
pay (as an operating expense) a retirement supplement to eligible executives
designed to maintain total retirement benefits at a
7
<PAGE>
formula level of the Plan. In order to attract and retain executives, the
Company provides supplemental retirement benefits for executives who retire
under the terms of the General Retirement Plan and are at least 59 years of
age, which supplement the average salary by adding the average of the highest
three annual incentive awards in the last five consecutive years. The annual
incentive amounts are equal to the amounts shown in the Bonus column of the
Summary Compensation Table. The current age, years of credited service and
compensation used to determine retirement benefits (including supplemental
benefits) for the above-named officers are as follows: Mr. Mitchell, 66 and 40
years of credit, $839,546; Mr. Derrick, 57 and 36 years of credit, $532,532;
Mr. Wraase, 53 and 28 years of credit, $308,227; Mr. Torgerson, 53 and 28
years of credit, $285,821; and Mr. Williams, 48 and 23 years of service,
$237,434. Annual benefits at age 65 (including the effect of the Social
Security offset) are illustrated in the table above.
EMPLOYMENT AGREEMENTS
An employment agreement between the Company and Mr. Mitchell provides for
his continued employment as Chairman of the Company until May 1, 1998 at an
annual salary determined by the Board of Directors. The agreement provides for
a supplemental retirement benefit payable to Mr. Mitchell (or his surviving
spouse) for a
period of not less than ten years in an amount equal to the excess of 65% of
his final average annual compensation (based upon salary paid or deferred
during his final 12 months of employment and the target annual award during
his last year of employment) over the benefits to which he is entitled under
the Company's General Retirement Plan. The employment agreement also provides
for certain additional spouse benefits, and for the provision by the Company
of supplemental life insurance for Mr. Mitchell following his retirement.
Messrs. Derrick, Torgerson and Wraase have entered into employment
agreements with the Company that provide for each executive's employment
through August 1, 2000, and that automatically extend for successive periods
of five years thereafter unless the Company or the executive has given one
year's prior notice that it shall not be so extended. Each of the employment
agreements provides that the executive (i) will receive an annual base salary
in an amount not less than his salary in effect as of August 1, 1995, and
incentive compensation as determined by the Company's Board and (ii) will be
entitled to participate in retirement and other benefit plans, and receive
fringe benefits, on the same basis as other senior executives of the Company.
Under each of the employment agreements with Messrs. Derrick, Torgerson and
Wraase, the executive is entitled to certain benefits if his employment is
terminated prior to the expiration of the initial term of the agreement (or as
extended) either (i) by the Company other than for cause, death or disability
or (ii) by the executive if his salary is reduced, he is not in good faith
considered for incentive awards, the Company fails to provide him with
retirement, other benefit plans and fringe benefits provided to other
similarly situated executives, he is required to relocate by more than 50
miles from Washington, D.C., or he is demoted from a senior management
position. These benefits include a lump sum payment in cash equal to the sum
of (i) the greater of (A) the present value of the executive's annual base
salary (the highest base salary in effect during the three-year period
preceding termination) and annual cash incentive awards (calculated based on
the highest annual incentive target award during the three-year period
preceding termination) through the remainder of the agreement (not to exceed
three years) or (B) two times the executive's annual salary and target annual
incentive award as in effect at the time of termination, (ii) the executive's
annual cash incentive award for the year preceding termination of employment,
if not yet paid, and (iii) a pro rata portion of the executive's annual cash
incentive award for the year in which the executive's employment terminates.
In addition, the executive will be entitled to receive certain supplemental
retirement benefits under existing plans of the Company, the same benefits
that a retiree who has attained age 55 and has completed 30 years of service
would be entitled, and a continuation of premium payments under the Company's
split dollar life insurance policy.
8
<PAGE>
Mr. Williams has entered into a Severance Agreement which has an initial
term until August 1, 1998 and automatically extends for successive three-year
periods thereafter, unless the Chief Executive Officer of the Company (or a
successor company) has given notice that it shall not be so extended. The
Severance Agreement provides for the payment of severance benefits to the
executive if, within two years following a change in control of the Company,
any of the following events occur: (i) termination of the employment of the
executive by the Company (or a successor company), other than for cause,
death, disability or voluntary normal retirement; (ii) termination of
employment by the executive for "good reason," defined as the assignment of
duties materially inconsistent with the executive's duties prior to a change
in control or a material reduction or alteration of his duties, a reduction in
the executive's salary or relocation of the executive by more than 50 miles;
(iii) the failure or refusal by a successor company to assume the Company's
obligations under the agreement; or (iv) a material breach of the agreement by
the Company (or a successor company). In addition, the executive is entitled
to severance benefits upon (i) the termination of the executive's employment
without cause "in contemplation of," but prior to, a change in control or (ii)
the occurrence of an event, "in contemplation of," but prior to a change in
control, constituting "good reason" followed by the executive's voluntary
termination of employment within two years after a change in control.
The severance benefits consist of: (i) an amount in cash equal to two times
the executive's annual base salary (in effect at the time of termination) and
annual bonus (average of annual target bonuses during the three years prior to
termination) paid in 24 equal monthly installments and (ii) certain welfare
benefits for a three-year period after the date of termination. If the
foregoing benefits, when taken together with any other payments to the
executive, result in the imposition of the excise tax on excess parachute
payments and the loss of a tax deduction to the Company (or a successor
company), and the net after-tax benefits to the executive attributable to the
severance payment would not exceed by $10,000 or more the net after-tax
benefits accruing to the executive if he was paid the maximum amount that
would not trigger the excise tax, then the severance benefits and benefits
payable under other plans will be reduced to the maximum amount that would not
trigger the excise tax.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors is composed entirely
of independent, non-employee directors. The Committee's role includes review
of the performance of elected officers and other executives in connection with
executive compensation programs designed to provide a strong and direct link
between compensation, executive performance and the current and long-term
level of Company performance. The Committee recommends specific officer
salaries to the Board of Directors. The Committee also establishes and
recommends to the Board performance guidelines under the Executive Incentive
Compensation Plan, approves payments made pursuant to that Plan and recommends
the structure of compensation and amounts of awards under the Long-Term
Incentive Plan. The Committee also reviews other elements of compensation and
benefits, making recommendations to the Board as appropriate. The Committee
carries out these responsibilities with assistance from consulting firms and
with such input from the Chief Executive Officer and management as it deems
appropriate.
Officer Compensation Philosophy
The Company's compensation philosophy reflects a commitment to attract and
retain key executives with a program which compensates executive officers
competitively with other companies in the industry while rewarding executives
for achieving levels of operational excellence and financial results which
result in growth in shareholder value. The Company's compensation policy is to
provide a total compensation opportunity comparable to the median compensation
levels of the companies which comprised the Salomon Brothers Electric
Utilities index, at
9
<PAGE>
the time it was last published, which index has been replicated by the Company
(the "Index"). The relationship between pay and performance is reinforced by
aligning the peer group used for compensation comparison purposes with the
same industry peer group used for purposes of comparing total shareholder
return.
The compensation program for officers consists of base salary, annual
incentive and, for senior officers, long-term incentive components. The
combination of these three elements balances short- and long-term business
performance goals and aligns officer financial rewards with Company operating
results and shareholder return. Total compensation for any specific year may
be above the median for the peer group in the event performance exceeds goals,
or below the median if performance falls short of goals.
Annual incentive awards are earned based on the Company's financial and
operational plans and results, including annual earnings. Prior to January 1,
1997, long-term incentive awards had been in the form of shares of Company
stock (Restricted Shares) which will be awarded at the end of each three-year
cycle based upon meeting pre-established goals based on relative shareholder
return. Restricted Shares, if any, awarded under the long-term incentive
program will vest on the basis of continued service (with provision for
immediate vesting in the event of death, disability or retirement). As
reported on page 7 herein, a performance cycle covering the years 1997 through
1999 was approved during 1997 with awards, if any, to be determined in 2000.
The Plan was changed to a Performance Share plan rather than Restricted Stock
since the Company's Long-Term Incentive Plan provided that no additional
restricted stock awards could be made after July 1, 1996. The new Plan will
pay in cash at the end of the performance cycle amounts earned during the
performance period. The officer compensation program is structured so that
between 36 and 48 percent of the total compensation opportunity consists of
incentive compensation.
The Omnibus Budget Reconciliation Act of 1993 included a provision limiting
the deductibility of certain executive compensation. For 1997, all
compensation earned by the Company's five highest paid officers was completely
deductible. In the future the Committee will, considering the best interests
of the Company and its shareholders, use its best judgment to continue the
complete tax deductibility of the compensation paid to its officers.
Officer Salaries
The Committee determines base salary ranges for executive officers based
upon competitive pay practices. Officer salaries correspond to approximately
the median of the companies in the Index. Mr. Mitchell, who served as Chief
Executive Officer until October 23, 1997, was awarded a 9.7% salary increase
on March 1, 1997 after the Committee's compensation assessment within the
philosophy and framework outlined above and in consideration of the Company's
performance in 1996. Mr. Derrick was elected Chief Executive Officer effective
October 23, 1997 and no salary adjustment was made to reflect this change in
responsibilities.
Executive Incentive Compensation Plan
In 1983 the Board of Directors established the Executive Incentive
Compensation Plan for Company officers and senior executives. Under the plan
guidelines, awards for the Chairman, Vice Chairman and President are based
upon the Company's progress in achieving plan goals; awards for other officers
are based on a combination of corporate goals and individual goals established
at the beginning of the year. No awards for performance in 1997 were made.
Long-Term Incentive Plan
In 1991 the Board of Directors adopted an Executive Restricted Stock
Performance Award Program pursuant to the Long-Term Incentive Plan.
10
<PAGE>
The fourth performance cycle under the Executive Restricted Stock
Performance Award Program covered the three-year period 1995 through 1997. The
maximum shares available for award were determined at the beginning of the
cycle, based upon the year-end 1994 market price of Company stock and each
participant's salary at that date, and provision was made for increasing such
maximum available shares by the addition of shares for the reinvestment of
dividends on Company stock. In January 1998 the Performance Cycle 4 award
formula was applied and awards were made to eligible participants. Pursuant to
the formula, shares awarded were based upon two equally weighted measures of
the Company's relative ranking among the companies comprising the Index over
the three-year cycle: (1) total shareholder return and (2) market-to-book
ratio. For the three-year cycle, the total shareholder return for the Company
ranked 30th in shareholder return for the 62 companies comprising the Index,
resulting in 56% of the maximum award for this measure. For the three-year
cycle, the Company's average market-to-book ratio rank was 31st compared to
the 64 companies comprising the Index, resulting in 53.3% of the maximum award
for this measurement. As a result, pursuant to the plan formula, Mr. Mitchell
was awarded 15,353 shares, or 54.7% of his total award potential. Mr. Derrick
was awarded 9,596 shares, or 54.7% of his total award potential. Subject to
the participants' continued employment, 50% of the shares earned for the 1995
through 1997 cycle will vest on January 1, 1999 and the remaining 50% will
vest on January 1, 2000.
HUMAN RESOURCES COMMITTEE
A. James Clark, Chairman
Richard E Marriott
David O. Maxwell
Ann D. McLaughlin
Peter F. O'Malley
PERFORMANCE PRESENTATION
The following chart compares PEPCO's five year cumulative total return to
shareholders consisting of the change in stock price and reinvestment of
dividends with the five year cumulative total return on the Salomon Brothers
Electric Utilities index, the EEI 100 Index of Investor-owned Electrics and
the Dow Jones Utilities index.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Salomon Dow
Measurement Period Brothers Jones EEI 100
(Fiscal Year Covered) PEPCO Electric Utilities Index
- --------------------- --------------- --------- ---------- -------
<S> <C> <C> <C> <C>
Measurement Pt-12/31/1992 $100 $100 $100 $100
FYE 12/31/1993 $119 $112 $113 $111
FYE 12/31/1994 $ 89 $ 98 $ 97 $ 98
FYE 12/31/1995 $137 $129 $129 $129
FYE 12/31/1996 $143 $130 $130 $130
FYE 12/31/1997 $153 $165 $165 $166
</TABLE>
11
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Company appointed Price Waterhouse LLP as
Independent Public Accountants for the Company for the year 1997 and, upon
recommendation of the Audit Committee of the Board, has reappointed the firm
for 1998. A representative of Price Waterhouse LLP is expected to attend the
Annual Meeting and will be given the opportunity to make a statement and to
respond to appropriate questions.
2. LONG-TERM INCENTIVE PLAN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 2.
The Board of Directors of the Company (the "Board") has adopted a Long-Term
Incentive Plan (the "Plan" or "LTIP") for key employees (including officers)
and directors of the Company and its subsidiaries, subject to approval by the
affirmative vote of the holders of a majority of the number of shares of
Common Stock present in person or by proxy at the meeting. The Company's
former Long-Term Incentive Plan provided that no additional awards could be
made after July 1, 1996.
The continuing growth and development and financial success of the Company and
its subsidiaries are dependent upon ensuring the best possible management. The
Board believes the Plan will be an important aid to the Company in attracting
and retaining individuals of outstanding abilities and in rewarding them for
the continued profitable performance of the Company and its subsidiaries. A
summary of the principal provisions of the Plan is set forth below. Please
read this information in conjunction with the full text of the Plan, which is
attached as Appendix 1 to this Proxy Statement.
OBJECTIVE
The objective of the LTIP is to increase shareholder value by providing a
long-term incentive to reward officers, key employees and directors of the
Company and its subsidiaries for the profitable performance of the Company and
its subsidiaries, and to increase the ownership of Common Stock by such
individuals.
SHARES AVAILABLE UNDER THE PLAN
The number of shares of Common Stock that may be granted to participants
under the proposed LTIP is 5,000,000. If an award lapses or the participant's
rights with respect to an award otherwise terminate, any shares of Common
Stock subject to such award will again be available for future awards under
the LTIP.
ADMINISTRATION
The LTIP will be administered by the Board. The LTIP gives the Board broad
authority to determine the persons to whom, and the times at which, awards
will be granted or lapse under the LTIP, the types of awards to be granted,
the number of shares of Common Stock to be covered by each award, and all
other terms and conditions for awards granted under the LTIP.
PARTICIPATION
Each officer or key employee of the Company or its subsidiaries designated
by the Board will be eligible to participate in the LTIP. Non-employee
directors will receive a non-qualified stock option for 1,000 shares of Common
Stock on or about May 1 of each year. Currently, approximately 14 officers, 14
other key employees and 9 directors of the Company would be eligible to
participate in the LTIP.
12
<PAGE>
AWARDS
Under the LTIP, the following types of awards may be granted from time to
time by the Board:
RESTRICTED STOCK. The Board may grant awards of Common Stock bearing
restrictions ("Restricted Stock") prohibiting a participant's transfer of the
Restricted Stock until the lapse of a restriction period. No consideration is
payable by the participant as a result of the grant. The Board may establish
the terms and conditions of each grant, including the restriction period
(which will be not less than one and not more than 10 years), whether
dividends will be paid currently or accumulated and the form of any dividend
payment, and may also condition the awards on the completion of a specified
period of service or on attainment, during a performance period established by
the Board, of one or more performance objectives established by the Board.
Performance objectives, which may vary from participant to participant, are
determined by the Board and may include, but are not limited to, the
performance of the participant, the Company, one or more of its subsidiaries,
or any combination thereof. On completion of the restriction period and
attainment of any performance objectives, the restrictions will expire with
respect to one or more shares of Restricted Stock. If target performance
objectives are exceeded, the Board may award additional Common Stock to a
participant.
OPTIONS. The Board may grant either incentive stock options ("ISO") that are
qualified under Section 422 of the Code or options not intended to qualify
under Section 422 of the Code ("Nonqualified Options"). No consideration is
payable by the participant as a result of the grant. The Board may establish
the terms and conditions of each grant; PROVIDED, HOWEVER, that an option to
purchase a share of Common Stock may not be granted with an exercise price of
less than 100% of the fair market value of a share of Common Stock on the
grant date. Further, the period during which the options are exercisable will
not exceed 10 years from the date of grant. In the Board's discretion, the
exercise price may be paid in cash, shares of Common Stock, or both.
PERFORMANCE UNITS. The Board may make performance awards payable in cash,
Common Stock or both, upon attainment during a performance period established
by the Board, of one or more performance objectives established by the Board.
Performance objectives, which may vary from participant to participant, are
determined by the Board and may include, but are not limited to, the
performance of the participant, the Company, one or more of its subsidiaries,
or any combination thereof.
STOCK APPRECIATION RIGHTS. The Board may grant awards of stock appreciation
rights in conjunction with an option or as a separate award. No consideration
is payable by the participant as a result of the grant. The Board may
establish the terms and conditions of each grant; PROVIDED, HOWEVER, the
period during which the rights are exercisable may not exceed 10 years.
Stock appreciation rights provide the right to receive a payment in cash,
Common Stock, or both in the Board's discretion. If a grant is in conjunction
with an option, the option must be surrendered, and the amount of the payment
will be determined, in the Board's sole discretion, based on (i) the excess of
the fair market value of the Common Stock at the date of exercise over the
option price or (ii) the excess of the book value of the Common Stock at the
date of exercise over the book value of the Common Stock at the date the
underlying option was granted. If a grant is not in conjunction with an
option, the payment will be determined, in the Board's sole discretion, based
on (i) the excess of the fair market value of the Common Stock at the date of
exercise over the fair market value of the Common Stock at the date of grant
of the stock appreciation right or (ii) the excess of the book value of the
Common Stock at the date of exercise over the book value of the Common Stock
at the date of grant of the stock appreciation right.
13
<PAGE>
DIVIDEND EQUIVALENTS. The Board may grant awards of dividend equivalents in
conjunction with an option, a separately awarded stock appreciation right,
performance units or awards of additional Common Stock if performance-based
Restricted Stock target performance objectives are exceeded. No consideration
is payable by the participant as a result of the grant. Each dividend
equivalent entitles the participant to receive an amount, at such times and in
a form and manner in the Board's discretion, equal to the dividend actually
paid with respect to a share of Common Stock on each dividend payment date
from the date of grant until the dividend equivalent lapses. Dividend
equivalents will lapse at a date no later than the date the underlying award
lapses or is exercised.
ACCELERATED AWARD
If a participant is terminated as an employee or director or suffers a
dimunition of responsibility, authority, position or salary following a change
in control of the Company, a participant with an outstanding restricted stock
or performance unit award will be entitled to an accelerated, prorated payout,
and any outstanding option or stock appreciation right award will be
immediately exercisable. If the original award provided for payment in Common
Stock, any required payout will be made in Common Stock. For purposes of the
LTIP, the term "change in control" means (i) the purchase or acquisition by
any person, entity or group of persons (within the meaning of Section 13(d) or
14(d) of the Exchange Act, or any comparable successor provisions), of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 30% or more of the combined voting power of the Company's
then outstanding shares of voting securities, or (ii) the approval by the
shareholders of the Company of a merger or consolidation with respect to which
persons who were shareholders of the Company immediately prior to such merger
or consolidation do not, immediately thereafter, own more than 70% of the
combined voting power of the merged or consolidated entity's then outstanding
securities, or (iii) a liquidation of the Company or the sale of substantially
all of its assets, or (iv) within a 24-month period, a change of more than
one-half of the members of the Board whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote of at least
2/3 of the directors who were directors at the beginning of the period or
whose election or nomination was previously so approved.
TAX WITHHOLDING
The Company or its subsidiaries may withhold any applicable federal, state
or local taxes upon payment under an award. Subject to any applicable law, if
payment under an award is to be made in Common Stock, the Board may in its
discretion permit or require a participant to satisfy any withholding or other
taxes payable through (i) the payment of cash by the participant to the
Company or its subsidiaries, (ii) the retention by the Company or its
subsidiaries of shares of Common Stock or (iii) the delivery by the
participant to the Company or its subsidiaries of Common Stock owned by the
participant. Special rules apply to participants subject to the reporting
requirements of Section 16(a) of the Exchange Act.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of an award under the LTIP depend on the
type of award, as discussed below:
RESTRICTED STOCK. The grant of Restricted Stock does not result in taxable
income to a participant or a tax deduction for the Company. At the time the
restrictions expire, however, a participant will realize ordinary taxable
income in an amount equal to the fair market value of the Common Stock on the
date the restrictions expire, and the Company will be entitled to a
corresponding deduction. In addition, during or after the restriction period
(depending on whether the dividends are paid to the individuals or
accumulated), a participant will be taxed on the dividends paid with respect
to Restricted Stock as compensation, and the Company will be entitled to a
corresponding deduction.
14
<PAGE>
INCENTIVE STOCK OPTIONS. ISOs under the Plan are intended to meet the
requirements of Section 422 of the Code. The grant of an ISO does not result
in taxable income to the participant or a tax deduction for the Company. The
exercise of an ISO will not result in ordinary taxable income to the
participant (although the difference between the exercise price and the fair
market value of the Common Stock subject to the option may result in
alternative minimum tax liability to the participant) and the Company will not
be allowed a deduction at any time in connection with such award, if the
following conditions are met: (i) at all times during the period beginning
with the date of grant and ending on the day three months before the date of
exercise, the participant is an employee of the Company or of a subsidiary;
and (ii) the participant makes no disposition of Common Stock within two years
from the date of grant nor within one year after the Common Stock is
transferred to the participant. The three-month period is extended to one year
in the event of disability and is waived in the event of death of the
participant. If the Common Stock is sold by the participant after meeting
these conditions, any gain realized over the exercise price ordinarily will be
treated as long-term capital gain, and any loss will be treated as long-term
capital loss, in the year of the sale.
If the participant fails to comply with the employment or holding period
requirements discussed above, the participant will recognize ordinary taxable
income in an amount equal to the lesser of (i) the excess of the fair market
value of the Common Stock on the date of exercise over the exercise price or
(ii) the excess of the amount realized upon such disposition over the exercise
price. If the participant realizes ordinary taxable income on account of such
a disqualifying disposition (described above), a corresponding deduction will
be allowed to the Company for the same year.
NONQUALIFIED STOCK OPTIONS. The grant of a Nonqualified Option does not
result in taxable income to the participant or a tax deduction for the
Company. Upon exercise of a nonqualified stock option, the participant will
realize compensation taxable as ordinary income in an amount equal to the
difference between the exercise price and the fair market value of the Common
Stock on the date of exercise, and the Company will be entitled to a
corresponding deduction for the same year. The participant's basis in such
shares will be the fair market value on the date income is realized, and when
the participant disposes of the shares he or she will recognize capital gain
or loss, either long-term or short-term, depending on the holding period of
the shares.
STOCK APPRECIATION RIGHTS. The grant of a stock appreciation right does not
result in taxable income to the participant or a tax deduction for the
Company. Upon exercise of a stock appreciation right, the participant will
realize ordinary taxable income in an amount equal to the excess of the fair
market value of the Common Stock or cash received over any amount paid by the
participant upon exercise, and the Company will be entitled to a corresponding
deduction for the same year.
PERFORMANCE UNITS. The grant of a performance unit does not result in
taxable income to the participant or a tax deduction for the Company. Upon the
expiration of the applicable award cycle and receipt of the Common Stock
distributed in payment of the award or an equivalent amount of cash, the
participant will realize ordinary taxable income equal to the full fair market
value of the shares delivered or the amount of cash paid. At that time, the
Company generally will be allowed a corresponding tax deduction equal to the
compensation taxable to participant.
Accounting principles require that restricted share awards be charged
against earnings on a pro rata basis over the restriction period and will be
based on the value of the stock at the date of grant. Under the terms of the
LTIP, the granting of ISOs or Nonqualified Options, without accompanying stock
appreciation rights, will not require a charge against earnings. The granting
of stock appreciation rights, however, will require that earnings be charged
over the specified award period for any appreciation in the value of the
underlying stock subsequent to the date of grant.
15
<PAGE>
PLAN BENEFITS
It cannot be determined at this time what benefits or amounts, if any, would
be received by or allocated to any key employee or officer under the LTIP if
it is adopted. All such determinations would be made by the Board in the
future pursuant to its authority to administer the Plan.
Approval of the Plan requires approval by the holders of a majority of the
shares of Common Stock of the Company present in person or by proxy and
entitled to vote at the meeting. Abstentions and broker non-votes will be
deemed present and entitled to vote but will not be counted as a vote either
for or against this proposal. If no voting instructions are given, a properly
executed proxy will be voted for this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF
THIS PLAN, SET FORTH AS ITEM 2 ON THE PROXY.
3. SHAREHOLDER PROPOSAL
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEM 3.
Mrs. Evelyn Y. Davis, Watergate Office Building, Suite 215, 2600 Virginia
Avenue, N. W., Washington, D.C. 20037, who on the Record Date was the record
holder of 200 shares of the Company's Common Stock, has notified the Company
of her intention to present the following proposal for action at the meeting:
RESOLVED: "That the shareholders of PEPCO recommend that the Board of
Directors take the necessary steps to reinstate the election of directors
ANNUALLY, instead of the staggered system which was recently adopted."
The following statement has been supplied by the shareholder submitting this
proposal:
REASONS: "Until recently, directors of PEPCO were elected annually by all
shareholders."
"The great majority of New York Stock Exchange listed corporations elect all
their directors each year."
"This insures that ALL directors will be more accountable to ALL
shareholders each year and to a certain extent prevents the self-perpetuation
of the Board."
"Last year the owners of 28,159,771 shares, representing 33.7% of shares
voting, voted FOR this proposal."
"If you AGREE, please mark your proxy FOR this resolution."
END OF SUPPORTING STATEMENT
16
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THE ADOPTION OF
THIS PROPOSAL, SET FORTH AS ITEM 3 ON THE PROXY.
Mrs. Davis has submitted this proposal at each of the Company's last nine
Annual Meetings. In each instance, the proposal was defeated.
The Board of Directors believes that this proposal is not in the best
interests of the Company and its shareholders. The Board believes that the
present system which has been in place since 1987, providing for the election
of directors for three-year terms on a staggered basis rather than one-year
terms, has enhanced the continuity and stability in the composition of and in
the policies formulated by the Company's Board of Directors. The Board also
believes that this, in turn, has permitted it to represent more effectively
the interests of all shareholders.
In order to be adopted, the shareholder proposal requires the vote of the
holders of a majority of the shares of Common Stock present and entitled to
vote at a meeting of shareholders at which a quorum is present. Abstentions
and broker non-votes will be deemed present and entitled to vote but will not
be counted as a vote either for or against this proposal. If no voting
instructions are given, a properly executed proxy will be voted against the
shareholder proposal.
4. SHAREHOLDER PROPOSAL
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEM 4.
Mr. John A. Coleman, 6514 Palisades Drive, Centreville, Virginia 22020, who
on the Record Date was the record holder of 400 shares of the Company's Common
Stock, has notified the Company of his intention to present the following
proposal for action at the meeting:
"BE IT RESOLVED: That the stockholders of Potomac Electric Power Co.
(PEPCO), ("Company"), assembled in annual meeting in person and by proxy,
hereby request that the Board of Directors to take the steps necessary to
provide for CUMULATIVE VOTING in the election of directors, which means each
stockholder shall be entitled to as many votes as shall equal the number
shares he or she owns, multiplied by the number of directors to be elected,
and he or she may cast all of such votes for a single candidate, or any two or
more candidates as he or she may see fit."
The following statement has been supplied by the shareholder submitting this
proposal:
SUPPORTING STATEMENT:
"Cumulative voting is one of the few ways stockholders can attempt to elect
members who they believe represent their views.
"Cumulative voting maximizes a stockholder's voting power by allowing him or
her to concentrate their votes for a single nominee or combination of
nominees. For example, PEPCO has a Classified Board, which means that only
four directors are elected in any given year. Without cumulative voting, the
owners of 13% of the company's stock do not have a realistic chance of
electing a director. They would only be able to cast their 13% for each
nominee. However, with cumulative voting, those same owners would be able to
actually elect a nominee by lumping all of their votes for that nominee.
"Even if dissident stockholders do not have enough votes to elect nominees,
cumulative voting ensures that management and the Board will consider their
views.
"WE URGE YOU TO VOTE FOR THIS PROPOSAL."
END OF SUPPORTING STATEMENT
17
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THE ADOPTION OF
THIS PROPOSAL, SET FORTH AS ITEM 4 ON THE PROXY.
The Board of Directors believes that this proposal is not in the best
interests of the Company and its shareholders. The Board supports the present
system, whereby directors of the Company are elected by majority vote.
Cumulative voting makes it possible for an individual or a group of
individuals to elect one or more directors who are more likely to focus on
narrow concerns and not on those of the Company as a whole. The proponent of
this proposal is the Vice President of Local 1900 of the International
Brotherhood of Electrical Workers which represents certain of the Company's
employees. The Board remains committed to the view that the present system of
voting for directors provides the best assurance that the decisions of the
directors will be in the best interest of the Company and all of its
shareholders, and not for the benefit of any one shareholder or group of
shareholders.
In order to be adopted, the shareholder proposal requires the vote of the
holders of a majority of the shares of Common Stock present and entitled to
vote at a meeting of shareholders at which a quorum is present. Abstentions
and broker non-votes will be deemed present and entitled to vote but will not
be counted as a vote either for or against this proposal. If no voting
instructions are given, a properly executed proxy will be voted against the
shareholder proposal.
RECEIPT OF SHAREHOLDER PROPOSALS
Shareholder proposals must be received by the Company by November 4, 1998
for inclusion in the proxy material for next year's Annual Meeting.
5. OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
The Board of Directors knows of no other matters which are likely to be
brought before the meeting. However, if any other matter should properly come
before the meeting, it is the intention of the individuals named in the
enclosed proxy to exercise the power conferred by the proxy to vote it in
accordance with their judgment on such matter.
----------------
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors and
regular employees of the Company personally, by telephone or by facsimile. The
Company will reimburse banks and brokers for certain costs incurred in
forwarding proxy materials to beneficial owners.
18
<PAGE>
APPENDIX 1
POTOMAC ELECTRIC POWER COMPANYLONG-TERM INCENTIVE PLAN
1. OBJECTIVE. The objective of this Plan is to increase shareholder value by
providing a long-term incentive to reward officers, key employees, and
Directors of the Company and its Subsidiaries, who are mainly responsible for
the continued growth, development, and financial success of the Company and
its Subsidiaries, for the profitable performance of the Company and its
Subsidiaries. The Plan is also designed to permit the Company and its
Subsidiaries to retain talented and motivated officers, key employees, and
Directors and to increase their ownership of Company common stock.
2. DEFINITIONS. All singular terms defined in this Plan will include the
plural and VICE VERSA. As used herein, the following terms will have the
meaning specified below:
"Award" means, individually or collectively, Restricted Stock, Options,
Performance Units, Stock Appreciation Rights, or Dividend Equivalents
granted under this Plan.
"Board" means the Board of Directors of the Company.
"Book Value" means the book value of a share of Stock determined in
accordance with the Company's regular accounting practices as of the last
business day of the month immediately preceding the month in which a Stock
Appreciation Right is exercised as provided in Section 10.
"Code" means the Internal Revenue Code of 1986, as amended. Reference in
the Plan to any section of the Code will be deemed to include any
amendments or successor provisions to such section and any regulations
promulgated thereunder.
"Company" means Potomac Electric Power Company, a District of Columbia and
a Virginia corporation, or its successor, including any "New Company" as
provided in Section 14I.
"Date of Grant" means the date on which the granting of an Award is
authorized by the Board or such later date as may be specified by the Board
in such authorization.
"Date of Retirement" means the date of Retirement or Early Retirement
applicable to a Participant.
"Director" means a member of the Board.
"Disability" means the determination that a Participant is "disabled" under
the Company disability plan in effect at that time.
"Dividend Equivalent" means an award granted under Section 11.
"Early Retirement" means retirement prior to the Normal Retirement Date.
A-1
<PAGE>
"Earned Performance Award" means an actual award of a specified number of
Performance Units (or shares of Restricted Stock, as the context requires)
which the Board has determined have been earned and are payable (or, in the
case of Restricted Stock, earned and with respect to which restrictions
will lapse) for a particular Performance Period.
"Eligible Employee" means any person employed by the Company or a
Subsidiary on a regularly scheduled basis who satisfies all of the
requirements of Section 5.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Period" means the period or periods during which a Stock
Appreciation Right is exercisable as described in Section 10.
"Fair Market Value" means the average of the highest and lowest price at
which the Stock was sold the regular way on the New York Stock Exchange-
Composite Transactions on a specified date.
"Incentive Stock Option" means an incentive stock option within the meaning
of Section 422 of the Code.
"Normal Retirement Date" is the earliest date as described in the Pension
Plan when a Participant is entitled to an unreduced retirement benefit
under such plan.
"Option" or "Stock Option" means either a nonqualified stock option or an
incentive stock option granted under Section 8.
"Option Period" or "Option Periods" means the period or periods during
which an Option is exercisable as described in Section 8.
"Participant" means an employee or Director of the Company or a Subsidiary
who has been granted an Award under this Plan.
"Pension Plan" means the applicable qualified or nonqualified retirement or
pension plan of the Company or its Subsidiaries as may be amended from time
to time which covers the Participant.
"Performance-Based" means that in determining the amount of a Restricted
Stock Award payout, the Board will take into account the performance of the
Participant, the Company, one or more Subsidiaries, or any combination
thereof.
"Performance Period" means a period of time, established by the Board at
the time an Award is granted, during which corporate and/or individual
performance is measured.
"Performance Unit" means a unit of measurement equivalent to such amount or
measure as defined by the Board which may include, but is not limited to,
dollars, market value shares, or book value shares.
"Plan" means the Potomac Electric Power Company Long-Term Incentive Plan as
set forth herein.
"Reporting Person" means a Participant who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
"Restricted Stock" means an Award granted under Section 7.
A-2
<PAGE>
"Retirement" means retirement on or after the "Normal Retirement Date" (as
such term is defined in the Pension Plan or a Subsidiary's retirement or
pension plan).
"Service-Based" means that in determining the amount of a Restricted Stock
Award payout, the Board will take into account only the period of time that
the Participant performed services for the Company or its Subsidiaries
since the Date of Grant.
"Stock" means the common stock of the Company.
"Stock Appreciation Right" means an Award granted under Section 10.
"Subsidiary(ies)" means any corporation of which 20% or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
"Target Performance Award" means a targeted award of a specified number of
Performance Units (or shares of Restricted Stock, as the context requires)
which may be earned and payable (or, in the case of Restricted Stock,
earned and with respect to which restrictions will lapse) based upon the
performance objectives for a particular Performance Period, all as
determined by the Board. The Target Performance Award will be a factor in
the Board's ultimate determination of the Earned Performance Award.
"Termination" means resignation or discharge as a Director or resignation
or discharge from employment with the Company or any of its Subsidiaries
except in the event of death, Disability, Retirement or Early Retirement.
3. EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL.
A. EFFECTIVE DATE AND STOCKHOLDER APPROVAL. Subject to the approval of the
Plan by a majority of the outstanding shares of common stock of Potomac
Electric Power Company voted in person or by proxy at the 1998 meeting of its
stockholders, the Plan will be effective May 1, 1998.
B. PERIOD FOR GRANTS OF AWARDS. Awards may be made as provided herein for a
period of 10 years after May 1, 1998.
C. TERMINATION. The Plan will continue in effect until all matters relating
to the payment of outstanding Awards and administration of the Plan have been
settled.
4. PLAN ADMINISTRATION. The Board is the Plan Administrator and has sole
authority (except as specified otherwise herein) to determine all questions of
interpretation and application of the Plan, or of the terms and conditions
pursuant to which Awards are granted, exercised or forfeited under the Plan
provisions, and, in general, to make all determinations advisable for the
administration of the Plan to achieve its stated objective. Such
determinations shall be final and not subject to further appeal.
5. ELIGIBILITY. Each officer or key employee of the Company and its
Subsidiaries (including officers or employees who are members of the Board,
but excluding directors who are not officers or employees) may be designated
by the Board as a Participant, from time to time, with respect to one or more
Awards. In addition, each Director who is not an employee may be granted
options under Section 8 of the Plan which are non-qualified stock options. No
officer or employee of the Company or its Subsidiaries shall have any right to
be granted an Award under this Plan.
A-3
<PAGE>
6. GRANT OF AWARDS AND LIMITATION OF NUMBER OF SHARES AWARDED. The Board
may, from time to time, grant Awards to one or more Eligible Employees and may
grant awards in the form of non-qualified stock options to Directors, provided
that (i) subject to any adjustment pursuant to Section 14H, the aggregate
number of shares of Stock subject to Awards under this Plan may not exceed
five million (5,000,000) shares; (ii) to the extent that an Award lapses or
the rights of the Participant to whom it was granted terminate, any shares of
Stock subject to such Award shall again be available for the grant of an Award
under the Plan; and (iii) shares delivered by the Company under the Plan may
be authorized and unissued Stock, Stock held in the treasury of the Company,
or Stock purchased on the open market (including private purchases) in
accordance with applicable securities laws.
7. RESTRICTED STOCK AWARDS.
A. GRANTS OF RESTRICTED SHARES. One or more shares of Restricted Stock may
be granted to any Eligible Employee. The Restricted Stock will be issued to
the Participant on the Date of Grant without the payment of consideration by
the Participant. The Restricted Stock will be issued in the name of the
Participant and will bear a restrictive legend prohibiting sale, transfer,
pledge or hypothecation of the Restricted Stock until the expiration of the
restriction period.
The Board may also impose such other restrictions and conditions on the
Restricted Stock as it deems appropriate, and will designate the grant as
either a Service-Based or Performance-Based Award.
Upon issuance to the Participant of the Restricted Stock, the Participant
will have the right to vote the Restricted Stock, and subject to the Board's
discretion, to receive the cash dividends distributable with respect to such
shares, with such dividends treated as compensation to the Participant. The
Board, in its sole discretion, may direct the accumulation and payment of
distributable dividends to the Participant at such times, and in such form and
manner, as determined by the Board.
B. SERVICE-BASED AWARD.
i. RESTRICTION PERIOD. At the time a Service-Based Restricted Stock Award is
granted, the Board will establish a restriction period applicable to such
Award which will be not less than one year and not more than ten years. Each
Restricted Stock Award may have a different restriction period, at the
discretion of the Board.
ii. FORFEITURE OR PAYOUT OF AWARD. In the event a Participant ceases
employment during a restriction period, a Restricted Stock Award is subject to
forfeiture or payout (i.e., removal of restrictions) as follows: (a)
Termination--the Restricted Stock Award is completely forfeited; (b)
Retirement, Disability or death--payout of the Restricted Stock Award is
prorated for service during the period; or (c) Early Retirement--if at the
Participant's request, the payout or forfeiture of the Restricted Stock Award
is determined at the discretion of the Board, or if at the Company's request,
payout of the Restricted Stock Award is prorated for service during the
period; provided, however, that the Board may modify the above if it
determines in its sole discretion that special circumstances warrant such
modification.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period, all Award restrictions will
expire and new certificates representing the Award will be issued (the payout)
without the restrictive legend described in Section 7A.
A-4
<PAGE>
C. PERFORMANCE-BASED AWARD.
i. RESTRICTION PERIOD. At the time a Performance-Based Restricted Stock
Award is granted, the Board will establish a restriction period applicable to
such Award which will be not less than one year and not more than ten years.
Each Restricted Stock Award may have a different restriction period, at the
discretion of the Board. The Board will also establish a Performance Period.
ii. PERFORMANCE OBJECTIVES. The Board will determine, no later than 90 days
after the beginning of each Performance Period, the performance objectives for
each Participant's Target Performance Award and the number of shares of
Restricted Stock for each Target Performance Award that will be issued on the
Date of Grant. Performance objectives may vary from Participant to Participant
and will be based upon such performance criteria or combination of factors as
the Board deems appropriate, which may include, but not be limited to, the
performance of the Participant, the Company, one or more Subsidiaries, or any
combination thereof. Performance Periods may overlap and Participants may
participate simultaneously with respect to Performance-Based Restricted Stock
Awards for which different Performance Periods are prescribed.
If, during the course of a Performance Period, significant events occur as
determined in the sole discretion of the Board, which the Board expects to
have a substantial effect on a performance objective during such period, the
Board may revise such objective.
iii. FORFEITURE OR PAYOUT OF AWARD. As soon as practicable after the end of
each Performance Period, the Board will determine whether the performance
objectives and other material terms of the Award were satisfied. The Board's
determination of all such matters will be final and conclusive.
As soon as practicable after the later of (i) the date the Board makes the
above determination, or (ii) the completion of the restriction period, the
Board will determine the Earned Performance Award for each Participant. Such
determination may result in forfeiture of all or some shares of Restricted
Stock (if Target Performance Award performance objectives were not attained),
or the issuance of additional shares of Stock (if Target Performance Award
performance objectives were exceeded), and will be based upon such factors as
the Board determines in its sole discretion, but including the Target
Performance Award performance objectives.
In the event a Participant ceases employment during a restriction period,
the Restricted Stock Award is subject to forfeiture or payout (i.e., removal
of restrictions) as follows: (a) Termination -- the Restricted Stock Award is
completely forfeited; (b) Retirement, Disability or death -- payout of the
Restricted Stock Award is prorated taking into account factors including, but
not limited to, service during the period and the performance of the
Participant during the portion of the Performance Period before employment
ceased; or (c) Early Retirement -- if at the Participant's request, the payout
or forfeiture of the Restricted Stock Award is determined at the discretion of
the Board, or if at the Company's request, payout of the Restricted Stock
Award is prorated taking into account factors including, but not limited to,
service during the period and the performance of the Participant during the
portion of the Performance Period before employment ceased; provided, however,
that the Board may modify the above if it determines in its sole discretion
that special circumstances warrant such modification.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
With respect to shares of Restricted Stock for which restrictions lapse, new
certificates will be issued (the payout) without the restrictive legend
described in Section 7A. New certificates will also be issued for additional
Stock, if any, awarded to the Participant because Target Performance Award
performance objectives were exceeded.
D. WAIVER OF SECTION 83(B) ELECTION. Unless otherwise directed by the Board,
as a condition of receiving an Award of Restricted Stock, a Participant must
waive in writing the right to make an election under Section 83(b) of the Code
to report the value of the Restricted Stock as income on the Date of Grant.
A-5
<PAGE>
8. STOCK OPTIONS.
A. GRANTS OF OPTIONS. One or more Options may be granted to any Eligible
Employee or Director on the Date of Grant without the payment of consideration
by the Participant. In no event will the number of shares with respect to all
options granted in a single calendar year to any one individual who is a
"covered employee" as defined in Section 162(m) of the Code exceed 250,000. In
addition, unless prospectively modified by the Board, each year each Director
will receive on or about May 1, commencing May 1, 1998 a non-qualified stock
option related to 1,000 shares of stock.
B. STOCK OPTION AGREEMENT. Each Option granted under the Plan will be
evidenced by a "Stock Option Agreement" between the Company and the
Participant containing provisions determined by the Board, including, without
limitation, provisions to qualify Incentive Stock Options as such under
Section 422 of the Code if directed by the Board at the Date of Grant;
provided, however, that each Incentive Stock Option Agreement must include the
following terms and conditions: (i) that the Options are exercisable, either
in total or in part, with a partial exercise not affecting the exercisability
of the balance of the Option; (ii) every share of Stock purchased through the
exercise of an Option will be paid for in full at the time of the exercise;
(iii) each Option will cease to be exercisable, as to any share of Stock, at
the earliest of (a) the Participant's purchase of the Stock to which the
Option relates, (b) the Participant's exercise of a related Stock Appreciation
Right, or (c) the lapse of the Option; (iv) Options will not be transferable
by the Participant except by Will or the laws of descent and distribution and
will be exercisable during the Participant's lifetime only by the Participant
or by the Participant's guardian or legal representative; and (v)
notwithstanding any other provision, in the event of a public tender for all
or any portion of the Stock or in the event that any proposal to merge or
consolidate the Company with another company is submitted to the stockholders
of the Company for a vote, the Board, in its sole discretion, may declare any
previously granted Option to be immediately exercisable.
C. OPTION PRICE. The Option price per share of Stock will be set by the
grant, but will be not less than 100% of the Fair Market Value at the Date of
Grant.
D. FORM OF PAYMENT. At the time of the exercise of the Option, the Option
price will be payable in cash or in other shares of Stock or in a combination
of cash and other shares of Stock, in a form and manner as required by the
Board in its sole discretion. When Stock is used in full or partial payment of
the Option price, it will be valued at the Fair Market Value on the date the
Option is exercised.
E. OTHER TERMS AND CONDITIONS. The Option will become exercisable in such
manner and within such Option Period or Periods, not to exceed 10 years from
its Date of Grant, as set forth in the Stock Option Agreement upon payment in
full. Except as otherwise provided in this Plan or in the Stock Option
Agreement, any Option may be exercised in whole or in part at any time.
F. LAPSE OF OPTION. An Option will lapse upon the earlier of: (i) 10 years
from the Date of Grant, or (ii) at the expiration of the Option Period set by
the grant. If the Participant ceases employment or ceases to be a Director
within the Option Period and prior to the lapse of the Option, the Option will
lapse as follows:(a) Termination -- the Option will lapse on the effective
date of the Termination; or (b) Retirement, Early Retirement, or Disability --
the Option will lapse at the expiration of the Option Period set by the grant;
provided, however, that the Board may modify the above if it determines in its
sole discretion that special circumstances warrant such modification. If the
Participant dies within the Option Period and prior to the lapse of the
Option, the Option will lapse at the expiration of the Option Period set by
the grant unless it is exercised before such time by the Participant's legal
representative(s) or by the person(s) entitled to do so under the
Participant's Will or, if the Participant fails to make testamentary
disposition of the Option or dies intestate, by the person(s) entitled to
receive the Option under the applicable laws of descent and distribution.
A-6
<PAGE>
G. INDIVIDUAL LIMITATION. In the case of an Incentive Stock Option, the
aggregate Fair Market Value of the Stock for which Incentive Stock Options
(whether under this Plan or another arrangement) in any calendar year are
first exercisable will not exceed $100,000 with respect to such calendar year
(or such other individual limit as may be in effect under the Code on the Date
of Grant) plus any unused portion of such limit as the Code may permit to be
carried over.
9. PERFORMANCE UNITS.
A. PERFORMANCE UNITS. One or more Performance Units may be earned by an
Eligible Employee based on the achievement of preestablished performance
objectives during a Performance Period.
B. PERFORMANCE PERIOD AND PERFORMANCE OBJECTIVES. The Board will determine a
Performance Period and will determine, no later than 90 days after the
beginning of each Performance Period, the performance objectives for each
Participant's Target Performance Award and the number of Performance Units
subject to each Target Performance Award. Performance objectives may vary from
Participant to Participant and will be based upon such performance criteria or
combination of factors as the Board deems appropriate, which may include, but
not be limited to, the performance of the Participant, the Company, one or
more Subsidiaries, or any combination thereof. Performance Periods may overlap
and Participants may participate simultaneously with respect to Performance
Units for which different Performance Periods are prescribed.
If during the course of a Performance Period significant events occur as
determined in the sole discretion of the Board which the Board expects to have
a substantial effect on a performance objective during such period, the Board
may revise such objective.
C. FORFEITURE OR PAYOUT OF AWARD. As soon as practicable after the end of
each Performance Period, the Board will determine whether the performance
objectives and other material terms of the Award were satisfied. The Board's
determination of all such matters will be final and conclusive.
As soon as practicable after the date the Board makes the above
determination, the Board will determine the Earned Performance Award for each
Participant. Such determination may result in an increase or decrease in the
number of Performance Units payable based upon such Participant's Target
Performance Award, and will be based upon such factors as the Board determines
in its sole discretion, but including the Target Performance Award performance
objectives.
In the event a Participant ceases employment during a Performance Period,
the Performance Unit Award is subject to forfeiture or payout as follows: (a)
Termination -- the Performance Unit Award is completely forfeited; (b)
Retirement, Disability or death -- payout of the Performance Unit Award is
prorated taking into account factors including, but not limited to, service
and the performance of the Participant during the portion of the Performance
Period before employment ceased; or (c) Early Retirement -- if at the
Participant's request, the payout or forfeiture of the Performance Unit Award
is determined at the discretion of the Board, or if at the Company's request,
payout of the Performance Unit Award is prorated taking into account factors
including, but not limited to, service and the performance of the Participant
during the portion of the Performance Period before employment ceased;
provided, however, that the Board may modify the above if it determines in its
sole discretion that special circumstances warrant such modification.
D. FORM AND TIMING OF PAYMENT. Each Performance Unit is payable in cash or
shares of Stock or in a combination of cash and Stock, as determined by the
Board in its sole discretion. Such payment will be made as soon as practicable
after the Earned Performance Award is determined.
A-7
<PAGE>
10. STOCK APPRECIATION RIGHTS.
A. GRANTS OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted under the Plan in conjunction with an Option either at the Date of
Grant or by amendment or may be separately granted. Stock Appreciation Rights
will be subject to such terms and conditions not inconsistent with the Plan as
the Board may impose.
B. RIGHT TO EXERCISE; EXERCISE PERIOD. A Stock Appreciation Right issued
pursuant to an Option will be exercisable to the extent the Option is
exercisable; both such Stock Appreciation Right and the Option to which it
relates will not be exercisable during the six months following their
respective Dates of Grant except in the event of the Participant's Disability
or death. A Stock Appreciation Right issued independent of an Option will be
exercisable pursuant to such terms and conditions established in the grant.
Notwithstanding such terms and conditions, in the event of a public tender for
all or any portion of the Stock or in the event that any proposal to merge or
consolidate the Company with another company is submitted to the stockholders
of the Company for a vote, the Board, in its sole discretion, may declare any
previously granted Stock Appreciation Right immediately exercisable.
C. FAILURE TO EXERCISE. If on the last day of the Option Period, in the case
of a Stock Appreciation Right granted pursuant to an Option, or the specified
Exercise Period, in the case of a Stock Appreciation Right issued independent
of an Option, the Participant has not exercised a Stock Appreciation Right,
then such Stock Appreciation Right will be deemed to have been exercised by
the Participant on the last day of the Option Period or Exercise Period.
D. PAYMENT. An exercisable Stock Appreciation Right granted pursuant to an
Option will entitle the Participant to surrender unexercised the Option or any
portion thereof to which the Stock Appreciation Right is attached, and to
receive in exchange for the Stock Appreciation Right payment (in cash or Stock
or a combination thereof as described below) equal to either of the following
amounts, determined in the sole discretion of the Board at the Date of Grant:
(1) the excess of the Fair Market Value of one share of Stock at the date of
exercise over the Option price, times the number of shares called for by the
Stock Appreciation Right (or portion thereof) which is so surrendered, or (2)
the excess of the Book Value of one share of Stock at the date of exercise
over the Book Value of one share of Stock at the Date of Grant of the related
Option, times the number of shares called for by the Stock Appreciation Right.
Upon exercise of a Stock Appreciation Right not granted pursuant to an Option,
the Participant will receive for each Stock Appreciation Right payment (in
cash or Stock or a combination thereof as described below) equal to either of
the following amounts, determined in the sole discretion of the Board at the
Date of Grant: (1) the excess of the Fair Market Value of one share of Stock
at the date of exercise over the Fair Market Value of one share of Stock at
the Date of Grant of the Stock Appreciation Right, times the number of shares
called for by the Stock Appreciation Right, or (2) the excess of the Book
Value of one share of Stock at the date of exercise of the Stock Appreciation
Right over the Book Value of one share of Stock at the Date of Grant of the
Stock Appreciation Right, times the number of shares called for by the Stock
Appreciation Right.
The Board may direct the payment in settlement of the Stock Appreciation
Right to be in cash or Stock or a combination thereof. Alternatively, the
Board may permit the Participant to elect to receive cash in full or partial
settlement of the Stock Appreciation Right, provided that (i) the Board must
consent to or disapprove such election and (ii) unless the Board directs
otherwise, the election and the exercise must be made during the period
beginning on the 3rd business day following the date of public release of
quarterly or year-end earnings and ending on the 12th business day following
the date of public release of quarterly or year-end earnings. The value of the
Stock to be received upon exercise of a Stock Appreciation Right shall be the
Fair Market Value of the Stock on the trading day preceding the date on which
the Stock Appreciation Right is exercised. To the extent that a Stock
Appreciation Right issued pursuant to an Option is exercised, such Option
shall be deemed to have been exercised, and shall not be deemed to have
lapsed.
A-8
<PAGE>
E. NONTRANSFERABLE. A Stock Appreciation Right will not be transferable by
the Participant except by Will or the laws of descent and distribution and
will be exercisable during the Participant's lifetime only by the Participant
or by the Participant's guardian or legal representative.
F. LAPSE OF A STOCK APPRECIATION RIGHT. A Stock Appreciation Right will
lapse upon the earlier of: (i) 10 years from the Date of Grant; or (ii) at the
expiration of the Exercise Period as set by the grant. If the Participant
ceases employment within the Exercise Period and prior to the lapse of the
Stock Appreciation Right, the Stock Appreciation Right will lapse as follows:
(a) Termination -- the Stock Appreciation Right will lapse on the effective
date of the Termination; or (b) Retirement, Early Retirement, or Disability --
the Stock Appreciation Right will lapse at the expiration of the Exercise
Period set by the grant; provided, however, that the Board may modify the
above if it determines in its sole discretion that special circumstances
warrant such modification. If the Participant dies within the Exercise Period
and prior to the lapse of the Stock Appreciation Right, the Stock Appreciation
Right will lapse at the expiration of the Exercise Period set by the grant
unless it is exercised before such time by the Participant's legal
representative(s) or by the person(s) entitled to do so under the
Participant's Will or, if the Participant fails to make testamentary
disposition of the Stock Appreciation Right or dies intestate, by the
person(s) entitled to receive the Stock Appreciation Right under the
applicable laws of descent and distribution.
11. DIVIDEND EQUIVALENTS.
A. GRANTS OF DIVIDEND EQUIVALENTS. Dividend Equivalents may be granted under
the Plan in conjunction with an Option or a separately awarded Stock
Appreciation Right, at the Date of Grant or by amendment, without
consideration by the Participant. Dividend Equivalents may also be granted
under the Plan in conjunction with Performance Units, at any time during the
Performance Period, without consideration by the Participant. Dividend
Equivalents will be granted under a Performance-Based Restricted Stock Award
in conjunction with additional shares of Stock issued if Target Performance
Award performance objectives are exceeded.
B. PAYMENT. Each Dividend Equivalent will entitle the Participant to receive
an amount equal to the dividend actually paid with respect to a share of Stock
on each dividend payment date from the Date of Grant to the date the Dividend
Equivalent lapses as set forth in Section 11D. The Board, in its sole
discretion, may direct the payment of such amount at such times and in such
form and manner as determined by the Board.
C. NONTRANSFERABLE. A Dividend Equivalent will not be transferable by the
Participant.
D. LAPSE OF A DIVIDEND EQUIVALENT. Each Dividend Equivalent will lapse on
the earlier of (i) the date of the lapse of the related Option or Stock
Appreciation Right; (ii) the date of the exercise of the related Option or
Stock Appreciation Right; (iii) the end of the Performance Period (or if
earlier, the date the Participant ceases employment) of the related
Performance Units or Performance-Based Restricted Stock Award; or (iv) the
lapse date established by the Board on the Date of Grant of the Dividend
Equivalent.
12. ACCELERATED AWARD PAYOUT/EXERCISE.
A. CHANGE IN CONTROL. Notwithstanding anything in this Plan document to the
contrary, a Participant is entitled to an accelerated payout or accelerated
Option or Exercise Period (as set forth in Section 12B) with respect to any
previously granted Award if the Participant is terminated as an employee or
Director or suffers a diminution of responsibility, authority, position or
salary following a Change in Control described in 1) through 3) below:
1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a
trustee or other fiduciary holding securities under an employee benefit
A-9
<PAGE>
plan of the Company or a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the combined voting
power of the Company's then outstanding securities; or,
2) during any period of twenty-four (24) consecutive months (not including
any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clauses (1) or (3) of this
Section) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or,
3) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 70%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation,
the stockholders of the Company approve a plan of complete liquidation of the
Company, or the stockholders of the Company approve an agreement for the sale
or disposition of the Company of all or substantially all the Company's
assets.
B. AMOUNT OF AWARD SUBJECT TO ACCELERATED PAYOUT/OPTION PERIOD/EXERCISE
PERIOD. The amount of a Participant's previously granted Award that will be
paid or exercisable upon the happening of a change in control will be
determined as follows:
RESTRICTED STOCK AWARDS. The Participant will be entitled to an
accelerated Award payout, and the amount of the payout will be based on the
number of shares of Restricted Stock that were issued on the Date of Grant,
prorated based on the number of months of the restriction period that have
elapsed as of the payout date. Also, with respect to Performance-Based
Restricted Stock Awards, in determining the amount of the payout, maximum
performance achievement will be assumed.
STOCK OPTION AWARDS AND STOCK APPRECIATION RIGHTS. Any previously granted
Stock Option Awards or Stock Appreciation Rights will be immediately
exercisable.
PERFORMANCE UNITS. The Participant will be entitled to an accelerated
Award payout, and the amount of the payout will be based on the number of
Performance Units subject to the Target Performance Award as established on
the Date of Grant, prorated based on the number of months of the
Performance Period that have elapsed as of the payout date, and assuming
that maximum performance was achieved.
C. TIMING OF ACCELERATED PAYOUT/OPTION PERIOD/EXERCISE PERIOD. The
accelerated payout set forth in Section 12B will be made within 30 days after
the date of the change in control. The accelerated Option Period/Exercise
Period set forth in Section 12B will begin on the date of the change in
control. If the original Award provided for a payout in Stock, any accelerated
payout set forth in Section 12B will be made in Stock.
13. AMENDMENT OF PLAN. The Board may at any time and from time to time
alter, amend, suspend or terminate the Plan in whole or in part, except (i) no
such action may be taken without stockholder approval which materially
increases the benefits accruing to Participants pursuant to the Plan,
materially increases the number of
A-10
<PAGE>
securities which may be issued pursuant to the Plan (except as provided in
Section 14H), extends the period for granting Options under the Plan or
materially modifies the requirements as to eligibility for participation in
the Plan; and (ii) no such action may be taken without the consent of the
Participant to whom any Award was previously granted, which adversely affects
the rights of such Participant concerning such Award, except as such
termination or amendment of the Plan is required by statute, or rules and
regulations promulgated thereunder. Notwithstanding the foregoing, the Board
may amend the Plan as desirable at the discretion of the Board to address any
issues concerning (i) Section 162(m) of the Code, or (ii) maintaining an
exemption under Rule 16b-3 of the Exchange Act.
14. MISCELLANEOUS PROVISIONS.
A. NONTRANSFERABILITY. No benefit provided under this Plan shall be subject
to alienation or assignment by a Participant (or by any person entitled to
such benefit pursuant to the terms of this Plan), nor shall it be subject to
attachment or other legal process except (i) to the extent specifically
mandated and directed by applicable state or federal statute, and (ii) as
requested by the Participant (or by any person entitled to such benefit
pursuant to the terms of this Plan), and approved by the Board, to satisfy
income tax withholding.
B. NO EMPLOYMENT RIGHT. Participation in this Plan shall not constitute a
contract of employment between the Company or any Subsidiary and any person
and shall not be deemed to be consideration for, or a condition of, continued
employment of any person.
C. TAX WITHHOLDING. The Company or a Subsidiary may withhold any applicable
federal, state or local taxes at such time and upon such terms and conditions
as required by law or determined by the Company or a Subsidiary. Subject to
compliance with any requirements of applicable law, the Board may permit or
require a Participant to have any portion of any withholding or other taxes
payable in respect to a distribution of Stock satisfied through the payment of
cash by the Participant to the Company or a Subsidiary, the retention by the
Company or a Subsidiary of shares of Stock, or delivery of previously owned
shares of the Participant's Stock, having a Fair Market Value equal to the
withholding amount. A Reporting Person may elect to have a sufficient number
of shares of Stock withheld to fulfill such withholding obligation (the
"Withholding Election") only if the election complies with the following
requirements: the Withholding Election is made (A) during the period beginning
on the third business day following the date of release for publication of the
quarterly or annual summary statements of the earnings of the Company or a
Subsidiary and ending on the twelfth business day following such date, (B) six
months before the Award becomes taxable or (C) during any other period in
which a Withholding Election may be made under the provisions of Rule 16b-3
promulgated pursuant to the Exchange Act. Any fractional share of Common Stock
required to satisfy such withholding obligations shall be disregarded and the
amount due shall be paid in cash by the Participant.
D. FRACTIONAL SHARES. Any fractional shares concerning Awards shall be
eliminated at the time of payment or payout by rounding down for fractions of
less than one-half and rounding up for fractions of equal to or more than one-
half. No cash settlements shall be made with respect to fractional shares
eliminated by rounding.
E. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock
issued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
A-11
<PAGE>
F. INDEMNIFICATION. Each person who is or at any time serves as a member of
the Board (and each person or Board to whom the Board or any member thereof
has delegated any of its authority or power under this Plan) shall be
indemnified and held harmless by the Company against and from (i) any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
such person in connection with or resulting from any claim, action, suit, or
proceeding to which such person may be a party or in which such person may be
involved by reason of any action or failure to act under the Plan; and (ii)
any and all amounts paid by such person in satisfaction of judgment in any
such action, suit, or proceeding relating to the Plan. Each person covered by
this indemnification shall give the Company an opportunity, at its own
expense, to handle and defend the same before such person undertakes to handle
and defend it on such person's own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Charter or By-Laws of the
Company or any of its Subsidiaries, as a matter of law, or otherwise, or any
power that the Company may have to indemnify such person or hold such person
harmless.
G. RELIANCE ON REPORTS. Each member of the Board (and each person or Board
to whom the Board or any member thereof has delegated any of its authority or
power under this Plan) shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the
Company and its Subsidiaries and upon any other information furnished in
connection with the Plan. In no event shall any person who is or shall have
been a member of the Board be liable for any determination made or other
action taken or any omission to act in reliance upon any such report or
information or for any action taken, including the furnishing of information,
or failure to act, if in good faith.
H. CHANGES IN CAPITAL STRUCTURE. In the event of any change in the
outstanding shares of Stock by reason of any stock dividend or split,
recapitalization, combination or exchange of shares or other similar changes
in the Stock, then appropriate adjustments shall be made in the shares of
Stock theretofore awarded to the Participants and in the aggregate number of
shares of Stock which may be awarded pursuant to the Plan. Such adjustments
shall be conclusive and binding for all purposes. Additional shares of Stock
issued to a Participant as the result of any such change shall bear the same
restrictions as the shares of Stock to which they relate.
I. COMPANY SUCCESSORS. In the event the Company becomes a party to a merger,
consolidation, sale of substantially all of its assets or any other corporate
reorganization in which the Company will not be the surviving corporation or
in which the holders of the Stock will receive securities of another
corporation (in any such case, the "New Company"), then the New Company shall
assume the rights and obligations of the Company under this Plan.
J. GOVERNING LAW. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the District of Columbia, without
regard to the principles of conflict of laws.
K. RELATIONSHIP TO OTHER BENEFITS. Any Awards under this Plan are not
considered compensation for purposes of determining benefits under any
pension, profit sharing, or other retirement or welfare plan, or for any other
general employee benefit program.
L. EXPENSES. The expenses of administering the Plan shall be borne by the
Company and its Subsidiaries.
M. TITLES AND HEADINGS. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles or headings, shall control.
[PRINTED ON RECYCLED PAPER LOGO]
A-12
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20068
[PEPCO
LOGO] ANNUAL MEETING OF SHAREHOLDERS -- APRIL 22, 1998 PROXY
The undersigned hereby appoints EDWARD F. MITCHELL, JOHN M. DERRICK, JR. and
DENNIS R. WRAASE and each of them, proxies of the undersigned, with power of
substitution, to attend the above Annual Meeting to be held on Wednesday, April
22, 1998 at 10 a.m. at the Omni Shoreham Hotel, 2500 Calvert Street, N.W.,
Washington, D.C., and all adjournments thereof, and thereat to vote all shares
of Common Stock of the Company that the undersigned would be entitled to vote
if personally present on matters set forth in the Proxy Statement and upon such
other matters as may properly come before the meeting. UNLESS INDICATED TO THE
CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE FOR ITEMS 1 AND
2 AND AGAINST ITEMS 3 AND 4.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF POTOMAC ELECTRIC POWER COMPANY
CONTINUED ON REVERSE SIDE
<PAGE>
[PEPCO LOGO] PROXY
- -------------------------------------------------------------------------------
1.ELECTION OF DIRECTORS FOR all nominees listed below
(except as marked to the contrary below [ ]
WITHHOLD AUTHORITY to vote
for all nominees listed below [ ]
(TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
Four to serve for three years
John M. Derrick, Jr. Peter F. O'Malley Louis A. Simpson Dennis R. Wraase
One to serve for one year
Edmund B. Cronin, Jr.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 2 BELOW
FOR AGAINST ABSTAIN
2. Approval of Long-Term Incentive Plan............. [ ] [ ] [ ]
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST ITEMS 3 AND 4 BELOW
FOR AGAINST ABSTAIN
3. Shareholder proposal relating to the election of
Directors........................................ [ ] [ ] [ ]
4. Shareholder proposal relating to cumulative
voting........................................... [ ] [ ] [ ]
Sign here
as name X (L.S.)
appears --------------------------------------
above X (L.S.) Date _____ , 1998
--------------------------------------
Attorneys, executors, administrators, trustees and corporate officials
should indicate the capacity in which they are signing. Shares held in
the Shareholder Dividend Reinvestment Plan are voted on this Proxy.
