Contract
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 1, 2002
between PEPCO HOLDINGS, INC. (the "Company") and XXXXXX X. XXXXXXXX
(the "Executive").
RECITALS:
The Board of Directors of the Company (the "Board of Directors") recognizes that
outstanding management of the Company is essential to advancing the best interests of
the Company, its shareholders and its subsidiaries. The Board of Directors believes that
it is particularly important to have stable, excellent management at the present time. The
Board of Directors believes that this objective may be achieved by giving key
management employees assurances of financial security for a period of time, so that they
will not be distracted by personal risks and will continue to devote their full time and best
efforts to the performance of their duties.
In order to achieve the foregoing objectives, the Human Resources Committee of the
Board of Directors (the "Committee") has recommended, and the Board of Directors has
approved, entering into employment agreements with the Company's key management
executives, which agreements will supercede in their entirety the executives' existing
severance agreements. Accordingly, this Agreement supercedes the severance agreement
previously entered into between the Company and the Executive, dated December 28,
1999 (the "Prior Agreement"). Upon execution of this Agreement, the Prior Agreement
shall be of no further force or effect. The Executive is a key management executive of
the Company and is a valuable member of the Company's management team. The
Company acknowledges that the Executive's contributions to the past and future growth
and success of the Company have been and will continue to be substantial. The
Company and the Executive are entering into this Agreement to induce the Executive to
remain an employee of the Company and to continue to devote his full energy to the
Company's affairs. The Executive has agreed to continue to be employed by the
Company under the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual undertakings
contained in this Agreement, the parties agree as follows:
1. Term of this Agreement. The term of this Agreement shall begin on the date first set
forth above and shall end on the third anniversary thereof; provided, however, that, on
such third anniversary, the term of this Agreement shall be automatically renewed for an
additional three (3) years unless either party gives notice to the other at least 6 months
prior to such anniversary that the term of this Agreement shall not be renewed (the initial
3 year term of this Agreement and, if extended, the extension thereof, shall hereinafter be
referred to as the "Term of this Agreement"). Notwithstanding the forgoing, if the
Executive's employment is terminated during the Term of this Agreement and all of the
Company's and the Executive's obligations hereunder have been satisfied prior to the end
of the Term of this Agreement, this Agreement shall expire upon satisfaction of all such
obligations.
2. Duties. The Company and the Executive agree that, while employed during the Term
of this Agreement, the Executive will serve in a senior management position with the
Company. The Executive (a) will devote his knowledge, skill and best efforts on a full-
time basis to performing his duties and obligations to the Company (with the exception of
absences on account of illness or vacation in accordance with the Company's policies and
civic and charitable commitments not involving a conflict with the Company's business),
and (b) will comply with the directions and orders of the Board of Directors and Chief
Executive Officer of the Company (or any designee thereof) with respect to the
performance of his duties.
3. Affiliates. Employment by an Affiliate of the Company or a successor to the
Company will be considered employment by the Company for purposes of this
Agreement, and the Executive's employment with the Company shall be considered
terminated only if the Executive is no longer employed by the Company or any of its
Affiliates or successors. The term "Company" as used in this Agreement will be deemed
to include Affiliates and successors. For purposes of this Agreement, the term "Affiliate"
means the subsidiaries of the Company and other entities under common control with the
Company.
4. Compensation and Benefits.
(a) During the Term of this Agreement, while the Executive is employed by the
Company, the Company will pay to the Executive the following salary and incentive
awards for services rendered to the Company:
(i) The Company will pay to the Executive an annual salary in an amount
not less than the base salary in effect for the Executive as of the date on which
this Agreement is executed (in the event the Executive's rate of annual base
salary is increased, such increased rate shall not be decreased during the Term
of this Agreement); and
(ii) The Executive will be entitled to receive incentive awards if and to the
extent that the Board of Directors determines in good faith that the Executive's
performance merits payment of an award according to the terms of the
incentive compensation plans applicable to senior executives of the Company.
If the Executive is employed by an Affiliate or a successor (as described in Section 3),
the term "Board of Directors" as used in this Section 4(a) and in Section 5(a) means the
Board of Directors of the Executive's employer.
(b) During the Term of this Agreement, while the Executive is employed by the
Company, the Executive will be eligible to participate in a similar manner as other senior
executives of the Company in retirement plans, fringe benefit plans, supplemental benefit
plans and other plans and programs provided by the Company for its executives or
employees from time to time.
5. Termination of Employment.
If, during the Term of this Agreement, the Company terminates the Executive's
employment other than for Cause (as defined in Section 7), the Company will pay to the
Executive in cash within 30 days after the Executive's termination of employment
(i) a lump sum payment equal to three (3) times the sum of: (A) the highest
annual base salary rate in effect for the Executive at any time during the three-
year period preceding employment termination, plus (B) the highest of (1) the
annual bonus for the year in which the termination of employment occurs, or
(2) the highest annual bonus received by the Executive during the three
calendar years preceding the calendar year in which the termination of
employment occurs; and
(ii) any unpaid salary through the date of employment termination, unpaid
annual bonus for the prior year and a pro-rated portion of the annual bonus for
the year in which termination of employment occurs.
For purposes of Sections 5(a)(i)(B)(1) and 5(a)(ii), the annual bonus for the year in which
termination of employment occurs will be the "target" annual bonus for such year unless,
before the Executive's termination of employment, the Board of Directors made a good
faith final determination of the amount of the Executive's actual annual bonus for such
year. If the Board of Directors made such a determination, the applicable award will be
computed based on the Board of Directors' determination, rather than on the "target"
amount for such year.
(b) If, during the Term of this Agreement, the Company terminates the Executive's
employment other than for Cause (as defined in Section 7), the Executive will be entitled
to receive the following additional benefits determined as of the date of his termination of
employment:
(i) Any outstanding restricted stock that would become vested (that is,
transferable and nonforfeitable) if the Executive remained an employee
through the Term of this Agreement will become vested as of the date of the
Executive's termination of employment (or as of the date described in the next
sentence, if applicable). In addition, if the Company has agreed to award the
Executive restricted stock at the end of a performance period, subject to the
Company's achievement of performance goals, and the date as of which the
restricted stock is to become vested falls within the Term of this Agreement,
the stock will be awarded and become vested at the end of the performance
period if and to the extent that the performance goals are met.
(ii) A supplemental retirement benefit payable in cash in a lump sum equal
to the difference between (A) the present value of the vested retirement
benefits that the Executive had accrued at the time of termination of
employment under the Company's qualified defined benefit retirement plan
(the "Retirement Plan"), any excess or supplemental retirement plans in
which the Executive participates and/or other supplemental retirement benefits
to which the Executive is entitled under any contract or agreement (together,
the "SERPs"), assuming for this purpose that the Executive would begin
receiving benefits at the first early retirement date provided under the
applicable plan or, if the Executive is eligible to receive retirement benefits
upon termination of employment under the applicable plan, assuming the
Executive will begin receiving benefits at the time of termination of
employment, and (B) the benefit the Executive would be entitled to receive
under the Retirement Plan and the SERPs assuming for all such benefit
determinations that the Executive was three years older than the Executive's
actual age and had three additional years of service. For purposes of the
calculations required under this Section 5(b)(ii), the same actuarial
assumptions that are used under the Company's qualified retirement plan shall
be used.
(iii) If the split dollar insurance arrangement between the Company and the
Executive is in effect at the time of the Executive's employment termination,
the Company shall continue to pay all premium amounts with respect to the
Executive's policy under the Company's split dollar insurance program for the
lesser of ten (10) years from the date of termination of employment or the
period of time remaining until the Executive's "Roll Out Qualification Date,"
(as defined in the split dollar program) whichever first occurs.
(c) If the Executive voluntarily terminates employment with the Company during the
Term of this Agreement under circumstances described in this subsection (c), the
Executive will be entitled to receive the benefits described in subsections (a) and (b)
above as if the Company had terminated the Executive's employment other than for
Cause. Subject to the provisions of this subsection (c), these benefits will be provided if
the Executive voluntarily terminates employment after (i) the Company reduces the
Executive's base salary (except a reduction consistent and proportional with an overall
reduction, due to extraordinary business conditions, in the compensation of all other
senior executives of the Company), (ii) the Executive is not in good faith considered for
incentive awards as described in Section 4(a)(ii), (iii) the Company fails to provide
benefits as required by Section 4(b), (iv) the Company relocates the Executive's primary
place of employment to a location, other than either the Washington, D.C. or
Wilmington, Delaware metropolitan areas, further than 50 miles from the Executive's
primary place of employment on the first day of the Term of this Agreement, or (v) the
Company demotes the Executive to a position that is not a senior management position
(other than on account of the Executive's disability, as defined in Section 6 below). In
order for this subsection (c) to be effective: (1) the Executive must give written notice to
the Company indicating that the Executive intends to terminate employment under this
subsection (c), (2) the Executive' s voluntary termination under this subsection must
occur within 60 days after the Executive knows or reasonably should know of an event
described in clause (i), (ii), (iii), (iv), or (v) above, or within 60 days after the last in a
series of such events, and (3) the Company must have failed to remedy the event
described in clause (i), (ii), (iii), (iv), or (v), as the case may be, within 30 days after
receiving the Executive's written notice. If the Company remedies the event described in
clause (i), (ii), (iii), (iv), or (v), as the case may be, within 30 days after receiving the
Executive's written notice, the Executive may not terminate employment under this
subsection (c) on account of the event specified in the Executive's notice. Termination
under the circumstances above shall be deemed an involuntary termination without Cause
for purposes of non-qualified benefit plans.
(d) Notwithstanding subsection (a), (b), and (c) of this Section 5, if the independent
public accountants for the Company (the "Accountants") determine that if the payments
and/or benefits to be provided under subsections (a), (b), and (c) of this Section 5 (and/or
any other payments and/or benefits provided or to be provided to the Executive under any
applicable plan, program, agreement or arrangement maintained, contributed to or
entered into by the Company or any group or entity whose actions result in a change of
ownership or effective control (as those terms are defined in Code Section 280G and
regulations promulgated thereunder) or any affiliate of the Company) (a "Payment" or
collectively "Payments") were provided to the Executive (x) the Executive would incur
an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code") (such excise tax, together with any interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), and (y) the net after tax benefits to the
Executive attributable to the Payments would not be at least $10,000 greater than the net
after tax benefits that would accrue to the Executive if the Payments that would otherwise
cause the Executive to be subject to the Excise Tax were not provided, the Payments shall
be reduced so that the Payments provided to the Executive are the greatest (as determined
by the Accountants) that may be provided without any such Payment being subject to the
Excise Tax. If the Payments are to be reduced under this subsection 5(d), the Executive
shall be given the opportunity to designate which Payments shall be reduced and in what
order of priority.
(i) If the Executive receives reduced Payments pursuant to subsection 5(d),
or if it had been determined that no such reduction was required, but it
nonetheless is established pursuant to the final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good faith of
the Executive and the Company in applying the terms of subsection 5(d), the
aggregate Payments to the Executive would result in any Payment being
subject to the Excise Tax, and that a reduction pursuant to subsection 5(d)
should have occurred, then the Executive shall be deemed for all purposes to
have received a loan made on the date of the receipt of the Payments in an
amount such that, after taking into consideration such loan, no portion of the
aggregate Payments would be subject to the Excise Tax. The Executive shall
have an obligation to repay such loan to the Company on demand, together
with interest on such amount at the applicable Federal rate (as defined in
Section 1274(d) of the Code) from the date of the Executive's receipt of such
loan until the date of such repayment.
(ii) If the Executive's Payments are reduced or are to be reduced pursuant to
subsection 5(d), and it is determined that the Payments were or are to be
reduced pursuant to subsection 5(d) to a greater extent than was or is
necessary to avoid the Excise Tax or it is determined that the Executive's
Payments should not be or should not have been reduced pursuant to
subsection 5(d), then the Company shall promptly pay to the Executive the
amount necessary so that, after such adjustment, the Executive will have
received or be entitled to receive the maximum payments payable under this
subsection 5(d), together with interest at the applicable Federal rate (as
defined in Section 1274(d) of the Code) on amounts that were incorrectly
reduced pursuant to subsection 5(d).
(iii) Gross-Up Payment.
(A) Anything in this Agreement to the contrary notwithstanding, if
it shall be determined that any Payments would be subject to
the Excise Tax or any interest or penalties are incurred, and it
is determined that the Payments should not be reduced
pursuant to subsection 5(d), then the Executive shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes,
employment taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(B) All determinations required to be made under this subsection
5(d)(iii), including whether and when a Gross-Up Payment is
required and the amount of such Gross-up Payment and the
assumptions to be utilized in arriving at such determination,
shall be made by the Accountants, who shall provide detailed
supporting calculations both to the Company and the Executive
within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as
is requested by the Company. All fees and expenses of the
Accountants shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this subsection
5(d)(iii), shall be paid by the Company to the Executive within
five days of the receipt of the Accountants' determination.
Any determination made independently and in good faith by
the Accountants shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Sections 280G and 4999 of the Code, at the time of the initial
determination by the Accountants hereunder, it is possible that
Gross-Up Payments which will not have been made by the
Company should have been made ("Underpayment") consistent
with the calculations required to be made hereunder. In the
event that the Company exhausts its remedies pursuant to
subsection 5(d)(iii)(C) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accountants shall
determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(C) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up
Payment. Such notification shall be given as soon as
practicable but no later than thirty business days after the
Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date
on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the
Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim,
the Executive shall:
(1) give the Company any information reasonably
requested by the Company relating to such claim,
(2) take such action in connection with contesting such
claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such
claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest
and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-
tax basis, for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this subsection
5(d)(iii), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and xxx for a
refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, further, that if the
Company directs the Executive to pay such claim and xxx for
a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income tax (including interest
or penalties with respect thereto) imposed with respect to such
advance or with respect to any imputed income with respect
to such advance; and provided, further, that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may
be any other issue raised by the Internal Revenue Service or
any other taxing authority.
(D) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to subsection 5(d)(iii)(C), the
Executive becomes entitled to receive any refund with respect
to such claim, the Executive shall (subject to the Company's
complying with the requirements of subsection 5(d)(iii))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If after the receipt by the Executive of an
amount advanced by the Company pursuant to subsection
5(d)(iii), a determination is made that the Executive shall not
be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent
to contest such denial of refund prior to the expiration of 30
days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.
6. Disability or Death. Upon the Executive's death or disability, the provisions of
Sections 1, 2, 4, and 5 of this Agreement will terminate. This contract provides no
benefits due to disability or death in addition to any death, disability and other benefit
provided under the Company benefit plans in which the executive participates. The
Executive shall be considered disabled if the Executive is entitled to long-term disability
benefits under the Company's disability plan or policy.
7. Cause. For purposes of this Agreement, the term "Cause" means (i) intentional fraud
or material misappropriation with respect to the business or assets of the Company, (ii)
persistent refusal or willful failure of the Executive to perform substantially his duties
and responsibilities to the Company, other than an asserted responsibility which would
give rise under Section 5(c) above to a right to terminate and have such termination
considered an involuntary termination without Cause, which continues after the
Executive receives notice of such refusal or failure, (iii) conduct that constitutes
disloyalty to the Company, and that materially damages the property, business or
reputation of the Company, or (iv) conviction of a felony involving moral turpitude.
8. Termination. This Agreement shall terminate upon the successful completion of the
Term of this Agreement; provided, however, that if the Executive's employment is
terminated during the Term of this Agreement and the Company's and the Executive's
obligations under Sections 5, 9 or 10 hereof have not been satisfied as of the last day of
the Term of this Agreement, such obligations shall survive the expiration of the Term of
this Agreement and shall remain in effect until such time as all such obligations have
been satisfied. No additional payments are required by the termination of this
Agreement.
9. Fees and Expenses. The Company will pay all reasonable fees and expenses, if any,
(including, without limitation, legal fees and expenses) that are incurred by the Executive
to enforce this Agreement and that result from a breach of this Agreement by the
Company, unless such fees and expenses result from a claim made by the Executive that
is deemed by an arbitrator, mediator, or court, as applicable, to be frivolous or made in
bad faith, in which case each party shall pay its own fees and expenses.
10. Tax Withholding. The Company may withhold from all amounts payable under this
Agreement an amount necessary to satisfy its income and payroll tax withholding
obligations.
11. Assignment. The rights and obligations of the Company under this Agreement will
inure to the benefit of and will be binding upon the successors and assigns of the
Company. If the Company is consolidated or merged with or into another corporation, or
if another entity purchases all or substantially all of the Company's assets, the surviving
or acquiring corporation will succeed to the Company's rights and obligations under this
Agreement. The Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal representative of the Executive's
estate will receive any amounts payable under this Agreement after the death of the
Executive.
12. Rights Under this Agreement. The right to receive benefits under the Agreement
will not give the Executive any proprietary interest in the Company or any of its assets.
Benefits under the Agreement will be payable from the general assets of the Company,
and there will be no required funding of amounts that may become payable under the
Agreement. The Executive will for all purposes be a general creditor of the Company.
The interest of the Executive under the Agreement cannot be assigned, anticipated, sold,
encumbered or pledged and will not be subject to the claims of the Executive's creditors.
13. Notice. For purposes of this Agreement, notices and all other communications to the
Executive must be in writing addressed to the Executive or his personal representative at
his last known address. All notices to the Company must be directed to the attention of
the Chief Executive Officer. Such other addresses may be used as either party may have
furnished to the other in writing. Notices are effective when mailed if sent by United
States registered mail, return receipt requested, postage prepaid. Notices sent otherwise
are effective when received. Notwithstanding the forgoing, notices of change of address
are effective only upon receipt.
14. Miscellaneous. To the extent not governed by federal law, this Agreement will be
construed in accordance with the law of the State of Maryland without reference to its
conflict of laws rules. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing and the
writing is signed by the Executive and the Company. A waiver of any breach of or
compliance with any provision or condition of this Agreement is not a waiver of similar
or dissimilar provisions or conditions. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of any other
provision of this Agreement, which will remain in full force and effect. This Agreement
may be executed in one or more counterparts, all of which will be considered one and the
same agreement. As of the date first above written, the Prior Agreement shall be
superceded in its entirety and shall no longer be of any force or effect.
WITNESS the following signatures.
PEPCO HOLDINGS, INC. EXECUTIVE
XXXX X. XXXXXXX, XX. X. X. XXXXXXXX
By:__________________________
_________________________
Chairman of the Board and Chief
Executive Officer
