<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6875
BELL ATLANTIC - MARYLAND, INC.
A Maryland Corporation I.R.S. Employer Identification No. 52-0270070
One East Pratt Street, Baltimore, Maryland 21202
Telephone Number (410) 539-9900
---------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
Bell Atlantic - Maryland
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service.................... $256,586 $248,770 $506,778 $493,489
Network access................... 126,260 125,263 254,064 246,724
Toll service..................... 28,515 28,163 57,822 57,251
Directory advertising, billing
services and other (including
$8,508, $6,767, $19,205 and
$17,097 from affiliates)....... 71,875 72,741 148,152 142,701
Provision for uncollectibles..... (5,077) (6,449) (11,179) (12,409)
-------- -------- -------- --------
478,159 468,488 955,637 927,756
-------- -------- -------- --------
OPERATING EXPENSES
Employee costs, including benefits
and taxes........................ 106,444 104,458 213,715 207,765
Depreciation and amortization..... 94,753 87,538 189,520 175,083
Taxes other than income........... 28,214 26,532 55,806 52,848
Other (including $86,736,
$80,387, $172,436 and $158,659
to affiliates)................... 127,846 123,668 260,048 245,605
-------- -------- -------- --------
357,257 342,196 719,089 681,301
-------- -------- -------- --------
NET OPERATING REVENUES.............. 120,902 126,292 236,548 246,455
-------- -------- -------- --------
OPERATING INCOME TAXES
Federal........................... 33,675 33,722 65,770 65,470
State............................. 3,386 3,269 6,112 6,587
-------- -------- -------- --------
37,061 36,991 71,882 72,057
-------- -------- -------- --------
OPERATING INCOME.................... 83,841 89,301 164,666 174,398
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used
during construction.............. 1,274 992 2,593 2,193
Miscellaneous - net............... (911) (31) (2,082) (676)
-------- -------- -------- --------
363 961 511 1,517
-------- -------- -------- --------
INTEREST EXPENSE (including $256,
$477, $534 and $1,377 to affiliate). 18,224 21,109 36,338 42,273
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............. 65,980 69,153 128,839 133,642
EXTRAORDINARY ITEM
Early Extinguishment of Debt,
Net of Tax........................ --- (19,921) --- (19,921)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of Tax --- --- --- (14,271)
-------- -------- -------- --------
NET INCOME.......................... $ 65,980 $ 49,232 $128,839 $ 99,450
======== ======== ======== ========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF INCOME AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period.. $468,194 $459,693 $460,246 $456,993
Add: net income......... 65,980 49,232 128,839 99,450
-------- -------- -------- --------
534,174 508,925 589,085 556,443
Deduct: dividends....... 60,190 52,690 115,101 100,205
other changes.......... --- --- --- 3
-------- -------- -------- --------
At end of period........ $473,984 $456,235 $473,984 $456,235
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1994 1993
---------- ------------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $20,796 and $20,028....... $ 276,550 $ 278,176
Parent and affiliates........................ 52,285 55,541
Other........................................ 11,870 16,603
Material and supplies.......................... 10,744 7,123
Prepaid expenses............................... 42,889 98,735
Deferred income taxes.......................... 4,526 342
Other.......................................... 3,418 3,418
---------- ----------
402,282 459,938
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 5,210,490 5,097,901
Less accumulated depreciation.................. 1,983,529 1,847,677
---------- ----------
3,226,961 3,250,224
---------- ----------
OTHER ASSETS..................................... 135,613 150,796
---------- ----------
TOTAL ASSETS..................................... $3,764,856 $3,860,958
========== ==========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - Maryland, Inc.
<TABLE>
<CAPTION>
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
June 30, December 31,
1994 1993
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 7,896 $ 26,001
Other....................................... 31,357 7,023
Accounts payable:
Affiliates.................................. 129,970 132,599
Other....................................... 157,286 200,880
Accrued expenses:
Taxes....................................... 4,750 24,466
Other....................................... 75,997 76,449
Advance billings and customer deposits....... 35,782 36,851
---------- ----------
443,038 504,269
---------- ----------
LONG-TERM DEBT................................. 972,735 994,461
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS................... 422,795 411,729
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 359,917 366,213
Unamortized investment tax credits........... 62,406 66,241
Other........................................ 204,561 232,379
---------- ----------
626,884 664,833
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 825,420 825,420
Reinvested earnings.......................... 473,984 460,246
---------- ----------
1,299,404 1,285,666
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $3,764,856 $3,860,958
========== ==========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1994 1993
--------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 310,298 $ 348,659
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment...... (161,404) (145,371)
Other, net...................................... 3,827 11,492
-------- --------
Net cash used in investing activities............. (157,577) (133,879)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................ --- 442,952
Principal repayments of borrowings and capital
lease obligations.............................. (3,462) (1,510)
Early extinguishment of debt and related
call premium................................... --- (497,173)
Net change in note payable to affiliate......... (18,105) (49,914)
Dividends paid.................................. (115,101) (100,205)
Net change in outstanding checks drawn
on controlled disbursement accounts............ (16,053) 47
-------- --------
Net cash used in financing activities............. (152,721) (205,803)
-------- --------
NET CHANGE IN CASH ............................... --- 8,977
CASH, BEGINNING OF PERIOD ........................ --- 885
--------- ---------
CASH, END OF PERIOD .............................. $ --- $ 9,862
========= =========
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
Bell Atlantic - Maryland, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Bell Atlantic - Maryland, Inc. (formerly The Chesapeake and Potomac Telephone
Company of Maryland) (the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The December 31, 1993 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. In the opinion
of management, these financial statements include all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the results of
operations, financial position and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. The Company believes that the
disclosures made are adequate to make the information presented not misleading.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993.
(2) Dividend
On August 1, 1994, the Company declared and paid a dividend in the amount
of $62,680,000 to Bell Atlantic Corporation.
(3) Subsequent Events
Discontinued Application of Statement No. 71
--------------------------------------------
The Company has historically accounted for the economic effects of
regulation in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (Statement No. 71). Under Statement No. 71, as a result of actions
of regulators, the Company has depreciated telephone plant using lives
prescribed by regulators and deferred certain costs or recognized certain
liabilities (regulatory assets and liabilities).
On August 15, 1994, the Company's parent, Bell Atlantic Corporation (Bell
Atlantic), announced that it has determined that it is no longer eligible for
continued application of the accounting required by Statement No. 71. The
Company believes that the convergence of competition, technological change
(including the Company's recent technology deployment plans), recent and
potential regulatory, legislative and judicial actions and other factors will
create fully open and competitive markets. In such markets, the Company believes
it can no longer be assured that prices can be maintained at levels that will
recover the net carrying amount of existing telephone plant and equipment, which
has been depreciated over relatively long regulator-prescribed lives. In
addition, changes from cost-based regulation to a form of incentive regulation
contributed to the determination that the continued application of Statement No.
71 is inappropriate.
The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $316
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $19 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $532 million. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter
-6-
<PAGE>
Bell Atlantic - Maryland, Inc.
than those currently approved by regulators. The shorter estimated asset lives
result from the Company's current expectations as to the revenue-producing lives
of the assets. A comparison of the current regulator-approved asset lives and
the associated shorter estimated asset lives for the most significantly impacted
categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------------
Regulator-Approved Estimated
Asset Lives Asset Lives
------------------------ -----------
<S> <C> <C>
Digital Switch 17.5 12
Digital Circuit 12 9
Conduit 60 50
Copper Cable 24 - 28 15 - 17
Fiber Cable 30 20 - 25
</TABLE>
Employee Benefits
-----------------
On August 15, 1994, Bell Atlantic also announced that it will record a
charge in the third quarter of 1994, as required by Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (Statement No. 112), to recognize the benefit costs for the separation
of employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $20 million and $30 million to recognize its share of the benefit costs
under the separation pay plans.
(4) Restatement of 1993 Financial Statements
Results of operations for the six months ended June 30, 1993 were restated
in the fourth quarter of 1993 to reflect the cumulative effect of the adoption
of Statement No. 112, effective January 1, 1993.
(5) Reclassifications - Statements of Cash Flows
Certain amounts included in the Statement of Cash Flows for the six months
ended June 30, 1993 have been reclassified to conform to the current year's
classifications.
-7-
<PAGE>
Bell Atlantic - Maryland, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At June 30,
-------------
1994 1993
----- ----
<S> <C> <C>
Network Access Lines in Service:
Residence..................... 2,022 1,976
Business...................... 1,041 990
Public........................ 41 41
----- -----
3,104 3,007
===== =====
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate.................. 4,504,501 4,146,201
Intrastate.................. 1,318,764 1,056,810
--------- ---------
5,823,265 5,203,011
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Toll Messages:
Message Telecommunication Services..... 61,342 56,549
Optional Calling Plans................. 41 15
Unidirectional Long-Distance Services.. 3,284 2,948
------ ------
64,667 59,512
====== ======
</TABLE>
-8-
<PAGE>
Bell Atlantic - Maryland, Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1994 increased $29,389,000 or
29.6% from the corresponding period last year. Results for the six months ended
June 30, 1993 reflect an after-tax charge of $14,271,000 for the adoption of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" and an extraordinary charge, net of
tax, of $19,921,000 for the early extinguishment of debt.
OPERATING REVENUES
Operating revenues for the six months ended June 30, 1994 increased
$27,881,000 or 3.0% from the corresponding period last year. The increase in
total operating revenues was comprised of the following:
<TABLE>
<CAPTION>
Increase/(Decrease)
(Dollars in Thousands)
-----------------------
<S> <C>
Local service............................ $13,289
Network access........................... 7,340
Toll service............................. 571
Directory advertising, billing services
and other.............................. 5,451
Less: Provision for uncollectibles...... (1,230)
-------
$27,881
=======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$13,289,000 or 2.7% compared to the same period in 1993. The increase resulted
primarily from growth in network access lines and higher demand for value-added
central office services such as Custom Calling and Caller ID. Access lines in
service at June 30, 1994 increased 3.2% from June 30, 1993 (see Selected
Operating Data on page 8).
Network access revenues are received from interexchange carriers (IXCs) for
their use of the Company's local exchange facilities in providing long-distance
services to IXCs' customers and from end-user subscribers. Switched access
revenues are derived from usage-based charges paid by IXCs for access to the
Company's network. Special access revenues arise from access charges paid by
customers who have private lines, and end-user access revenues are earned from
local exchange carrier customers who pay for access to the network.
Network access revenues increased $7,340,000 or 3.0% compared to the same
period in 1993. Access minutes of use were 11.9% higher than the first six
months of 1993 (see Selected Operating Data on page 8), due to the effects of a
recovering economy and inclement weather conditions in the region during the
first quarter of 1994. In addition to this volume growth, network access
revenues increased due to lower support payments to the National Exchange
Carrier Association (NECA) interstate common line pool. Revenue increases were
partially offset by a reduction of revenues recognized through an interstate
revenue sharing arrangement with affiliated companies and the effect of an
interstate rate reduction filed by the Company with the Federal Communications
Commission (FCC), which became effective on July 2, 1993. In its April 1, 1994
tariff filing, the Company filed revised rates which became effective July 1,
1994. These revised rates, net of lower support obligations to the NECA
interstate common line pool, are not expected to significantly change current
levels of interstate access revenues.
Toll service revenues are earned from interexchange usage services such as
Message Telecommunication Services (MTS), including optional calling plans,
Unidirectional Services (Wide Area Toll Service (WATS) and 800 Services) and
private line services. Toll service revenues increased $571,000 or 1.0% compared
to the same period in 1993. Total toll message volumes were 8.7% higher than the
first six months of 1993 due to the
-9-
<PAGE>
Bell Atlantic - Maryland, Inc.
effects of a recovering economy and harsh weather conditions in the first
quarter of 1994 (see Selected Operating Data on page 8). Growth-related message
toll service revenue increases were substantially offset by a decline in
revenues from private line services, principally due to competitive pressures.
Directory advertising, billing services and other revenues include amounts
earned from directory advertising, billing and collection services provided to
IXCs, premises services such as inside wire installation and maintenance, rent
of Company facilities by affiliates and non-affiliates, and certain nonregulated
enhanced network services.
Directory advertising, billing services and other revenues increased
$5,451,000 or 3.8%, compared to the same period in 1993. This increase was
primarily a result of additional premises service revenue resulting from
contracts with the federal government for inside wire installation. Also
contributing to this increase were higher revenues from billing and collection
services and voice messaging services, primarily Answer Call. The total effect
of these increases was offset in part by certain one-time billing adjustments
recorded in the second quarter of 1993. Directory advertising revenues were
substantially unchanged from the first six months of 1993.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.2% for the six months of 1994 and 1.3% for the same period last
year.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1994 increased
$37,788,000 or 5.5% from the corresponding period last year. The increase in
total operating expenses was comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
<S> <C>
Employee costs................. $ 5,950
Depreciation and amortization.. 14,437
Taxes other than income........ 2,958
Other.......................... 14,443
-------
$37,788
=======
</TABLE>
Employee costs consist of salaries, wages and other employee compensation,
employee benefits, and payroll taxes paid directly by the Company. Similar costs
incurred by employees of Bell Atlantic Network Services, Inc. (NSI), who provide
centralized services on a contract basis, are allocated to the Company and are
included in other operating expenses. Employee costs increased $5,950,000 or
2.9%, compared to the same period in 1993, due to a combination of salary and
wage increases, increased overtime, and higher healthcare benefit costs. Higher
repair and maintenance activity experienced in the first quarter of 1994 caused
by unusually severe winter storm conditions throughout the region contributed to
the increase in employee costs.
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it will record a charge in the third quarter of 1994, as required by
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," to recognize the benefit costs for the separation of
employees who are entitled to benefits under its preexisting separation pay
plans. The charge, which was actuarially determined, represents benefits earned
to date by employees who are expected to receive separation payments in the
future, including those who will be separated through 1997 as a result of the
recently announced workforce reduction initiative. These workforce reductions
will be made possible by improved provisioning systems and customer service
processes, increased spans of control, and consolidation and centralization of
administrative and staff groups. The Company will record a pretax charge of
between $20 million and $30 million to recognize its share of the benefit costs
under the separation pay plans. Costs of enhancing systems and consolidating
work activities will be charged to expense as incurred.
Depreciation and amortization expense increased $14,437,000 or 8.2%, compared
to the same period in 1993. The increase was primarily due to additional
expense resulting from amortization of an intrastate reserve deficiency and
represcribed intrastate depreciation rates, as approved by the Public Service
Commission of Maryland (PSC), effective January 1, 1994. Also contributing to
the increase was higher depreciation expense due to growth in the level of
depreciable plant.
-10-
<PAGE>
Bell Atlantic - Maryland, Inc.
Taxes other than income increased $2,958,000 or 5.6%, compared to the same
period in 1993 principally due to increased property taxes resulting from higher
property assessments.
Other operating expenses consist primarily of contracted services, including
centralized service expenses allocated from NSI, rent, network software costs,
and other general and administrative expenses. Other operating expenses
increased $14,443,000 or 5.9%, compared to the same period in 1993. The
increase was principally due to higher costs allocated from NSI primarily as a
result of higher employee costs, contracted services and employee-related
expenses incurred in that organization. Also contributing to the increase were
higher material costs as a result of repair and maintenance activity relating to
the installation of terminal equipment and the effect of winter storms during
the first quarter of 1994. These increases were offset in part by a reduction in
write-offs during the first half of 1994 associated with uncollectible accounts
with the Company's billing and collection services.
OPERATING INCOME TAXES
Operating income taxes decreased $175,000 or .2%, compared to the same period
in 1993. The Company's effective income tax rate was 35.7% for the six months
ended June 30, 1994, compared to 34.8% for the same period in 1993. The
increase in the effective tax rate was principally the result of federal tax
legislation enacted in the third quarter of 1993, which increased the federal
corporate tax rate from 34% to 35%.
INTEREST EXPENSE
Interest expense decreased $5,935,000 or 14.0%, compared to the same period in
1993, primarily due to the effect of long-term debt refinancings in 1993 and
lower levels of average short-term debt.
COMPETITIVE ENVIRONMENT
The communications industry is currently undergoing fundamental changes which
may have a significant impact on future financial performance of
telecommunications companies. These changes are driven by a number of factors,
including the accelerated pace of technological innovation, the convergence of
telecommunications, cable television, information services and entertainment
businesses, and a regulatory environment in which many traditional regulatory
barriers are being lowered and competition permitted or encouraged.
Communications services and equipment and the number of competitors offering
such services are continuing to expand. The Company's telecommunications
business is currently subject to competition from numerous sources, including
competitive access providers for network access services and competing cellular
telephone companies. An increasing amount of this competition is from large
companies which have substantial capital, technological and marketing resources,
many of which do not face the same regulatory constraints as the Company. Other
potential sources of competition are cable television systems, shared tenant
services and other non-carrier systems which are capable of partially or
completely bypassing the Company's local network.
The entry of well-financed competitors, such as large long-distance carriers
and other local exchange service competitors, has the potential to adversely
affect multiple revenue streams of the Company, including local exchange, local
access, and long-distance services in the market segments and geographical areas
in which the competitors operate. The amount of revenue reductions will depend
on the competitors' success in marketing these services, and the conditions of
interconnection established by regulators. The potential impact is expected to
be offset, to some extent, by revenues from interconnection charges to be paid
to the Company by these competitors.
The Company continues to focus its efforts on becoming more competitive and
seeking growth opportunities. The Company's responses to competitive challenges
include an increased emphasis on meeting customer requirements through the rapid
introduction of new products and services, the delivery of increased customer
value, and the development of customer loyalty programs. In addition, the
Company continues to strive for increased pricing flexibility through efforts to
reprice and repackage existing competitive services, to reduce its cost
structure and workforce through consolidation, re-
-11-
<PAGE>
Bell Atlantic - Maryland, Inc.
engineering and streamlining initiatives, and to achieve an improved regulatory
and legislative environment. Other important competitive responses, including
the development of broadband networks, will improve the Company's ability to
take advantage of the growth opportunities created by technological advances and
the convergence of the communications, information services and entertainment
industries.
On May 19, 1994, Bell Atlantic Corporation announced the specifics underlying
its full service network deployment program to make broadband, interactive,
multimedia services available to up to 8.5 million homes throughout the Bell
Atlantic region by the end of the year 2000. The Company will use a variety of
technologies, on a market by market basis, depending on customer demand and cost
considerations.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. Effective February 1994, the FCC ordered local
exchange carriers (LECs), including the Company, to allow competing carriers to
interconnect to the local exchange network for the purpose of providing switched
access transport services. The terms and conditions of this ruling are similar
to those for special access collocation ordered during 1992. The principal goal
of the FCC's collocation rulings is to encourage competition for these services.
The FCC also granted additional, but limited, pricing flexibility for these
services so that the LECs can better respond to the competition that will
result. The Company does not expect the net revenue impact of special access
collocation to be material. Revenue losses from switched access collocation,
however, are expected to be larger than from special access collocation. Bell
Atlantic and certain other parties appealed both the special and switched access
collocation orders. In June 1994, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC's special access collocation order insofar as
it required physical collocation and remanded for further proceedings in which
the FCC could consider whether, and to what extent, virtual collocation should
be imposed. In July 1994, the FCC voted to require LECs to offer competitors
virtual collocation, with the LECs having the option to offer physical
collocation. Tariffs for virtual collocation for special access are required to
be filed on September 1, 1994 and will become effective on December 15, 1994.
The appeal of the switched access collocation order is being held in abeyance.
The FCC has informed the U.S. Court of Appeals that it will not further litigate
the June 1994 special access decision.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of the price cap rules and decide what changes, if any, should be
made to those rules. Under proposed rulemaking, the FCC identified for
examination three broad sets of issues including those related to the basic
goals of price regulation, the operation of price caps and the transition of
local exchange services to a fully competitive market. This rulemaking is
expected to be concluded by the end of 1994. Any changes to the current price
cap plan are expected to be effective January 1, 1995 or shortly thereafter. At
this time, the Company cannot estimate the financial impact, if any, that would
result if the FCC revised its current price cap rules.
State Regulation
----------------
The communications services of the Company are subject to regulation by the
PSC with respect to intrastate rates and services and other matters.
On April 25, 1994, the PSC approved an application from MFS-Intelenet of
Maryland, Inc.(MFS-I), a subsidiary of MFS Communications Company, Inc., to
provide and resell local exchange and interexchange telecommunications services
to business customers in areas served by the Company. MFS-I is authorized to be
a co-carrier in Maryland and will be assigned its own central office codes for
use with its customers and the Company is required to provide intrastate
switched access collocation. The rates that MFS-I will pay to interconnect with
the Company must contribute to the joint and common costs that support universal
service. On an interim basis, MFS-I will pay the Company 6.1 cents per call to
terminate a call on the Company's network. The PSC has established a schedule,
which extends into 1995, for Phase II of this case. Final interconnection rates
will be decided in Phase II. In May 1994, SBC Media Ventures, Inc. (SBC), an
affiliate of Southwestern Bell Corporation, filed an application to provide
local
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Bell Atlantic - Maryland, Inc.
exchange service in Montgomery County, Maryland. The PSC has established a
schedule for hearings in this case in December 1994. A decision is expected in
1995. The Company expects some loss of market share as a result of these
competitors offering local exchange services.
In November 1993, the PSC instituted an investigation into legal and policy
matters relevant to the regulation of firms, including current
telecommunications providers and cable television firms, which may provide local
exchange and exchange access services in Maryland in the future. On May 5,
1994, the PSC issued an order in which it decided that it had jurisdiction,
under Maryland law, over the cable television companies that might offer
telecommunications services in the future.
OTHER MATTERS
Subsequent Event - Discontinued Application of Statement No. 71
---------------------------------------------------------------
On August 15, 1994, the Company's parent, Bell Atlantic Corporation, announced
that it has determined that it is no longer eligible for continued application
of the accounting required by Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (Statement No.
71). The discontinued application of Statement No. 71 requires the Company, for
financial reporting purposes, to eliminate its regulatory assets and liabilities
and adjust the carrying amount of its telephone plant to the extent that it
determines that such amounts either are overstated as a result of the regulatory
process, or are not recoverable. Accordingly, as of August 1, 1994, the Company
will recognize a non-cash, after-tax extraordinary charge of approximately $316
million to adjust the net carrying amount of telephone plant and equipment and
an after-tax extraordinary charge of approximately $19 million to eliminate net
regulatory assets. The adjustment to the net carrying amount of telephone plant
and equipment will increase the reserve for accumulated depreciation by
approximately $532 million. The Company expects to report a loss for the third
quarter and year as a result of the extraordinary charge for the discontinued
application of Statement No. 71.
As of August 1, 1994, for financial reporting purposes, the Company will
utilize estimated asset lives for certain categories of plant and equipment that
are shorter than those currently approved by regulators (see Note 3 to the
Financial Statements). It is expected that the use of the shorter asset lives
when applied to the reduced net asset base will result in increased depreciation
expense for financial reporting purposes of approximately $16 million for the
remainder of 1994. The ongoing impact on operating expense resulting from the
elimination of the amortization of net regulatory assets is not expected to be
significant in future periods. The Company's accounting and reporting for
regulatory purposes are not affected by the discontinued application of
Statement No. 71.
Environmental Issues
--------------------
The Company is subject to a number of environmental matters as a result of its
operations and shared liability provisions in the Plan of Reorganization,
related to the Modification of Final Judgment. The Company is also responsible
for the remediation of sites with underground fuel storage tanks and other
expenses associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. The Company's recorded liability reflects those
specific issues where remediation activities are currently deemed to be probable
and where the cost of remediation is estimable. Management believes that the
aggregate amount of any potential liability would not have a material effect on
the Company's financial condition or results of operations.
FINANCIAL CONDITION
Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements, including network
expansion and modernization, and payment of dividends. Management expects that
presently foreseeable capital requirements will be financed primarily through
internally generated funds,
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Bell Atlantic - Maryland, Inc.
although additional long-term debt may be needed to fund development activities
and to maintain the Company's capital structure within management's guidelines.
The Company's debt ratio was 43.8% at June 30, 1994, compared to 44.4% at
December 31, 1993.
As of June 30, 1994, the Company had $50,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
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Bell Atlantic - Maryland, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under
the Plan of Reorganization governing the divestiture by AT&T
Corporation (formerly American Telephone and Telegraph Company) of
certain assets of the former Bell System Operating Companies with
respect to private actions relating to pre-divestiture events,
including pending antitrust cases, see Item 3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
Item 6. Exhibits and Reports on Form 8-K
(b) There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 1994.
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Bell Atlantic - Maryland, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - MARYLAND, INC.
Date: August 15, 1994 By /s/ W. M. English
--------------------------------------
W. M. English
Controller
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