<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 September 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, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local service................................... $ 259,177 $ 247,016 $ 765,955 $ 740,505
Network access.................................. 131,085 127,649 385,149 374,373
Toll service.................................... 28,250 28,257 86,072 85,508
Directory advertising, billing services and
other (including $16,369 $9,316, $35,574 and
$26,413 from affiliates)...................... 77,502 74,923 225,654 217,624
Provision for uncollectibles.................... (4,158) (6,185) (15,337) (18,594)
--------- ---------- ---------- ----------
491,856 471,660 1,447,493 1,399,416
--------- ---------- ---------- ----------
OPERATING EXPENSES
Employee costs, including benefits
and taxes...................................... 132,694 110,598 346,409 318,363
Depreciation and amortization................... 102,469 89,147 291,989 264,230
Taxes other than income......................... 29,441 28,743 85,247 81,591
Other (including $94,187, $83,295,
$266,623 and $241,954 to
affiliates).................................... 144,202 127,381 404,250 372,986
--------- ---------- ---------- ----------
408,806 355,869 1,127,895 1,037,170
--------- ---------- ---------- ----------
NET OPERATING REVENUES............................ 83,050 115,791 319,598 362,246
--------- ---------- ---------- ----------
OPERATING INCOME TAXES
Federal......................................... 21,482 30,410 87,252 95,880
State........................................... 1,986 2,446 8,098 9,033
--------- ---------- ---------- ----------
23,468 32,856 95,350 104,913
--------- ---------- ---------- ----------
OPERATING INCOME.................................. 59,582 82,935 224,248 257,333
--------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Allowance for funds used during
construction................................... 457 856 3,050 3,049
Miscellaneous - net............................. (1,350) (190) (3,432) (866)
--------- ---------- ---------- ----------
(893) 666 (382) 2,183
--------- ---------- ---------- ----------
INTEREST EXPENSE (including $164,
$880, $698 and $2,257 to affiliate).............. 16,549 18,499 52,887 60,772
--------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE.......................... 42,140 65,102 170,979 198,744
EXTRAORDINARY ITEMS
Discontinuation of Regulatory Accounting
Principles, Net of Tax ........................ (335,119) --- (335,119) ---
Early Extinguishment of Debt, Net of Tax........ --- --- --- (19,921)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Postemployment Benefits, Net of Tax ............ --- --- --- (14,271)
--------- ---------- ---------- ----------
NET INCOME (LOSS)................................. $(292,979) $ 65,102 $ (164,140) $ 164,552
========= ========== ========== ==========
</TABLE>
(Continued)
See Notes to Financial Statements.
-1-
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS (Continued)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1994 1993 1994 1993
--------- -------- --------- --------
<S> <C> <C> <C> <C>
REINVESTED EARNINGS
At beginning of period........... $ 473,984 $456,235 $ 460,246 $456,993
Add: net income (loss)........... (292,979) 65,102 (164,140) 164,552
--------- -------- --------- --------
181,005 521,337 296,106 621,545
Deduct: dividends................ 62,680 56,493 177,781 156,698
other changes............ (70) 188 (70) 191
--------- -------- --------- --------
At end of period................. $ 118,395 $464,656 $ 118,395 $464,656
========= ======== ========= ========
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $18,196 and $20,028....... $ 277,892 $ 278,176
Parent and affiliates........................ 50,501 55,541
Other........................................ 12,908 16,603
Material and supplies.......................... 8,373 7,123
Prepaid expenses............................... 106,953 98,735
Deferred income taxes.......................... 3,438 342
Other.......................................... 2,867 3,418
---------- ----------
462,932 459,938
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................... 5,277,904 5,097,901
Less accumulated depreciation.................. 2,579,332 1,847,677
---------- ----------
2,698,572 3,250,224
---------- ----------
OTHER ASSETS..................................... 46,339 150,796
---------- ----------
TOTAL ASSETS..................................... $3,207,843 $3,860,958
========== ==========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
September 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Affiliate................................... $ 18,439 $ 26,001
Other....................................... 30,654 7,023
Accounts payable:
Parent and affiliates....................... 160,198 132,599
Other....................................... 193,778 200,880
Accrued expenses:
Taxes....................................... 12,620 24,466
Other....................................... 87,138 76,449
Advance billings and customer deposits....... 38,163 36,851
---------- ----------
540,990 504,269
---------- ----------
LONG-TERM DEBT................................. 985,604 994,461
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS................... 451,853 411,729
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ 140,089 366,213
Unamortized investment tax credits........... 26,647 66,241
Other........................................ 118,845 232,379
---------- ----------
285,581 664,833
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock, one share, without par value,
owned by parent............................. 825,420 825,420
Reinvested earnings.......................... 118,395 460,246
---------- ----------
943,815 1,285,666
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT.. $3,207,843 $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>
Nine months ended
September 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ $ 451,867 $ 515,568
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment...... (271,044) (217,888)
Other, net...................................... 4,548 11,667
-------- --------
Net cash used in investing activities............. (266,496) (206,221)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................ --- 442,952
Principal repayments of borrowings and capital
lease obligations.............................. (5,092) (1,573)
Early extinguishment of debt and related
call premium................................... --- (497,173)
Net change in other short-term debt............. --- 20,625
Net change in note payable to affiliate......... (7,562) (116,471)
Dividends paid.................................. (177,781) (156,698)
Net change in outstanding checks drawn
on controlled disbursement accounts............ 5,064 (1,893)
-------- --------
Net cash used in financing activities............. (185,371) (310,231)
-------- --------
NET CHANGE IN CASH ............................... --- (884)
CASH, BEGINNING OF PERIOD ........................ --- 885
-------- --------
CASH, END OF PERIOD .............................. $ --- $ 1
======== ========
</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.
Effective August 1, 1994, the Company no longer reports using generally accepted
accounting principles applicable to regulated entities (see Note 3).
(2) Dividend
On November 1, 1994, the Company declared and paid a dividend in the amount of
$56,000,000 to Bell Atlantic Corporation.
(3) Discontinuation of Regulatory Accounting Principles
In the third quarter of 1994, the Company determined that it was 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). In connection with the decision to
discontinue regulatory accounting principles under Statement No. 71, the Company
recorded a non-cash, after-tax extraordinary charge of $335,119,000, which is
net of an income tax benefit of $230,341,000.
The Company's determination that it was no longer eligible for continued
application of the accounting required by Statement No. 71 was based on the
belief 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 are creating 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 components of the charge recognized as a result of the discontinued
application of Statement No. 71 follow:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
Pre-tax After-tax
-------- ---------
<S> <C> <C>
Increase in plant and equipment depreciation reserve.. $532,141 $337,590
Accelerated investment tax credit amortization........ --- (21,735)
Tax-related regulatory asset and liability elimination --- (1,874)
Other regulatory asset and liability elimination...... 33,319 21,138
-------- --------
Total................................................. $565,460 $335,119
======== ========
</TABLE>
-6-
<PAGE>
Bell Atlantic - Maryland, Inc.
The accumulated depreciation reserve was increased by $532,141,000. This
increase was supported by both an impairment analysis which identified estimated
amounts not recoverable from future discounted cash flows, and a depreciation
study which identified inadequate depreciation reserve levels which the Company
believes resulted principally from the cumulative underdepreciation of plant as
a result of the regulatory process. Investment tax credits (ITCs) are deferred
and amortized over the estimated service lives of the related telephone plant
and equipment. ITC amortization was accelerated as a result of the reduction in
asset lives of the associated telephone plant and equipment.
Upon adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the effects of required adjustments to deferred
tax balances were deferred on the balance sheet as regulatory assets and
liabilities and amortized at the time the related deferred taxes were recognized
in the ratemaking process. As of August 1, 1994, tax-related regulatory assets
of $86,710,000 and tax-related regulatory liabilities of $88,584,000 were
eliminated. The elimination of other regulatory assets and liabilities relate
principally to deferred debt refinancing and vacation pay costs which were being
amortized as they were recognized in the ratemaking process.
On August 1, 1994, for financial reporting purposes, the Company began using
estimated asset lives for certain categories of plant and equipment that are
shorter than those approved by regulators prior to the discontinued application
of Statement No. 71. The shorter asset lives result from the Company's
expectations as to the revenue-producing lives of the assets. A comparison of
the regulator-approved asset lives to the shorter new asset lives for the most
significantly impacted categories of plant and equipment follows:
<TABLE>
<CAPTION>
Average Lives (in years)
-------------------------------------
Regulator-Approved New
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>
As a result of the discontinued application of Statement No. 71, regulatory
accounting principles no longer apply to the Company for financial accounting
and reporting purposes. The Company no longer recognizes regulatory assets and
liabilities and the related amortization. Additionally, the Company reports
depreciation expense based on economic asset lives and reports capitalized
interest costs as a cost of telephone plant and equipment and a reduction in
interest expense, in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost." Prior to the
discontinued application of Statement No. 71, the Company recorded an allowance
for funds used during construction which included both interest and equity
return components and was recorded as a cost of plant and an item of other
income. The Company's accounting and reporting for regulatory purposes are not
affected by the discontinued application of Statement No. 71.
(4) Postemployment Benefits
In the third quarter of 1994, the Company recorded a pretax charge of
$26,455,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those employees who will be
separated through 1997 as a result of a recently announced workforce reduction
initiative.
(5) Restatement
Results of operations for the nine months ended September 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.
-7-
<PAGE>
Bell Atlantic - Maryland, Inc.
(6) Reclassifications - Statements of Cash Flows
Certain amounts included in the Statement of Cash Flows for the nine months
ended September 30, 1993 have been reclassified to conform to the current year's
classifications.
-8-
<PAGE>
Bell Atlantic - Maryland, Inc.
SELECTED OPERATING DATA
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
At September 30,
-----------------
1994 1993
------ -------
<S> <C> <C>
Network Access Lines in Service:
Residence.............................. 2,037 1,984
Business............................... 1,057 1,004
Public................................. 41 41
----- -----
3,135 3,029
===== =====
<CAPTION>
Nine months ended
September 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Carrier Access Minutes of Use:
Interstate............................. 6,787,938 6,340,452
Intrastate............................. 1,998,349 1,655,469
--------- ---------
8,786,287 7,995,921
========= =========
<CAPTION>
Nine months ended
September 30,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Toll Messages:
Message Telecommuncation Services...... 92,490 85,517
Optional Calling Plans................. 209 22
Unidirectional Long-Distance Services.. 5,060 4,413
------ ------
97,759 89,952
====== ======
</TABLE>
-9-
<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
The Company reported a loss of $164,140,000 for the nine months ended
September 30, 1994, compared to net income of $164,552,000 for the corresponding
period last year.
Results for the nine months ended September 30, 1994 included a non-cash,
after-tax extraordinary charge of $335,119,000 in connection with the Company's
decision to discontinue application of regulatory accounting principles 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 required the Company, for
financial reporting purposes, to eliminate its regulatory assets and
liabilities, resulting in an after-tax charge of $19,264,000. In addition, the
Company recorded an after-tax charge of $315,855,000, net of related investment
tax credits of $21,735,000, to adjust the carrying amount of its telephone plant
and equipment.
As a result of the discontinued application of Statement No. 71, the Company
utilizes shorter asset lives for certain categories of plant and equipment than
those approved by regulators prior to the discontinued application of Statement
No. 71. It is expected that the use of the shorter asset lives will increase
depreciation expense for the fourth quarter of 1994 by approximately
$10,000,000, for financial reporting purposes, over the amount that would have
been recorded using asset lives prescribed by regulators prior to the
discontinued application of Statement No. 71. The elimination of the
amortization of net regulatory assets and the effect of changes in certain
accounting policies are not expected to have a significant impact on financial
results in future periods. The Company's accounting and reporting for regulatory
purposes are not affected by the discontinued application of Statement No. 71.
See Note 3 to the Financial Statements for additional information on the
discontinuation of regulatory accounting principles.
In the third quarter of 1994, the Company recorded a pretax charge of
$26,455,000, in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112), to
recognize the Company's proportionate share of benefit costs for the separation
of employees who are entitled to benefits under preexisting Bell Atlantic
separation pay plans. The charge, which was actuarially determined, represents
benefits earned through July 1, 1994 for employees who are expected to receive
separation payments in the future, including those who will be separated through
1997 as a result of a 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 (see Note 4 to the Financial
Statements). Management currently expects the wage and salary savings
associated with the workforce reduction to significantly offset the ongoing
expense impact for separation benefits accrued under these separation pay plans
for 1995 through 1997. Management also expects to recognize additional costs to
enhance systems and consolidate work activities which will be charged to
operating expense as incurred.
-10-
<PAGE>
Bell Atlantic - Maryland, Inc.
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 1994 increased
$48,077,000 or 3.4% 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............................ $25,450
Network access........................... 10,776
Toll service............................. 564
Directory advertising, billing services
and other.............................. 8,030
Less: Provision for uncollectibles...... (3,257)
-------
$48,077
=======
</TABLE>
Local service revenues are earned from the provision of local exchange, local
private line, and public telephone services. Local service revenues increased
$25,450,000 or 3.4% 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 September 30, 1994 increased 3.5% from September 30, 1993 (see
Selected Operating Data on page 9).
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 $10,776,000 or 2.9% compared to the same
period in 1993. Access minutes of use were 9.9% higher than the first nine
months of 1993 (see Selected Operating Data on page 9), due to the effects of a
recovering economy and inclement weather conditions in the region during the
first quarter of 1994. The increase in network access revenues is principally
due to customer demand as reflected by growth in access minutes of use, as well
as increased access lines in service. 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. The 1994 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 generated 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 $564,000 or .7% compared
to the same period in 1993. Total toll message volumes were 8.7% higher than
the first nine months of 1993 due to the effects of a recovering economy and
harsh weather conditions in the first quarter of 1994 (see Selected Operating
Data on page 9). Volume-related revenue growth was reduced by the effect of
repricing calling plan options and a decline in revenues from private line
services, as competitive pressures continue to impact these services.
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.
-11-
<PAGE>
Directory advertising, billing services and other revenues increased
$8,030,000 or 3.7%, compared to the same period in 1993. The increase was
primarily due to increased revenues from rent, premises services and enhanced
network services. The increase in rent revenue is due to additional revenues
received from affiliated companies. Higher demand for premises services and
voice messaging services, including Answer Call, also increased revenues. These
increases were partially offset by certain one-time billing adjustments recorded
in 1993. Directory advertising revenues were substantially unchanged from the
first nine months of 1993.
The provision for uncollectibles, expressed as a percentage of total operating
revenues, was 1.0% for the first nine months of 1994 and 1.3% for the same
period last year.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1994 increased
$90,725,000 or 8.7% 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................. $28,046
Depreciation and amortization.. 27,759
Taxes other than income........ 3,656
Other.......................... 31,264
-------
$90,725
=======
</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 $28,046,000 or 8.8% over the corresponding period in
1993. The increase was principally due to a charge of $20,725,000 to recognize,
in accordance with Statement No. 112, the Company's proportionate share of
benefit costs for the separation of employees who are entitled to benefits under
preexisting Bell Atlantic separation pay plans. Third quarter 1994 employee
costs also included approximately $564,000 for the ongoing accrual of separation
benefit costs under these separation pay plans. Benefit costs associated with
the separation of employees of NSI were allocated to the Company and are
included in other operating expenses. Additionally, the employee costs were
higher due to a combination of salary and wage increases, increased overtime,
and higher healthcare benefit costs for active and retired employees. Higher
repair and maintenance activity caused by unusually severe weather conditions
experienced in 1994 contributed to the overall increase in employee costs.
These expense increases were offset in part by the effect of lower force levels
during 1994.
Depreciation and amortization expense increased $27,759,000 or 10.5% compared
with the same period in 1993. The increase was principally due to growth in
telephone plant and increased rates of depreciation, including depreciation
increases resulting from the Company's aforementioned discontinued application
of Statement No. 71, effective August 1, 1994. The Company is using shorter
asset lives for certain categories of plant and equipment which reflect the
Company's expectations as to the revenue-producing lives of the assets (see Note
3 to the Financial Statements). The use of the shorter asset lives increased
depreciation expense in the third quarter of 1994, for financial reporting
purposes, by approximately $5,500,000. The Company expects depreciation expense
to increase in the fourth quarter of 1994 by approximately $10,000,000, for
financial reporting purposes, over the amount that would have been recorded
using asset lives prescribed by regulators prior to the discontinued application
of Statement No. 71. Future depreciation represcriptions by regulators will not
affect depreciation expense for financial reporting purposes.
Taxes other than income increased $3,656,000 or 4.5%, compared to the same
period in 1993 principally due to increased property taxes resulting from higher
property assessments.
-12-
<PAGE>
Bell Atlantic - Maryland, Inc.
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 $31,264,000 or 8.4%, 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, affiliate rent expense, and employee-related
expenses incurred in that organization, including $5,730,000 for the Company's
allocated share of a charge for separation benefit costs recognized under
Statement No. 112. 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 unusually severe weather conditions in
1994, and the impact of a change made in billing agreements with certain
affiliated companies. These increases were offset in part by a reduction in
uncollectibles during 1994 related to the Company's billing and collection
services.
OPERATING INCOME TAXES
Operating income taxes decreased $9,563,000 or 9.1%, compared to the same
period in 1993. The Company's effective income tax rate was 35.7% for the nine
month period ended September 30, 1994, compared to 34.4% for the same period in
1993. The increase in the effective tax rate was principally the result of the
reduction in amortization of investment tax credits as a result of the
discontinued application of Statement No. 71, and the effect of a one-time net
benefit recorded in the third quarter of 1993 to adjust deferred tax assets for
the increase in the federal corporate income tax rate from 34% to 35%.
OTHER INCOME AND EXPENSE
Other expense was $382,000 for the nine months ended September 30, 1994,
compared to other income of $2,183,000 for the same period in 1993. This change
was the result of additional expenses, principally due to contributions of
classroom equipment to schools as part of the State's Distance Learning
initiative, during 1994.
Prior to the discontinued application of Statement No. 71, the Company
recorded an allowance for funds used during construction as a cost of plant and
an item of other income. As prescribed by regulators, the allowance for funds
used during construction included both interest and equity return components.
Effective August 1, 1994, interest costs on telephone plant under construction
are capitalized in accordance with the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and reported as
a cost of telephone plant and a reduction to interest expense. The amount of
allowance for funds used during construction that was recorded as other income
prior to August 1, 1994 was $3,050,000 in 1994 and $4,000,000 for the twelve
month period ended December 31, 1993. The impact of this change was offset by
increased income recognized for the allowance for funds used during construction
resulting from higher levels of plant under construction prior to August 1,
1994.
INTEREST EXPENSE
Interest expense decreased $7,885,000 or 13.0%, 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. Interest expense was further reduced
by the recognition of $1,484,000 in capitalized interest costs, effective with
the discontinued application of Statement No. 71.
EXTRAORDINARY ITEM
As discussed in Note 3 to the Financial Statements, in connection with the
Company's decision to discontinue application of regulatory accounting
principles under Statement No. 71, the Company recorded a non-cash, after-tax
extraordinary charge of $335,119,000, net of an income tax benefit of
$230,341,000, in the third quarter of 1994.
COMPETITIVE ENVIRONMENT
The communications industry continues to undergo 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
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Bell Atlantic - Maryland, Inc.
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. As described in State Regulation, competitors are also
planning to provide and resell local exchange telecommunications services to
business customers. 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
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,
network access, and toll 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 being 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 services, to reduce its cost structure and
workforce through consolidation, re-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.
REGULATORY ENVIRONMENT
Federal Regulation
------------------
Recent FCC regulatory rulings have sought to expand competition for special
and switched access services. The FCC had ordered local exchange carriers
(LECs), including the Company, to provide physical collocation in the Company's
central offices to competitors for the purpose of providing special and switched
access transport 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. However, 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 were 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. The Company does not
expect the net revenue impact of virtual collocation to be material.
As reported in the Company's 1993 Form 10-K (Part I, Item 1 - Business), the
FCC initiated Computer Inquiry III in 1985 to re-examine its regulations
requiring that "enhanced services" (e.g., voice messaging services, electronic
mail, videotext gateway, protocol conversion) be offered only through a
structurally separated subsidiary. In 1986, the FCC eliminated this requirement,
permitting the Company to offer enhanced
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<PAGE>
services, subject to compliance with a series of nonstructural safeguards.
These safeguards include detailed cost accounting, protection of customer
information, public disclosure of technical interfaces and certain reporting
requirements.
In June 1990, the U.S. Court of Appeals for the Ninth Circuit (Court of
Appeals) vacated and remanded the Computer Inquiry III decisions to the FCC. In
December 1991, the FCC adopted an order which reinstated relief from the
separate subsidiary requirement upon a company's compliance with the FCC's
Computer III Open Network Architecture (ONA) requirements and strengthened some
of the nonstructural safeguards. In March 1992, the Company certified to the FCC
that it had complied with all initial ONA obligations, and the FCC granted the
Company structural relief in June 1992.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As the Court of Appeals has not yet
issued a mandate giving formal effect to the decision, the Company continues to
offer enhanced services pending further action by the Court of Appeals or the
FCC.
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 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. On October 26, 1994, the PSC approved an application from MCI Metro
ATS, a wholly owned subsidiary of MCI, to provide and resell local exchange
services to business customers in areas of the state served by the Company. MCI
Metro ATS requested and received approval for the same waivers and interim
connection rate established in the MFS-I proceeding. In November 1994, Teleport
Communications filed an application to provide local exchange and intraLATA toll
services to business customers in the Baltimore, Maryland metropolitan area.
The Company expects some loss of market share as a result of these competitors
offering local exchange services.
OTHER MATTERS
Environmental Issues
--------------------
The Company is subject to a number of environmental proceedings 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.
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Bell Atlantic - Maryland, Inc.
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, 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 52.3% at September 30, 1994, compared to 44.4% at
December 31, 1993. The debt ratio was significantly impacted by the equity
reduction associated with the discontinued application of Statement No. 71.
As of September 30, 1994, the Company had $50,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
As a result of the discontinued application of Statement No. 71, the Balance
Sheet at September 30, 1994 reflects significant changes due to the elimination
of regulatory assets and liabilities, the revaluation of plant and equipment and
the accelerated amortization of investment tax credits (see Note 3 to the
Financial Statements).
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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 Corp.
(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
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed during the quarter
ended September 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: November 10, 1994 By /s/ W. M. English
--------------------------------------
W. M. English
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 7, 1994.
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements filed pursuant to Item 1 of Part I of this Form 10-Q and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
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<RECEIVABLES> 308,996
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<PP&E> 5,277,904
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<OTHER-SE> 118,395
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