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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
_______________
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
--------------
Securities registered pursuant to Section 12(b) of the Act: See attached
Schedule A.
Securities registered pursuant to Section 12(g) of the Act: None.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION J(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
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Bell Atlantic - Maryland, Inc.
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------------------------------- ---------------------
Forty Year 7 1/4% Debentures, due February 1, 2012 New York Stock
Exchange
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Bell Atlantic - Maryland, Inc.
TABLE OF CONTENTS
ITEM NO. PAGE
-------- ----
PART I
1. Business ..................................................... 1
2. Properties ................................................... 10
3. Legal Proceedings ............................................ 11
4. Submission of Matters to a Vote of Security Holders .......... 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 12
6. Selected Financial Data ...................................... 12
7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction J(2).) .......... 13
8. Financial Statements and Supplementary Data .................. 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 21
PART III
10. Directors and Executive Officers of the Registrant ........... 21
11. Executive Compensation ....................................... 21
12. Security Ownership of Certain Beneficial Owners and
Management ................................................... 21
13. Certain Relationships and Related Transactions ............... 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ..................................................... 21
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 27, 1995.
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Bell Atlantic - Maryland, Inc.
PART I
Item 1. Business
GENERAL
Bell Atlantic - Maryland, Inc. (the "Company") is incorporated under the laws
of the State of Maryland and has its principal offices at 1 East Pratt Street,
Baltimore, Maryland 21202 (telephone number 410-539-9900). The Company is a
wholly owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), which is
one of the seven regional holding companies ("RHCs") formed in connection with
the court-approved divestiture (the "Divestiture"), effective January 1, 1984,
of those assets of American Telephone and Telegraph Company ("AT&T") related to
exchange telecommunications, exchange access functions, printed directories and
cellular mobile communications.
The Company presently serves a territory consisting of two complete and parts
of two other Local Access and Transport Areas ("LATAs"). These LATAs are
generally centered on a city or based on some other identifiable common
geography and, with certain limited exceptions, each LATA marks the boundary
within which the Company may provide telephone service.
The Company provides two basic types of telecommunications services. First,
the Company transports telecommunications traffic between subscribers located
within the same LATA ("intraLATA service"), including both local and toll
services. Local service includes the provision of local exchange ("dial tone"),
local private line and public telephone services (including dial tone service
for pay telephones owned by the Company and other pay telephone providers).
Among other local services provided are Centrex (telephone company central
office-based switched telephone service enabling the subscriber to make both
intercom and outside calls) and a variety of special and custom calling
services. Toll service includes message toll service (calling service beyond
the local calling area) within LATA boundaries, and intraLATA Wide Area Toll
Service (WATS)/800 services (volume discount offerings for customers with highly
concentrated demand). Second, the Company provides exchange access service,
which links a subscriber's telephone or other equipment to the transmission
facilities of interexchange carriers which, in turn, provide telecommunications
service between LATAs ("interLATA service") to their customers. The Company
also provides exchange access service to interexchange carriers which provide
intrastate intraLATA long distance telecommunications service.
OPERATIONS
During 1993, Bell Atlantic reorganized certain functions formerly performed
by each of the seven Bell System operating companies ("BOCs") transferred to it
pursuant to the Divestiture, including the Company (collectively, the "Network
Services Companies"), into lines of business ("LOBs") organized across the
Network Services Companies around specific market segments. The Network Services
Companies, however, remain responsible within their respective service areas for
the provision of telephone services, financial performance and regulatory
matters. The LOBs are:
The Consumer Services LOB markets communications services to residential
customers within the service territories of the Network Services Companies,
including the service territory of the Company, and plans to market information
services and entertainment programming.
The Carrier Services LOB markets (i) switched and special access to the
Company's local exchange network, and (ii) billing and collection services,
including recording, rating, bill processing and bill rendering. The principal
customers of this LOB are interexchange carriers; AT&T is the largest single
customer. Other customers include business customers and government agencies
with their own special access network connections, wireless companies and other
local exchange carriers ("LECs") which resell network connections to their own
customers.
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Bell Atlantic - Maryland, Inc.
The Small Business Services LOB markets communications and information
services to small businesses (customers having up to 20 access lines or 100
Centrex lines).
The Large Business Services LOB markets communications and information
services to large businesses (customers having more than 20 access lines or more
than 100 Centrex lines). These services include voice switching/processing
services (e.g., dedicated private lines, custom Centrex, call management and
voice messaging), end-user networking (e.g., credit and debit card transactions,
and personal computer-based conferencing, including data and video),
internetworking (establishing links between the geographically disparate
networks of two or more companies or within the same company), network
integration (integrating multiple geographically disparate networks into one
system), network optimization (disaster avoidance, 911, intelligent vehicle
highway systems), video services (distance learning, telemedicine, surveillance,
videoconferencing) and integrated multi-media applications services.
The Directory Services LOB manages the provision of (i) advertising and
marketing services to advertisers, and (ii) listing information (e.g., White
Pages and Yellow Pages). These services are currently provided primarily
through print media, but the Company expects that use of electronic formats will
increase in the future. In addition, the Directory Services LOB manages the
provision of photocomposition, database management and other related products
and services to publishers.
The Public and Operator Services LOB markets pay telephone and operator
services in the service territories of the Network Services Companies to meet
consumer needs for accessing public networks, locating and identifying network
subscribers, providing calling assistance and arranging billing alternatives
(e.g., calling card, collect and third party calls).
The Federal Systems LOB markets communications and information technology and
services to departments, agencies and offices of the executive, judicial and
legislative branches of the federal government.
The Network LOB manages the technologies, services and systems platforms
required by the other LOBs and the Network Services Companies, including the
Company, to meet the needs of their respective customers, including switching,
feature development and on-premises installation and maintenance services.
The Company has been making and expects to continue to make significant
capital expenditures to meet the demand for communications services and to
further improve such services. Capital expenditures were approximately $369
million in 1992, $349 million in 1993 and $381 million in 1994. The total
investment in plant, property and equipment was approximately $4.90 billion at
December 31, 1992, $5.10 billion at December 31, 1993, and $5.27 billion at
December 31, 1994, in each case after giving effect to retirements, but before
deducting accumulated depreciation at such date.
The Company is projecting construction expenditures for 1995 of approximately
$415 million. However, subject to regulatory approvals, the Network Services
Companies, including the Company, plan to allocate a greater portion of capital
resources to the deployment of broadband network platforms (technologies
ultimately capable of providing a switched facility for access to and transport
of high-speed data services, video-on-demand, and image and interactive
multimedia applications). Most of the funds for these expenditures are expected
to be generated internally. Some additional external financing may be necessary
or desirable.
LINE OF BUSINESS RESTRICTIONS
The consent decree entitled "Modification of Final Judgment" ("MFJ") approved
by the United States District Court for the District of Columbia (the "D.C.
District Court") which, together with the Plan of Reorganization ("Plan")
approved by the D.C. District Court, set forth the terms of Divestiture also
established certain restrictions on the post-Divestiture activities of the RHCs,
including Bell Atlantic
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Bell Atlantic - Maryland, Inc.
and its subsidiaries. Currently, the MFJ's principal restrictions on post-
Divestiture RHC activities are prohibitions on (i) providing interexchange
telecommunications, and (ii) engaging in the manufacture of telecommunications
equipment and customer premises equipment ("CPE"). Since Divestiture, the D.C.
District Court has retained jurisdiction over the construction, modification,
implementation and enforcement of the MFJ.
Legislation has been introduced in the current session of Congress pursuant
to which the line of business restrictions established by the MFJ could be
eliminated or modified. No definitive prediction can be made as to whether or
when any such legislation will be enacted, the provisions thereof or the impact
on the business or financial condition of the Company.
FCC REGULATION AND INTERSTATE RATES
The Company is subject to the jurisdiction of the Federal Communications
Commission ("FCC") with respect to interstate services and certain related
matters. The FCC prescribes a uniform system of accounts for telephone
companies, interstate depreciation rates and the principles and standard
procedures used to separate plant investment, expenses, taxes and reserves
between those applicable to interstate services under the jurisdiction of the
FCC and those applicable to intrastate services under the jurisdiction of the
respective state regulatory authorities ("separations procedures"). The FCC
also prescribes procedures for allocating costs and revenues between regulated
and unregulated activities.
Interstate Access Charges
The Company provides intraLATA service and does not participate in the
provision of interLATA service except through offerings of exchange access
service. The FCC has prescribed structures for exchange access tariffs to
specify the charges ("Access Charges") for use and availability of the Company's
facilities for the origination and termination of interstate interLATA service.
In general, the tariff structures prescribed by the FCC provide that
interstate costs of the Company which do not vary based on usage ("non-traffic
sensitive costs") are recovered from subscribers through flat monthly charges
("Subscriber Line Charges"), and from interexchange carriers through usage-
sensitive Carrier Common Line ("CCL") charges. Traffic-sensitive interstate
costs are recovered from carriers through variable access charges based on
several factors, primarily usage.
In May 1984, the FCC authorized the implementation of Access Charge tariffs
for "switched access service" (access to the local exchange network) and of
Subscriber Line Charges for multiple line business customers (up to $6.00 per
month per line). In 1985, the FCC authorized Subscriber Line Charges for
residential and single-line business customers at the rate of $1.00 per month
per line, which increased in installments to $3.50, effective April 1, 1989.
FCC Access Charge Pooling Arrangements
The FCC previously required that all LECs, including the Company, pool
revenues from CCL and Subscriber Line Charges that cover the non-traffic
sensitive costs of the local exchange network, that is, interstate costs
associated with the lines from subscribers' premises to telephone company
central offices. To administer such pooling arrangements, the FCC mandated the
formation of the National Exchange Carrier Association, Inc. ("NECA"). All but
one of the Network Services Companies, including the Company, received
substantially less from the pool than the amount billed to their interexchange
carrier customers.
The FCC changed its mandatory pooling requirements, effective April 1, 1989.
As a result, the Network Services Companies as a group withdrew from the pool
and were permitted to charge CCL rates which more closely reflect their non-
traffic sensitive costs. The Network Services Companies, including the Company,
are still obligated to make contributions of CCL revenues to companies who
choose to continue to pool non-traffic sensitive costs so that the pooling
companies can charge a CCL rate no greater than the nationwide average CCL rate
of price cap companies. In addition to this continuing obligation, the Network
Services Companies, including the Company, had a
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Bell Atlantic - Maryland, Inc.
transitional support obligation to high cost companies who left the pool in 1989
and 1990. This transitional support obligation ended in July 1994.
In February 1995, the FCC issued an Order to Show Cause with respect to
certain findings contained in an independent audit concluded in December 1991
with respect to certain filings by the Network Services Companies with NECA.
Resolution of these issues is expected in the second half of 1995.
Price Caps
The price cap system, which has been in effect since 1991, places a cap on
overall LEC prices for interstate access services which is modified annually, in
inflation-adjusted terms, by a fixed percentage which is intended to reflect
increases in productivity. The price cap level can also be adjusted to reflect
"exogenous" changes, such as changes in FCC separations procedures or accounting
rules. LECs subject to price caps have somewhat increased flexibility to change
the prices of existing services within certain groupings of interstate services,
known as "baskets".
FCC regulations applicable to the Company provide for an authorized rate of
return of 11.25% for the years 1991 and beyond. To the extent that a company is
able to earn a higher rate of return through improved efficiency, the FCC's
price cap rules permit them to retain the full amount of this higher return up
to 100 basis points above the authorized rate of return (currently, up to a
12.25% rate of return). If a company's rate of return is between 100 and 500
basis points above the authorized rate of return (that is, currently, between
12.25% and 16.25%), the company must share 50% of the earnings above the 100-
basis-point level with customers by reducing rates prospectively. All earnings
above the 500-basis-point level must be returned to customers in the form of
prospective rate decreases. If, on the other hand, a company's rate of return
is more than 100 basis points below the authorized rate of return (that is,
currently, below 10.25%), the company is permitted to increase rates
prospectively to make up the deficiency.
Under FCC-approved tariffs, the Network Services Companies are charging
uniform rates for interstate access services (with the exception of Subscriber
Line Charges) throughout the service territories and are regarded as a single
unit by the FCC for rate of return measurement.
In February 1994, the FCC initiated a rulemaking proceeding to determine the
effectiveness of LEC price cap rules and to decide what changes, if any, should
be made to those rules. This rulemaking is expected to be concluded in the
first half of 1995.
Enhanced Services
In 1985, the FCC initiated an examination of 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 services, subject to compliance with a series of non-
structural safeguards. These safeguards include detailed cost accounting,
protection of customer information, public disclosure of technical interfaces
and certain reporting requirements. In 1990, the U.S. Court of Appeals for the
Ninth Circuit (Court of Appeals) vacated and remanded the matter to the FCC. In
1991, the FCC adopted an order which reinstated relief from the separate
subsidiary requirement upon a company's compliance with the FCC's Open Network
Architecture requirements and strengthened some of the nonstructural safeguards.
In 1992, the Company certified to the FCC that it had complied with applicable
requirements, and the FCC granted structural relief.
In October 1994, the Court of Appeals vacated the 1991 order and remanded the
matter to the FCC for further proceedings. As a result, the FCC has initiated a
broad examination of the state of competition in the enhanced services business
and the adequacy of existing non-structural safeguards. The Company is permitted
to continue to offer existing enhanced services pending further action.
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Bell Atlantic - Maryland, Inc.
FCC Cost Allocation and Affiliate Transaction Rules
FCC rules govern: (i) the allocation of costs between the regulated and
unregulated activities of a communications common carrier and (ii) transactions
between the regulated and unregulated affiliates of a communications common
carrier.
The cost allocation rules apply to certain unregulated activities: activities
that have never been regulated as communications common carrier offerings and
activities that have been preemptively deregulated by the FCC. The costs of
these activities are removed prior to the separations procedures process and are
assigned to unregulated activities in the aggregate, not to specific services,
for pricing purposes. Other activities must be accounted for as regulated
activities, and their costs are subject to separations procedures.
The affiliate transaction rules govern the pricing of assets transferred to
and services provided by affiliates. These rules generally require that assets
be transferred between affiliates at "market price", if such price can be
established through a tariff or a prevailing price actually charged to third
parties. In the absence of a tariff or prevailing price, "market price" cannot
be established, in which case (i) asset transfers from a regulated to an
unregulated affiliate must be valued at the higher of cost or fair market value,
and (ii) asset transfers from an unregulated to a regulated affiliate must be
valued at the lower of cost or fair market value.
The FCC has not attempted to make its cost allocation or affiliate
transaction rules preemptive. State regulatory authorities are free to use
different cost allocation methods and affiliate transaction rules for intrastate
ratemaking and to require carriers to keep separate allocation records.
Telephone Company Provision of Video Dial Tone and Video Programming
In August 1992, the FCC issued an order permitting telephone companies such
as the Company to provide "video dial tone" service. Video dial tone permits
telephone companies to provide video transport to multiple programmers on a non-
discriminatory common carrier basis. In November 1994, the FCC issued an order
which stated that jurisdiction for video dial tone service will be divided
between the FCC and the states. Over the air services and services transported
across state lines will be deemed interstate services subject to regulation by
the FCC. Services delivered entirely within a single state will be deemed
intrastate services subject to state regulation. The order also generally
prohibits the Company from acquiring in-region cable television facilities or
entering into a joint venture with an in-region cable television company or
other video programmer to jointly construct or operate a video dial tone
platform.
In December 1992, two Bell Atlantic Companies, Bell Atlantic - Virginia, Inc.
and Bell Atlantic Video Services Company, filed a lawsuit against the federal
government in the United States District Court for the Eastern District of
Virginia seeking to overturn the prohibition in the Cable Communications Policy
Act of 1984 against LECs providing video programming in their respective
telephone service areas. In 1993, the court struck down this prohibition as a
violation of the First Amendment's freedom of speech protections and enjoined
its enforcement against Bell Atlantic, the Network Services Companies, including
the Company, and Bell Atlantic Video Services Company. This decision was
affirmed by the United States Court of Appeals for the Fourth Circuit in 1994.
The federal government is expected to petition the United States Supreme Court
to review the decision.
In 1993, the FCC granted Bell Atlantic authority to test a new technology
known as Asynchronous Digital Subscriber Line ("ADSL") for use in delivering
video entertainment and information over existing copper telephone lines.
Beginning in March 1993, Bell Atlantic began a one-year technical trial of ADSL
serving up to 400 Bell Atlantic employees in northern Virginia. In the Fall of
1993, Bell Atlantic petitioned the FCC for authorization to expand and convert
this technical trial, upon its completion, into a six month market trial serving
up to 2,000 customers. The FCC approved this application in early 1995. Bell
Atlantic has also requested authority to offer a commercial video dial tone
service to customers served by 25 central offices in parts of northern Virginia
and southern Maryland upon completion of the six month market trial. This
application remains pending at the FCC.
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Bell Atlantic - Maryland, Inc.
Interconnection and Collocation
In order to encourage greater competition in the provision of interstate
special access services, the FCC issued an order in 1992 allowing third parties
to collocate their equipment in telephone company offices to provide special
access (private line) services to the public. The order permits collocating
parties to pay LECs an interconnection charge that is lower than the existing
tariffed rates for similar non-collocated services and it allows LECs limited
additional pricing flexibility for their own special access services when
collocated interconnection is operational. In 1993, the FCC extended collocation
to switched access services under terms and conditions similar to those for
special access collocation. In June 1994, the U.S. Court of Appeals for the
District of Columbia vacated the FCC's special access collocation order insofar
as it required physical collocation. In July 1994, the FCC voted to require LECs
to offer virtual collocation, with the LECs having the option to offer physical
collocation.
STATE REGULATION AND COMPETITIVE ENVIRONMENT
The communications services of the Company are subject to regulation by the
Public Service Commission of Maryland (the "PSC") with respect to intrastate
rates and services and other matters.
In 1990, the PSC instituted a regulatory reform plan (the "Reform Plan") for
regulation of intrastate services provided by the Company. The Reform Plan
provides for sharing of earnings on other-than-competitive services (e.g., basic
business and residential dial tone line and usage, pay telephone services and
intraLATA toll services) within a prescribed range (13.6% to 15.6% return on
equity), for the direct refund to ratepayers of all earnings above that range
and for no sharing of earnings if earnings fall below that range. Earnings on
competitive services (e.g., Centrex intercom and high capacity, special access
and private line services) are not subject to a rate of return limitation. In
connection with its approval of the Reform Plan, the PSC required the Company to
initiate a rate proceeding to examine its financial and operating results under
the Reform Plan and to serve as a rate case for determining rates and rate
structure on a going-forward basis for services that the PSC has determined are
other-than-competitive.
In January 1993, the PSC issued an order directing the Company to reduce
rates prospectively in the aggregate amount of $28.6 million annually. Tariffs
reducing rates by that amount became effective on January 23, 1993.
The Reform Plan was extended through 1995 and the sharing range was changed
to 12.7% to 14.7%. This range was expanded on reconsideration to 12.7% to
16.5%.
Legislation was passed by both houses of the Maryland General Assembly that
would enable the PSC to regulate the Company by a method other than rate base
rate of return regulation. If signed into law, the legislation would become
effective in June 1995.
In April 1994, the PSC approved an application from MFS-Intelenet of
Maryland, Inc. ("MFS-I"), a subsidiary of MFS Communications Company, Inc.,
("MFS") 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 has been
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 include MFS-I's
fair share of the joint and common costs that support universal service. On an
interim basis, MFS-I will pay 6.1 cents per call to terminate a call on the
Company's network. The PSC established a schedule, which extends into 1995, for
Phase II of this case. Final interconnection rates will be decided in Phase II.
In late 1994, MCI Metro ATS and Teleport Communications Group received approval
for the same waivers and interconnection rates established in the MFS-I
proceeding. An application by SBC Media Ventures ("SBC") to provide residential
service in Montgomery County was suspended at SBC's request pending completion
of Phase II of the MFS-I proceeding.
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Bell Atlantic - Maryland, Inc.
COMPETITION
General
Regulatory proceedings, as well as new technology, are continuing to expand
the types of available communications services and equipment and the number of
competitors offering such services. 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.
Alternative Access
A substantial portion of the Company's revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.
The Company faces competition from alternative communications systems,
constructed by large end users, interexchange carriers, and alternative access
vendors, which are capable of originating and/or terminating calls without the
use of the company's plant. MFS has an optical fiber network which currently
competes with the Company in the Baltimore metropolitan area. In the Maryland
suburbs of Washington, D.C., Institutional Communications Company, in which MFS
has acquired a controlling interest, has deployed an optical fiber network to
compete with the Company in the provision of switched and special access
services and local services.
The ability of such alternative access providers to compete with the Company
has been enhanced by the FCC's orders requiring the Company to offer virtual
collocated interconnection for special and switched access services.
Other potential sources of competition are cable television systems, shared
tenant services and other non-carrier systems which are capable of bypassing the
Company's local plant, either partially or completely, through substitution of
special access for switched access or through concentration of
telecommunications traffic on fewer of the Company's lines.
IntraLATA Toll Competition
The ability of interexchange carriers to engage in the provision of
intrastate intraLATA toll service in competition with the Company is subject to
state regulation. Such competition is permitted in Maryland.
Personal Communications Services
Radio-based personal communications services ("PCS") also constitute
potential sources of competition to the Company. PCS consists of wireless
portable telephone services which would allow customers to make and receive
telephone calls from any location using small handsets, and which could also be
used for data transmission. The FCC has authorized trials of such services,
using a variety of technologies, by numerous companies, including Bell
Atlantic's cellular telecommunications subsidiaries.
In September 1993, the FCC issued an order allocating radio spectrum to be
licensed for use in providing PCS. Under the order, seven separate bandwidths
of spectrum, ranging in size from 10 MHz to 30 MHz, would be auctioned to
potential PCS providers in each geographic area of the United States; five of
the spectrum blocks would be auctioned by "basic trading area" and the remaining
two would be auctioned by larger "major trading area" (as such trading areas are
defined by Rand McNally). LECs and companies with LEC subsidiaries, such as
Bell Atlantic, are eligible to bid for PCS licenses, except that cellular
carriers, such as Bell Atlantic, are limited to obtaining only 10 MHz of PCS
bandwidth in areas where they provide cellular service. Bidders other than
cellular providers may obtain multiple licenses aggregating up to 40 MHz of
bandwidth in any area.
In October 1994, Bell Atlantic, NYNEX, AirTouch Communications and U S WEST,
Inc., formed a partnership to bid jointly in the FCC's auctions for PCS
licenses. In March 1995, this partnership was a successful bidder for licenses
for spectrum to provide
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Bell Atlantic - Maryland, Inc.
PCS services in the following markets: Chicago; Dallas; Tampa; Houston; Miami;
New Orleans; Milwaukee; Richmond; San Antonio; Jacksonville; and Honolulu.
Centrex
The Company offers Centrex service, which is a telephone company central
office-based communications system for business, government and other
institutional customers consisting of a variety of integrated software-based
features located in a centralized switch or switches and extended to the
customer's premises primarily via local distribution facilities. In the
provision of Centrex, the Company is subject to significant competition from the
providers of CPE systems, such as private branch exchanges ("PBXs"), which
perform similar functions with less use of the Company's switching facilities.
Users of Centrex systems generally require more subscriber lines than users
of PBX systems of similar capacity. The FCC increased the maximum Subscriber
Line Charge on embedded Centrex lines to $6.00 per month per line, effective
April 1, 1989. Increases in Subscriber Line Charges result in Centrex users
incurring higher charges than users of comparable PBX systems. The PSC has
approved the Company's Centrex tariff methodology and rates, which are designed
to offset the effects of such higher Subscriber Line Charges.
Directories
The Company continues to face significant competition from other providers of
directories, as well as competition from other advertising media. In
particular, the former sales representative of several of the Network Services
Companies, including the Company, publishes directories in competition with
those published by the Company in its service territory.
Public Telephone Services
The Company faces increasing competition in the provision of pay telephone
services from other pay telephone service providers. In addition, the growth of
wireless communications negatively impacts usage of public telephones.
Operator Services
Alternative operator services providers have entered into competition with
the Company's operator services product line.
NEW PRODUCTS AND SERVICES
The following new products and services were introduced by the Company in
1994:
ISDN Anywhere allows customers in non-equipped Integrated Services Digital
Network ("ISDN") offices to be offered service from a designated host switch.
Customers served by non-equipped offices will be offered service from the
designated host switch until such time as their home office becomes equipped
with ISDN. ISDN services provide for simultaneous transport of voice, data and
images.
CustoPak is a Centrex service targeted to small business customers which
provides intercommunication between Centrex lines within the customer's system,
Local Exchange Service, direct in dialing to Centrex lines, identification and
billing of outgoing long distance messages by line number where such billing is
done by the Company, Touch Tone Calling service, and intercept to the main
listed number.
Line Side Answer Supervision ("LSAS") is provided to customer owned coin
operated telephone ("COCOT") customers and is an electrical signal passed back
to the calling end of a switched telephone connection indicating that the call
has gone off hook or has been answered. This service will enhance usage billing
accuracy.
Consumer Opportunity Savings Plan is an optional calling plan that provides a
20% discount on direct distance dialed ("DDD") calls for residence customers who
enroll in the plan and whose monthly intraLATA DDD charges equal or exceed $20.
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Bell Atlantic - Maryland, Inc.
Number-To-Number Referral Service provides for intercept to private branch
exchange and Centrex lines.
In addition to these services, the Company initiated certain other services
including: i) establishing provisions for interconnection with other local
carriers including interconnection rates, directory listing, 911 access and
other services, ii) introducing new payment options for several high speed data
transmission services, and iii) introducing alternate methods for changing Ultra
Forward and Fixed Call Forwarding. The Company also introduced Prepaid Calling
Cards for Bell Atlantic and established provisions for promotions and trial
offerings.
CERTAIN CONTRACTS AND RELATIONSHIPS
Certain planning, marketing, procurement, financial, legal, accounting,
technical support and other management services are provided on behalf of the
Company on a centralized basis by Bell Atlantic's wholly owned subsidiary, Bell
Atlantic Network Services, Inc. ("NSI"). Bell Atlantic Network Funding
Corporation provides short-term financing and cash management services to the
Company.
The seven RHCs each own (directly or through subsidiaries) a one-seventh
interest in Bell Communications Research, Inc. ("Bellcore"). Pursuant to the
Plan, Bellcore furnishes the RHCs and their BOC subsidiaries with technical
assistance such as network planning, engineering and software development, as
well as various other consulting services that can be provided more effectively
on a centralized basis. Bellcore is the central point of contact for
coordinating the efforts of the RHCs in meeting the national security and
emergency preparedness requirements of the federal government. It also helps to
mobilize the combined resources of the RHCs in times of natural disasters.
EMPLOYEE RELATIONS
As of December 31, 1994, the Company had approximately 8,100 employees. This
represents a decrease of approximately 5% from December 31, 1993. This
workforce is augmented by employees of the centralized staff of NSI, who perform
services for the Company on a contract basis.
Approximately 88% of the employees of the Company are represented by the
Communications Workers of America which is affiliated with the American
Federation of Labor - Congress of Industrial Organizations.
The represented associates received a base wage increase of 4.00% in August
1994 under the terms of three-year contracts, which were ratified in October
1992 by unions representing associate employees of the Bell Atlantic Network
Services Companies, including the Company and NSI. Under the same contracts,
associates received a Corporate Profit Sharing payment of $480 per person in
1995 based on Bell Atlantic's 1994 financial performance.
The terms of the contracts ratified in October 1992 by unions representing
associate employees of the Bell Atlantic Network Services Companies, including
the Company and NSI, expire in August 1995.
9
<PAGE>
Bell Atlantic - Maryland, Inc.
Item 2. Properties
The principal properties of the Company do not lend themselves to simple
description by character and location. The Company's investment in plant,
property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Central office equipment.... 40% 40%
Cable, wiring, and conduit.. 38 38
Land and buildings.......... 8 8
Other equipment............. 10 10
Other....................... 4 4
---- ----
100% 100%
==== ====
</TABLE>
"Central office equipment" consists of switching equipment, transmission
equipment and related facilities. "Cable, wiring, and conduit" consists
primarily of aerial cable, underground cable, conduit and wiring. "Land and
buildings" consists of land owned in fee and improvements thereto, principally
central office buildings. "Other equipment" consists of public telephone
terminal equipment and other terminal equipment, poles, furniture, office
equipment, and vehicles and other work equipment. "Other" property consists
primarily of plant under construction, capital leases and leasehold
improvements.
The Company's customers are served by electronic switching systems that
provide a wide variety of services. The Company's network is in a transition
from an analog to a digital network, which provides the capabilities to furnish
advanced data transmission and information management services. At December 31,
1994, approximately 88% of the access lines were served by digital capability.
10
<PAGE>
Bell Atlantic - Maryland, Inc.
Item 3. Legal Proceedings
PRE-DIVESTITURE CONTINGENT LIABILITIES AND LITIGATION
The Plan provides for the recognition and payment by AT&T and the former BOCs
(including the Company) of liabilities that are attributable to pre-Divestiture
events but do not become certain until after Divestiture. These contingent
liabilities relate principally to litigation and other claims with respect to
the former Bell System's rates, taxes, contracts and torts (including business
torts, such as alleged violations of the antitrust laws). Except to the extent
that affected parties otherwise agree, contingent liabilities that are
attributable to pre-Divestiture events are shared by AT&T and the BOCs in
accordance with formulas prescribed by the Plan, whether or not an entity was a
party to the proceeding and regardless of whether an entity was dismissed from
the proceeding by virtue of settlement or otherwise. Each company's allocable
share of liability under these formulas depends on several factors, including
the type of contingent liability involved and each company's relative net
investment as of the effective date of Divestiture. Under the formula generally
applicable to most of the categories of these contingent liabilities, the
Company's aggregate allocable share of liability is approximately 1.5%.
AT&T and various of its subsidiaries and the BOCs (including, in some cases,
the Company) have been and are parties to various types of litigation relating
to pre-Divestiture events, including actions and proceedings involving
environmental claims and allegations of violations of equal employment laws.
Damages, if any, ultimately awarded in the remaining actions relating to pre-
Divestiture events could have a financial impact on the Company whether or not
the Company is a defendant since such damages will be treated as contingent
liabilities and allocated in accordance with the allocation rules established by
the Plan.
While complete assurance cannot be given as to the outcome of any contingent
liabilities or litigation, in the opinion of the Company's management, any
monetary liability or financial impact to which the Company would be subject
after final adjudication of all of the remaining potential or actual pre-
Divestiture claims would not be material in amount to the financial position of
the Company.
11
<PAGE>
Bell Atlantic - Maryland, Inc.
PART I
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction J(2).)
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(Inapplicable.)
Item 6. Selected Financial Data
(Omitted pursuant to General Instruction J(2).)
12
<PAGE>
Bell Atlantic - Maryland, Inc.
Item 7. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction J(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements as listed in the index set forth on page F-1.
RESULTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
For the Years Ended December 31 1994 1993
----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Income Before Extraordinary Items and
Cumulative Effect of Change in Accounting Principle $ 232,979 $256,303
Extraordinary Items
Discontinuation of regulatory accounting
principles, net of tax (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) $(102,140) $222,111
========= ========
</TABLE>
The Company reported a loss of $102,140,000 for 1994, compared to net income
of $222,111,000 for 1993.
Results for 1994 included a noncash, 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. On August 1, 1994, the Company began using shorter asset lives
to depreciate certain categories of plant and equipment. The use of shorter
asset lives increased depreciation expense for 1994 by approximately
$15,600,000, for financial reporting purposes, over the amount that would have
been recorded using asset lives prescribed by regulators at the time of the
discontinued application of Statement No. 71. See Notes 1, 2 and 3 to the
Financial Statements for additional information on the discontinuation of
regulatory accounting principles.
Results for 1993 included an extraordinary charge of $19,921,000 for the
early extinguishment of debt, net of tax, and $14,271,000 for the cumulative
effect of adopting Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (Statement No. 112).
In the third quarter of 1994, the Company recorded a pretax charge of
$26,455,000, in accordance with 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, pursuant to
initiatives announced in August 1994. These workforce reductions will be made
possible by changes in provisioning systems and customer service processes,
increased spans of control, and consolidation and centralization of
administrative and staff groups. Costs to enhance systems and consolidate work
activities will be charged to expense as incurred. The Company will continue to
evaluate ways to streamline and restructure its operations and reduce its
workforce to improve its future cost structure.
13
<PAGE>
Bell Atlantic - Maryland, Inc.
OPERATING REVENUES
------------------
<TABLE>
<CAPTION>
For the Years Ended December 31 1994 1993
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Transport Services
Local service $ 900,686 $ 877,371
Network access 512,377 497,610
Toll service 113,068 113,249
Ancillary Services
Directory advertising 153,335 153,113
Other 77,257 70,448
Value-added Services 193,819 184,927
---------- ----------
Total $1,950,542 $1,896,718
========== ==========
</TABLE>
TRANSPORT SERVICES OPERATING STATISTICS
---------------------------------------
<TABLE>
<CAPTION>
Percentage
1994 1993 Increase
------------------------------------------------------------------------
<S> <C> <C> <C>
AT YEAR-END
-----------
ACCESS LINES IN SERVICE (In thousands)
Residence 2,050 1,992 2.9%
Business 1,067 1,017 4.9
Public 40 40 -
-------- -------
3,157 3,049 3.5
======== =======
FOR THE YEAR
------------
ACCESS MINUTES OF USE (In millions)
Interstate 9,049 8,519 6.2
Intrastate 2,693 2,288 17.7
-------- -------
11,742 10,807 8.7
======== =======
TOLL MESSAGES (In thousands)
Intrastate 106,417 99,042 7.4
Interstate 22,692 21,312 6.5
-------- -------
129,109 120,354 7.3
======== =======
</TABLE>
LOCAL SERVICE REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 23,315 2.7%
--------------------------------------------------------------------------------
</TABLE>
Local service revenues are earned by the Company from the provision of local
exchange, local private line and public telephone services.
Local service revenues increased in 1994 due primarily to the 3.5% growth in
the number of access lines in service, as well as higher usage of basic calling
services.
NETWORK ACCESS REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 14,767 3.0%
--------------------------------------------------------------------------------
</TABLE>
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
service 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.
14
<PAGE>
Bell Atlantic - Maryland, Inc.
Network access revenues increased principally due to higher customer demand
for access services as reflected by growth in access minutes of use of 8.7%, as
well as growth in revenue from end-user charges attributable to increasing
access lines in service. Volume-related increases were partially offset by the
effect of price reductions and lower revenues recognized through an interstate
revenue sharing arrangement with affiliated companies.
TOLL SERVICE REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands (Decrease)
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ (181) (.2)%
--------------------------------------------------------------------------------
</TABLE>
Toll service revenues are earned from calls made outside a customer's local
calling area, but within the same service area boundaries of the Company,
commonly referred to as "LATAs." Other toll services include 800 services and
Wide Area Telephone Service (WATS).
Toll service revenues grew in the first half of 1994 by $571,000, but
declined by $752,000 during the second half of 1994 over comparable periods in
1993. Growth in the first half of the year was primarily the result of the
recovering economy and harsh weather conditions. The decline in revenues in the
second half of the year reflects increased competition. The Company also
implemented price reductions on certain toll services which contributed to the
decline in revenues in the second half of 1994. Price reductions and
competition for private line and interstate toll services resulted in a revenue
decline for the year of $1,230,000. The Company expects that competition for
toll services will continue to intensify in 1995.
DIRECTORY ADVERTISING REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 222 .1%
--------------------------------------------------------------------------------
</TABLE>
Directory advertising revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Page
directories. Other directory advertising services include database and foreign
directory marketing.
Growth in directory advertising revenues was principally due to higher rates
charged for these services. Volume growth continues to be impacted by
competition from other directory companies, as well as other advertising media.
OTHER ANCILLARY REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 6,809 9.7%
--------------------------------------------------------------------------------
</TABLE>
Other ancillary services include billing and collection services provided to
IXCs, and facilities rental services provided to affiliates and non-affiliates.
Other ancillary services revenues increased primarily due to increased rental
revenue from affiliates resulting from rate changes made to facilities rental
agreements, and higher billing and collection revenues due to volume increases.
15
<PAGE>
Bell Atlantic - Maryland, Inc.
VALUE-ADDED SERVICES REVENUES
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 8,892 4.8%
--------------------------------------------------------------------------------
</TABLE>
Value-added services represent a family of enhanced services including Call
Waiting, Return Call, Caller ID, Answer Call, and Voice Mail. These services
also include customer premises services such as inside wire installation and
maintenance and other central office services and features.
Continued growth in the network customer base (access lines) and higher
demand by residence customers for value-added central office and voice messaging
services offered by the Company increased value-added services revenues in 1994.
These revenue increases were offset, in part, by lower revenues generated from
certain maturing central office services and features.
OPERATING EXPENSES
------------------
<TABLE>
<CAPTION>
For the Years Ended December 31 1994 1993
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Employee costs, including benefits and taxes $ 446,618 $ 420,853
Depreciation and amortization 397,404 354,076
Other operating expenses 671,331 654,373
---------- ----------
Total $1,515,353 $1,429,302
========== ==========
</TABLE>
EMPLOYEE COSTS
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 -1993 $ 25,765 6.1%
--------------------------------------------------------------------------------
</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.
The increase in employee costs was largely attributable to a charge of
$20,725,000 to recognize the Company's proportionate share of benefit costs for
the aforementioned separation of employees. The third and fourth quarters of
1994 also included approximately $1,400,000 for the ongoing recognition of costs
under 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. In addition, employee costs were higher due to salary and
wage increases and increased overtime pay caused by unusually severe weather
conditions experienced during the year. These expense increases were offset, in
part, by the effect of lower workforce levels during 1994.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 43,328 12.2%
--------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense increased due principally 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. On August 1, 1994, the Company began 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
16
<PAGE>
Bell Atlantic - Maryland, Inc.
use of the shorter asset lives increased depreciation expense in 1994, for
financial reporting purposes, by approximately $15,600,000, over the amount that
would have been recorded using asset lives prescribed by regulators at the time
of the discontinued application of Statement No. 71. Future depreciation
represcriptions by regulators will not affect depreciation expense recognized
for financial reporting purposes.
OTHER OPERATING EXPENSE
<TABLE>
<CAPTION>
Dollars in Thousands Increase
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ 16,958 2.6%
--------------------------------------------------------------------------------
</TABLE>
Other operating expenses consist primarily of contracted services including
centralized service expenses allocated from NSI, rent, network software costs,
operating taxes other than income, provision for uncollectible accounts
receivable and other costs.
The increase in other operating expense 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, including
$5,730,000 for the Company's allocated share of separation benefit costs
associated with employees of NSI. Also contributing to the increase were higher
non-affiliate contract labor and engineering services costs.
These increases were offset, in part, by $8,297,000 representing the
Company's allocated share of reimbursements of previously recognized costs as a
result of the decision by other Bell Communications Research, Inc. owners to
participate in the Advanced Intelligent Network (AIN) project. Previously, this
project had been supported entirely by Bell Atlantic's network services
subsidiaries, including the Company. Lower directory expenses further offset
these increases.
OTHER INCOME AND (EXPENSE), NET
<TABLE>
<CAPTION>
Dollars in Thousands (Decrease)
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ (5,378) ---
--------------------------------------------------------------------------------
</TABLE>
The change in other income and (expense), net was largely attributable to
additional expenses in 1994, primarily due to increased contributions, including
contributions to schools as part of the state of Maryland's Distance Learning
initiative.
Upon the discontinued application of Statement No. 71, effective August 1,
1994, interest costs on telephone plant under construction were 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 of interest expense. Previously, the Company recorded an
allowance for funds used during construction as a cost of plant and an item of
other income. The allowance for funds used during construction recorded prior
to August 1, 1994 totaled $3,050,000, compared to $4,000,000 for the twelve-
month period ended December 31, 1993. The lower amount in 1994 resulted
primarily from the discontinued application of Statement No. 71 offset, in part,
by increased levels of telephone plant under construction during 1994.
INTEREST EXPENSE
<TABLE>
<CAPTION>
Dollars in Thousands (Decrease)
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $(10,498) (13.4)%
--------------------------------------------------------------------------------
</TABLE>
Interest expense decreased 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 $3,271,000 in capitalized
interest costs,
17
<PAGE>
Bell Atlantic - Maryland, Inc.
subsequent to the discontinued application of Statement No. 71. Partially
offsetting these decreases was the effect of rising interest rates during the
year.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Dollars in Thousands (Decrease)
--------------------------------------------------------------------------------
<S> <C> <C>
1994 - 1993 $ (3,783) (2.8)%
--------------------------------------------------------------------------------
</TABLE>
EFFECTIVE INCOME TAX RATES
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------------------------------------------
<S> <C>
1994 35.8%
--------------------------------------------------------------------------------
1993 34.2%
--------------------------------------------------------------------------------
</TABLE>
The Company's effective income tax rate was higher in 1994 due to the
reduction in the amortization of investment tax credits and the elimination of
the benefit of the rate differential applied to reversing timing differences as
a result of the discontinued application of Statement No. 71. The higher
effective income tax rate also resulted from the effect of a one-time net
benefit recorded in 1993 to adjust deferred taxes for the increase in the
federal corporate income tax rate from 34% to 35%.
COMPETITIVE AND REGULATORY 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 being driven by a number of
factors, including the accelerated pace of technological innovation, the
convergence of the telecommunications, cable television, information services
and entertainment businesses and a regulatory environment in which traditional
barriers are being lowered or eliminated and competition permitted or
encouraged.
The Company's telecommunications business is subject to competition from
numerous sources. An increasing amount of this competition is from companies
that have substantial capital, technological and marketing resources, many of
which do not face the same regulatory constraints as the Company.
A number of well-financed competitors have been granted authority, and others
are likely soon to seek authority, to offer competing local exchange services,
such as dial tone and local usage, in some of the most lucrative of the
Company's local telephone service areas. In April 1994, the Public Service
Commission of Maryland (PSC) approved an application from MFS-Intelenet of
Maryland, Inc. (MFS-I), a subsidiary of MFS Communications Company, Inc., (MFS)
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 has been assigned its own central
office codes for use with its customers and the Company is required to provide
intrastate switched access collocation. The Commission has determined that the
rates that MFS-I will pay to interconnect with the Company include MFS-I's fair
share of the joint and common costs that support universal service. On an
interim basis, MFS-I will pay 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 late 1994, MCI Metro ATS and Teleport Communications Group received
approval for the same waivers and interconnection rates established in the MFS-I
proceeding. An application by SBC Media Ventures (SBC) to provide residential
service in Montgomery County was suspended at SBC's request pending completion
of Phase II of the MFS-I proceeding.
The entry of well-financed competitors has the potential to adversely affect
multiple revenue streams of the Company, including toll, local exchange and
network access services in the market segments and geographical areas in which
the competitors
18
<PAGE>
Bell Atlantic - Maryland, Inc.
operate. The amount of revenue reductions will depend, in part, on the
competitors' success in marketing these services, and the conditions established
by regulatory authorities. 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 respond to competitive challenges by intensely
focusing on meeting customer requirements and by reducing its cost structure
through efficiency and productivity initiatives. In addition, the Company
continues to seek growth opportunities in businesses where it possesses core
competencies.
FEDERAL REGULATION
Legislation has been introduced in the current session of the United States
Congress that would remove barriers to entry in the local exchange markets and
would permit local exchange carriers, such as the Company, to provide interLATA
services. The impact of the enactment of such legislation on the Company's
future financial performance will depend on a number of factors, including the
degree of parity under which competition is permitted in the local and long-
distance markets.
In February 1994, the Federal Communications Commission (FCC) initiated a
rulemaking proceeding to determine the effectiveness of the price cap rules
affecting local exchange carriers, including the Company, and to decide what
changes, if any, should be made to those rules. This rulemaking is expected to
be concluded in the first half of 1995.
Recent FCC rulings have sought to expand competition for special and switched
access services. The FCC ordered local exchange carriers, including the
Company, to provide virtual collocation in the Company's central offices to
competitors, with the option of offering physical collocation, for the purpose
of providing special and switched access transport services. The Company does
not expect the net revenue impact of collocation to be material.
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.
The Company has been operating under a regulatory reform plan instituted by
the PSC in 1990. Legislation was passed by both houses of the Maryland General
Assembly that would enable the PSC to regulate the Company by a method other
than rate base rate of return regulation. If signed into law, the legislation
would become effective in June 1995.
See Item 1 - Description of Business, State Regulation and Competitive
Environment for a complete description of the Company's current regulatory plan
and competitive environment.
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 additional potential liability would not have a material
effect on the Company's results of operations or financial condition.
19
<PAGE>
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. Additional long-term debt may be needed to fund
development activities and to maintain the Company's capital structure within
management's guidelines.
As of December 31, 1994, the Company had $232,900,000 of an unused line of
credit with an affiliate, Bell Atlantic Network Funding Corporation. In
addition, the Company had $50,000,000 remaining under a shelf registration
statement filed with the Securities and Exchange Commission.
The Company's debt ratio was 51.9% at December 31, 1994, compared to 44.4% at
December 31, 1993. The 1994 debt ratio was impacted significantly by the equity
reduction associated with the discontinued application of Statement No. 71.
As a result of the discontinued application of Statement No. 71, the Balance
Sheet at December 31, 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 2 to the
Financial Statements).
20
<PAGE>
Bell Atlantic - Maryland, Inc.
PART II
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on pages F-1
through F-20.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2).)
Item 11. Executive Compensation
(Omitted pursuant to General Instruction J(2).)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Omitted pursuant to General Instruction J(2).)
Item 13. Certain Relationships and Related Transactions
(Omitted pursuant to General Instruction J(2).)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedule appearing on page F-1.
(2) Financial Statement Schedule
See Index to Financial Statements and Financial Statement
Schedule appearing on page F-1.
21
<PAGE>
Bell Atlantic - Maryland, Inc.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(3) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission (SEC), are incorporated
herein by reference as exhibits hereto.
Exhibit Number (Referenced to Item 601 of Regulation S-K)
---------------------------------------------------------
3a Articles of Restatement of registrant filed July 30, 1990.
(Exhibit 3a to the registrant's Annual Report on Form 10-K for
the year ended December 31, 1990, File No. 1-6875.)
3a(i) Articles of Amendment to registrant's Certificate of
Incorporation dated January 11, 1994 and filed January 13,
1994. (Exhibit 3a(i) to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1993,
File No. 1-6875.)
3b By-Laws of the registrant, as amended January 1, 1990.
(Exhibit 3b to the registrant's Annual Report on Form 10-K
for the year ended December 31, 1989, File No. 1-6875.)
3b(i) Resolution dated August 31, 1992 amending Article V,
Section 5-a regarding: Indemnification of Directors.
(Exhibit 3b(i) to the registrant's Annual Report on Form
10-K for the year ended December 31, 1992, File No.
1-6875.)
4 No instrument which defines the rights of holders of long-term
debt of the registrant is filed herewith pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such instrument
to the SEC upon request.
10a Agreement Concerning Contingent Liabilities, Tax Matters and
Termination of Certain Agreements among AT&T, Bell Atlantic
Corporation, the Bell Atlantic Corporation telephone
subsidiaries, and certain other parties, dated as of November 1,
1983. (Exhibit 10a to Bell Atlantic Corporation Annual Report on
Form 10-K for the year ended December 31, 1993, File No. 1-8606.)
10b Agreement among Bell Atlantic Network Services, Inc. and the Bell
Atlantic Corporation telephone subsidiaries, dated November 7,
1983. (Exhibit 10b to Bell Atlantic Corporation Annual Report on
Form 10-K for the year ended December 31, 1993, File No. 1-8606.)
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the
quarter ended December 31, 1994.
22
<PAGE>
Bell Atlantic - Maryland, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ William M. English
---------------------------
William M. English
Controller
March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
++
Principal Executive Officer: +
Frederick D. D'Alessio President and +
Chief Executive +
Officer +
+
Principal Financial Officer: +
+
William M. English Controller +
+
Directors: ++ By /s/ William M. English
George L. Bunting, Jr. + ---------------------------
Frederick D. D'Alessio + William M. English
Dr. Rhoda M. Dorsey + (individually and as
James H. McLean + attorney-in-fact)
Randal S. Milch + March 29, 1995
John W. Seazholtz +
Robert F. Tardio +
++
23
<PAGE>
Bell Atlantic - Maryland, Inc.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Independent Accountants ................................. F-2
Statements of Operations and Reinvested Earnings
For the years ended December 31, 1994, 1993, and 1992 .......... F-3
Balance Sheets - December 31, 1994 and 1993 ....................... F-4
Statements of Cash Flows
For the years ended December 31, 1994, 1993, and 1992 .......... F-6
Notes to Financial Statements ..................................... F-7
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1994, 1993, and 1992 .......... F-20
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
Bell Atlantic - Maryland, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of
Bell Atlantic - Maryland, Inc.
We have audited the financial statements and the financial statement schedule of
Bell Atlantic - Maryland, Inc. as listed in the index on page F-1 of this Form
10-K. The financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bell Atlantic - Maryland, Inc.
as of December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
As discussed in Notes 1 and 2 to the financial statements, the Company
discontinued accounting for its operations in accordance with Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," effective August 1, 1994. Also, as discussed in Notes 1, 7
and 8 to the financial statements, the Company changed its method of accounting
for income taxes and postemployment benefits in 1993.
/s/ COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1995
F-2
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING REVENUES (including $22,062,
$34,301 and $25,429 from affiliates)....... $1,950,542 $1,896,718 $1,853,261
---------- ---------- ----------
OPERATING EXPENSES
Employee costs, including benefits
and taxes................................ 446,618 420,853 418,222
Depreciation and amortization............. 397,404 354,076 352,882
Other (including $354,979,
$336,052 and $328,103 to affiliates)..... 671,331 654,373 635,794
---------- ---------- ----------
1,515,353 1,429,302 1,406,898
---------- ---------- ----------
OPERATING INCOME............................ 435,189 467,416 446,363
OTHER INCOME AND (EXPENSE), NET
Allowance for funds used
during construction...................... 3,050 4,000 6,985
Other, net (including $101, $498
and $43 from affiliate).................. (7,505) (3,077) 1,015
---------- ---------- ----------
(4,455) 923 8,000
INTEREST EXPENSE (including $1,025,
$2,042 and $3,252 to affiliate)............ 68,121 78,619 90,607
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES,
EXTRAORDINARY ITEMS, AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.................................. 362,613 389,720 363,756
PROVISION FOR INCOME TAXES.................. 129,634 133,417 113,149
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE....................... 232,979 256,303 250,607
---------- ---------- ----------
EXTRAORDINARY ITEMS
Discontinuation of Regulatory Accounting
Principles, Net of Tax................... (335,119) --- ---
Early Extinguishment of Debt,
Net of Tax............................... --- (19,921) ---
---------- ---------- ----------
(335,119) (19,921) ---
---------- ---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE
Postemployment Benefits, Net of Tax....... --- (14,271) ---
---------- ---------- ----------
NET INCOME (LOSS)........................... $ (102,140) $ 222,111 $ 250,607
========== ========== ==========
REINVESTED EARNINGS
At beginning of year...................... $ 460,246 $ 456,993 $ 402,171
Add: net income (loss)................... (102,140) 222,111 250,607
---------- ---------- ----------
358,106 679,104 652,778
Deduct: dividends........................ 233,781 218,704 195,700
other changes.................... (66) 154 85
---------- ---------- ----------
At end of year............................ $ 124,391 $ 460,246 $ 456,993
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1993
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $18,646 and $20,028...... $ 290,021 $ 278,176
Parent and affiliates........................ 49,233 55,541
Other........................................ 28,571 16,603
Material and supplies......................... 10,185 7,123
Prepaid expenses.............................. 97,730 98,735
Deferred income taxes......................... 14,942 342
Other......................................... 193 3,418
---------- ----------
490,875 459,938
---------- ----------
PLANT, PROPERTY AND EQUIPMENT.................. 5,268,419 5,097,901
Less accumulated depreciation................. 2,574,532 1,847,677
---------- ----------
2,693,887 3,250,224
---------- ----------
OTHER ASSETS................................... 43,357 150,796
---------- ----------
TOTAL ASSETS................................... $3,228,119 $3,860,958
========== ==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1993
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.............. $ 15,273 $ 26,001
Other.................................. 31,418 7,023
Accounts payable:
Parent and affiliates.................. 160,513 132,599
Other.................................. 187,167 200,880
Accrued expenses:
Vacation pay........................... 32,440 31,785
Interest............................... 16,170 15,619
Taxes.................................. 35,537 24,466
Other.................................. 34,381 29,045
Advance billings and customer deposits.. 46,607 36,851
---------- ----------
559,506 504,269
---------- ----------
LONG-TERM DEBT........................... 976,036 994,461
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS............. 459,789 411,729
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes................... 133,847 366,213
Unamortized investment tax credits...... 25,358 66,241
Other................................... 123,772 232,379
---------- ----------
282,977 664,833
---------- ----------
COMMITMENTS (Note 4)
SHAREOWNER'S INVESTMENT
Common stock - one share, without
par value, owned by parent............. 825,420 825,420
Reinvested earnings..................... 124,391 460,246
---------- ----------
949,811 1,285,666
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S
INVESTMENT ............................. $3,228,119 $3,860,958
========== ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................ $(102,140) $ 222,111 $ 250,607
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 397,404 354,076 352,882
Extraordinary items, net of tax............... 335,119 19,921 ---
Cumulative effect of change in accounting
principle, net of tax....................... --- 14,271 ---
Allowance for funds used during construction.. (3,050) (4,000) (6,985)
Other items, net.............................. 1,092 (26,349) 860
Changes in certain assets and liabilities:
Accounts receivable........................ (17,505) 6,871 (69,199)
Material and supplies...................... (4,529) (3,325) 4,357
Other assets............................... 5,467 (7,388) 18,549
Accounts payable and accrued taxes......... 18,520 55,156 37,200
Deferred income taxes, net................. (53,473) 1,895 (8,253)
Unamortized investment tax credits......... (6,622) (8,670) (12,397)
Employee benefit obligations............... 48,060 16,108 5,585
Other liabilities.......................... (2,957) (1,386) 10,912
--------- --------- ---------
Net cash provided by operating activities........ 615,386 639,291 584,118
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant, property and equipment....... (381,293) (352,366) (361,248)
Net change in note receivable from affiliate..... --- 49 (49)
Other plant-related changes...................... 14,321 13,071 (827)
--------- --------- ---------
Net cash used in investing activities............ (366,972) (339,246) (362,124)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings......................... --- 442,952 99,015
Principal repayments of borrowings and
capital lease obligations....................... (6,698) (2,007) (2,846)
Early extinguishment of debt..................... --- (470,000) (30,000)
Net change in short-term borrowings.............. --- 27,979 (100,000)
Net change in note payable to affiliate.......... (10,728) (96,289) 8,980
Dividends paid................................... (233,781) (218,704) (195,700)
Net change in outstanding checks drawn
on controlled disbursement accounts............. 2,793 15,139 (558)
--------- --------- ---------
Net cash used in financing activities............ (248,414) (300,930) (221,109)
--------- --------- ---------
INCREASE (DECREASE) IN CASH...................... --- (885) 885
CASH, BEGINNING OF YEAR.......................... --- 885 ---
--------- --------- ---------
CASH, END OF YEAR................................ $ --- $ --- $ 885
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
Bell Atlantic - Maryland, Inc.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Bell Atlantic - Maryland, Inc. (the Company), is a wholly owned subsidiary of
Bell Atlantic Corporation (Bell Atlantic).
Effective August 1, 1994, the Company discontinued accounting for its
operations under the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement
No. 71) (see Note 2).
REVENUE RECOGNITION
Revenues are recognized as earned on the accrual basis, which is generally
when services are rendered based on the usage of the Company's local exchange
network and facilities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
MATERIAL AND SUPPLIES
New and reusable materials are carried in inventory, principally at average
original cost, except that specific costs are used in the case of large
individual items.
PREPAID DIRECTORY
Costs of directory production and advertising sales are principally deferred
until the directory is published. Such costs are amortized to expense and the
related advertising revenues are recognized over the average life of the
directory, which is generally 12 months.
PLANT AND DEPRECIATION
The Company's provision for depreciation is based principally on the composite
group remaining life method of depreciation and straight-line composite rates.
This method provides for the recovery of the remaining net investment in
telephone plant, less anticipated net salvage value, over the remaining asset
lives. In connection with the discontinued application of Statement No. 71, the
Company began recording depreciation expense based on expected revenue-producing
asset lives. The following asset lives were used, effective August 1, 1994:
buildings, 34 to 40 years; central office equipment, 6 to 12 years; cable,
wiring, and conduit, 15 to 50 years; and other equipment, 6 to 34 years.
Previously, depreciation expense was based on asset lives that were authorized
by regulatory commissions (see Note 3) and included regulator-approved
amortization of certain classes of telephone plant.
When depreciable plant is replaced or retired, the amounts at which such plant
has been carried in plant, property and equipment are removed from the
respective accounts and charged to accumulated depreciation, and any gains or
losses on disposition are amortized over the remaining asset lives of the
remaining net investment in telephone plant.
MAINTENANCE AND REPAIRS
The cost of maintenance and repairs, including the cost of replacing minor
items not constituting substantial betterments, is charged to operating expense.
F-7
<PAGE>
Bell Atlantic - Maryland, Inc.
CAPITALIZED INTEREST COST
Upon the discontinued application of Statement No. 71, effective August 1,
1994, the Company began reporting capitalized interest 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, as a cost of plant and as an item of
other income.
EMPLOYEE BENEFITS
Pension Plans
Substantially all employees of the Company are covered under multi-employer
noncontributory defined benefit pension plans sponsored by Bell Atlantic and
certain of its subsidiaries, including the Company.
Amounts contributed to the Company's pension plans are actuarially determined,
principally under the aggregate cost actuarial method, and are subject to
applicable federal income tax regulations.
Postretirement Benefits Other Than Pensions
Substantially all employees of the Company are covered under postretirement
health and life insurance benefit plans sponsored by Bell Atlantic and certain
of its subsidiaries, including the Company.
Amounts contributed to 501(c)(9) trusts and 401(h) accounts under applicable
federal income tax regulations to pay certain postretirement benefits are
actuarially determined, principally under the aggregate cost actuarial method.
Postemployment Benefits
The Company provides employees with postemployment benefits such as disability
benefits, workers' compensation, and severance pay.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual accounting for the estimated cost of benefits
provided to former or inactive employees after employment but before retirement.
Prior to 1993, the cost of these benefits was charged to expense as the benefits
were paid.
INCOME TAXES
Bell Atlantic and its domestic subsidiaries, including the Company, file a
consolidated federal income tax return.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No. 109),
which requires the determination of deferred taxes using the asset and liability
method. Under the asset and liability method, deferred taxes are provided on
book and tax basis differences and deferred tax balances are adjusted to reflect
enacted changes in income tax rates.
The consolidated amount of current and deferred tax expense is allocated by
applying the provisions of Statement No. 109 to each subsidiary as if it were a
separate taxpayer.
Prior to 1993, the Company accounted for income taxes based on the provisions
of Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes"
(APB No. 11). Under APB No. 11, deferred taxes were generally provided to
reflect the effect of timing differences on the recognition of revenue and
expense determined for financial and income tax reporting purposes.
F-8
<PAGE>
Bell Atlantic - Maryland, Inc.
The Tax Reform Act of 1986 repealed the investment tax credit (ITC) as of
January 1, 1986, subject to certain transitional rules. ITCs were deferred and
are being amortized as a reduction to income tax expense over the estimated
service lives of the related assets.
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform to
1994 classifications.
2. 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 noncash, 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 technology deployment plans), actual and potential regulatory,
legislative and judicial actions, and other factors are creating fully open and
competitive markets. In such markets, the Company does not believe it can 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>
The increase in the accumulated depreciation reserve of $532,141,000 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 credit amortization was accelerated
as a result of the reduction in remaining 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.
F-9
<PAGE>
Bell Atlantic - Maryland, Inc.
3. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment, which is stated at cost, is summarized as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................ $ 23,743 $ 23,968
Buildings................... 384,236 374,508
Central office equipment.... 2,116,738 2,047,769
Cable, wiring, and conduit.. 2,012,028 1,928,787
Other equipment............. 533,780 515,627
Other....................... 63,522 76,293
Construction-in-progress.... 134,372 130,949
----------- -----------
5,268,419 5,097,901
Accumulated depreciation.... (2,574,532) (1,847,677)
----------- -----------
Total....................... $ 2,693,887 $ 3,250,224
=========== ===========
</TABLE>
The increase in accumulated depreciation in 1994 included $532,141,000
attributable to the adjustment to the carrying value of plant and equipment
resulting from the discontinued application of Statement No. 71 (see Note 2).
The components of the adjustment to the accumulated depreciation reserve are
summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Buildings................... $ 24,965
Central office equipment.... 220,844
Cable, wiring, and conduit.. 263,534
Other equipment............. 22,798
--------
Total....................... $532,141
========
</TABLE>
In connection with the discontinued application of Statement No. 71, effective
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 discontinuance of
Statement No. 71. The shorter lives result from the Company's expectation 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>
Buildings........ 34 - 58 34 - 40
Digital switch... 17.5 12
Digital circuit.. 12 9
Conduit.......... 60 50
Copper cable..... 24 - 28 15 - 17
Fiber cable...... 30 20 - 25
</TABLE>
4. LEASES
The Company has entered into both capital and operating leases for facilities
and equipment used in operations. Plant, property and equipment included
capital leases of $36,647,000 and $47,954,000 and related accumulated
amortization of $13,905,000 and $19,352,000 at December 31, 1994 and 1993,
respectively. The Company incurred initial capital lease obligations of
$6,153,000 in 1994, as compared to no initial capital lease obligations in 1993,
and $11,192,000 in 1992.
F-10
<PAGE>
Bell Atlantic - Maryland, Inc.
Total rent expense amounted to $44,723,000 in 1994, $45,441,000 in 1993, and
$47,824,000 in 1992. Of these amounts, the Company incurred rent expense of
$32,186,000, $32,925,000, and $32,786,000 in 1994, 1993, and 1992, respectively,
to affiliated companies.
At December 31, 1994, the aggregate minimum rental commitments under
noncancelable leases for the periods shown are as follows:
<TABLE>
<CAPTION>
YEARS CAPITAL LEASES OPERATING LEASES
----- -------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1995....................... $ 4,504 $ 7,335
1996....................... 4,453 6,912
1997....................... 4,333 6,201
1998....................... 4,353 5,104
1999....................... 4,370 1,878
Thereafter................. 43,828 2,801
------- -------
Total...................... 65,841 $30,231
=======
Less imputed interest and
executory costs........... 34,871
-------
Present value of net
minimum lease payments.... 30,970
Less current installments.. 682
-------
Long-term obligation at
December 31, 1994......... $30,288
=======
</TABLE>
5. DEBT
LONG-TERM
Long-term debt consists principally of debentures issued by the Company.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Forty year 3 1/4%, due 1995.............. $ 25,000 $ 25,000
Seven year 5 7/8%, due 1999.............. 100,000 100,000
Thirty-nine year 4 3/8%, due 2002........ 50,000 50,000
Ten year 6%, due 2003.................... 200,000 200,000
Thirty-seven year 5 7/8%, due 2004....... 60,000 60,000
Forty year 6 5/8%, due 2008.............. 75,000 75,000
Forty year 7 1/4%, due 2012.............. 50,000 50,000
Thirty year 7.15%, due 2023.............. 250,000 250,000
Forty year 8%, due 2029.................. 50,000 50,000
Forty year 8.3%, due 2031................ 100,000 100,000
---------- ----------
960,000 960,000
Unamortized discount and premium, net.... (7,739) (22,738)
Capital lease obligations-average
rate 11.2% and 11.5%.................... 30,970 34,684
Other-average rate 7.35% to 8.75%,
maturity dates 1998 to 2005............. 24,223 29,538
---------- ----------
Total long-term debt, including current
maturities.............................. 1,007,454 1,001,484
Less maturing within one year............ 31,418 7,023
---------- ----------
Total long-term debt..................... $ 976,036 $ 994,461
========== ==========
</TABLE>
Long-term debt outstanding at December 31, 1994 includes $260,000,000 that is
callable by the Company. The call prices range from 102.5% to 100.0% of face
value, depending upon the remaining term to maturity of the issue. In addition,
long-term debt includes $100,000,000 and $50,000,000 that will become redeemable
only on August 1, 1996 and October 15, 1996, respectively, at the option of the
holders. The redemption prices will be 100.0% of face value, plus accrued
interest.
F-11
<PAGE>
Bell Atlantic - Maryland, Inc.
In 1993, the Company recorded an extraordinary charge associated with the
early extinguishment of debentures called by the Company of $31,020,000, before
an income tax benefit of $11,099,000. In 1992, the financial impact of the
early extinguishment of debentures was not material.
At December 31, 1994, the Company had $50,000,000 remaining under a shelf
registration statement filed with the Securities and Exchange Commission.
DEBT MATURING WITHIN ONE YEAR
Debt maturing within one year consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to affiliate (BANFC)................ $15,273 $26,001
Long-term debt maturing within one year.......... 31,418 7,023
------- -------
Total............................................ $46,691 $33,024
======= =======
Weighted average interest rate for note payable
outstanding at year-end......................... 5.7% 3.3%
======= =======
</TABLE>
The Company has a contractual agreement with an affiliated company, Bell
Atlantic Network Funding Corporation (BANFC), for the provision of short-term
financing and cash management services. BANFC issues commercial paper and
secures bank loans to fund the working capital requirements of Bell Atlantic's
network services subsidiaries, including the Company, and invests funds in
temporary investments on their behalf. At December 31, 1994, the Company had
$232,900,000 of an unused line of credit with BANFC.
6. FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables.
Concentrations of credit risk with respect to trade receivables, other than
those from AT&T, are limited due to the large number of customers in the
Company's customer base. For the years ended December 31, 1994, 1993 and 1992,
revenues generated from services provided to AT&T, primarily network access,
billing and collection, and sharing of network facilities, were $204,624,000,
$209,971,000, and $235,732,000, respectively. At December 31, 1994 and 1993,
Accounts receivable, net, included $15,657,000 and $15,148,000, respectively,
from AT&T.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Accounts Receivable, Accounts Payable, Note Payable to Affiliate (BANFC), and
Accrued Liabilities
The carrying amount approximates fair value.
Debt Maturing Within One Year and Long-Term Debt
Fair value is estimated based on the quoted market prices for the same or
similar issues or is based on the net present value of the expected future cash
flows using current interest rates.
F-12
<PAGE>
Bell Atlantic - Maryland, Inc.
The estimated fair values of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt maturing within one
year, excluding capital
lease obligations.......... $ 46,009 $ 45,928 $ 31,315 $ 31,508
Long-term debt, excluding
unamortized discount and
premium and capital lease
obligations................ $953,487 $844,417 $984,224 $993,172
</TABLE>
7. EMPLOYEE BENEFITS
PENSION PLANS
Substantially all of the Company's management and associate employees are
covered under multi-employer noncontributory defined benefit pension plans
sponsored by Bell Atlantic and certain of its subsidiaries, including the
Company. The pension benefit formula is based on a flat dollar amount per year
of service according to job classification under the associate plan and a stated
percentage of adjusted career average earnings under the plans for management
employees. The Company's objective in funding the plans is to accumulate funds
at a relatively stable level over participants' working lives so that benefits
are fully funded at retirement. Plan assets consist principally of investments
in domestic and foreign corporate equity securities, U.S. and foreign government
and corporate debt securities, and real estate.
Aggregate pension cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pension cost.................. $15,195 $14,139 $15,748
======= ======= =======
Pension cost as a percentage
of salaries and wages........ 4.6% 4.6% 4.1%
======= ======= =======
</TABLE>
Pension cost in 1994 increased slightly over 1993 cost. Pension cost
decreases resulting from plan amendments were more than offset by cost increases
resulting from assumption changes, primarily a decrease in the discount rate
from 7.75% to 7.25%.
The decrease in pension cost in 1993 compared to 1992 is due to the net effect
of the elimination of one-time charges associated with special termination
benefits that were recognized in the preceding year, favorable investment
experience, and changes in plan demographics due to retirement and severance
programs.
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions" (Statement No. 87) requires a comparison of the actuarial present
value of projected benefit obligations with the fair value of plan assets, the
disclosure of the components of net periodic pension costs and a reconciliation
of the funded status of the plans with amounts recorded on the balance sheets.
The Company participates in multi-employer plans and therefore, such disclosures
are not presented for the Company because the structure of the plans does not
allow for the determination of this information on an individual participating
company basis.
F-13
<PAGE>
Bell Atlantic - Maryland, Inc.
Significant actuarial assumptions for pension benefits are as follows at
December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Discount rate............................. 8.25% 7.25% 7.75%
Rate of future increases in
compensation levels...................... 5.25% 5.25% 5.25%
</TABLE>
The expected long-term rate of return on plan assets was 8.25% for 1994, 1993,
and 1992.
The Company has in the past entered into collective bargaining agreements with
unions representing certain employees and expects to do so in the future.
Pension benefits have been included in these agreements and improvements in
benefits have been made from time to time. Additionally, the Company has
amended the benefit formula under pension plans maintained for its management
employees. Expectations with respect to future amendments to the Company's
pension plans have been reflected in determining the Company's pension cost
under Statement No. 87.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of the Company's management and associate employees are
covered under postretirement health and life insurance benefit plans sponsored
by Bell Atlantic and certain of its subsidiaries, including the Company. The
determination of benefit cost for postretirement health benefit plans is based
on comprehensive hospital, medical, surgical and dental benefit plan provisions.
The postretirement life insurance benefit formula used in the determination of
postretirement benefit cost is primarily based on annual basic pay at
retirement. The Company funds the postretirement health and life insurance
benefits of current and future retirees. Plan assets consist principally of
investments in domestic and foreign corporate equity securities, and U.S.
Government and corporate debt securities.
Aggregate postretirement benefit cost is as follows:
YEARS ENDED DECEMBER 31
---------------------------
1994 1993 1992
------- ------- ------
(DOLLARS IN THOUSANDS)
Postretirement benefit cost ............ $37,659 $38,653 $33,431
======= ======= =======
Postretirement benefit cost decreased in 1994 as a result of favorable claims
and demographic experience offset, in part, by cost increases resulting from
assumption changes, primarily a decrease in the discount rate from 7.75% to
7.25%. As a result of the 1992 collective bargaining agreements, Bell Atlantic
amended the postretirement medical benefit plan for associate employees and
certain associate retirees of the Company. The increase in 1993 postretirement
benefit cost over 1992 cost was primarily due to the change in benefit levels
and claims experience. Also contributing to the increase were changes in
actuarial assumptions and demographic experience.
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," (Statement No. 106) requires a
comparison of the actuarial present value of projected postretirement benefit
obligations with the fair value of plan assets, the disclosure of the components
of net periodic postretirement benefit costs, and a reconciliation of the funded
status of the plan with amounts recorded on the balance sheets. The Company
participates in multi-employer plans and therefore, such disclosures are not
presented for the Company because the structure of the plans does not provide
for the determination of this information on an individual participating company
basis.
F-14
<PAGE>
Bell Atlantic - Maryland, Inc.
Significant actuarial assumptions for postretirement benefits are as follows
at December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Discount rate...................... 8.25% 7.25% 7.75%
Rate of future increases in
compensation levels............... 5.25 5.25 5.25
Medical cost trend rate:
Year ending...................... 12.00 13.00 14.50
Ultimate (year 2003)............. 5.00 5.00 5.00
Dental cost trend rate............. 4.00 4.00 4.00
</TABLE>
The expected long-term rate of return on plan assets was 8.25% for 1994,
1993, and 1992.
Postretirement benefits other than pensions have been included in collective
bargaining agreements and have been modified from time to time. The Company has
periodically modified benefits under plans maintained for its management
employees. Expectations with respect to future amendments to the Company's
postretirement benefit plans have been reflected in determining the Company's
postretirement benefit cost under Statement No. 106.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (Statement No. 112). Statement No. 112 requires accrual accounting
for the estimated cost of benefits provided to former or inactive employees
after employment but before retirement. The cumulative effect at January 1,
1993 of adopting Statement No. 112 reduced net income by $14,271,000, net of a
deferred income tax benefit of $7,881,000. The adoption of Statement No. 112
did not have a significant effect on the Company's ongoing level of operating
expense.
In the third quarter of 1994, the Company recorded a pretax charge of
$26,455,000, in accordance with 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,
pursuant to initiatives announced in August 1994.
SAVINGS PLANS AND EMPLOYEE STOCK OWNERSHIP PLANS
Substantially all of the Company's employees are eligible to participate in
savings plans established by Bell Atlantic to provide opportunities for eligible
employees to save for retirement on a tax-deferred basis and encourage employees
to acquire and maintain an equity interest in Bell Atlantic. Under these plans,
a certain percentage of eligible employee contributions are matched with shares
of Bell Atlantic common stock. Bell Atlantic funds the matching contribution
through two leveraged employee stock ownership plans (ESOPs). Bell Atlantic
accounts for its ESOPs in accordance with the accounting rules applicable to
companies with ESOP trusts that held securities prior to December 15, 1989. The
Company recognizes its proportionate share of total ESOP cost based on the
Company's matching obligation attributable to participating Company employees.
The Company recorded total ESOP cost of $7,489,000, $6,751,000, and $9,568,000,
in 1994, 1993, and 1992, respectively.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No. 109).
Statement No. 109 requires the determination of deferred taxes using the asset
and liability method. Under the asset and liability method, deferred taxes are
provided on book and tax basis differences and deferred tax balances are
adjusted to reflect enacted changes
F-15
<PAGE>
Bell Atlantic - Maryland, Inc.
in income tax rates. Prior to 1993, the Company accounted for income taxes based
on the provisions of Accounting Principles Board Opinion No. 11.
Statement No. 109 has been adopted on a prospective basis and amounts
presented for prior years have not been restated. As of January 1, 1993, the
Company recorded a charge to income of $193,000, representing the cumulative
effect of adopting Statement No. 109, which has been reflected in the Provision
for Income Taxes in the Statement of Operations and Reinvested Earnings.
Upon adoption of Statement No. 109, the effects of required adjustments to
deferred tax balances of the Company, which would be recognized in the future
for regulatory purposes, were deferred on the balance sheet as regulatory assets
and liabilities in accordance with Statement No. 71. At January 1, 1993, the
Company recorded income tax-related regulatory assets totaling $108,518,000 in
Other Assets and income tax-related regulatory liabilities totaling $127,475,000
in Deferred Credits and Other Liabilities - Other. During 1993, these
regulatory assets were increased by $4,345,000 and regulatory liabilities were
reduced by $16,727,000 for the effect of the federal corporate income tax rate
increase from 34% to 35%, effective January 1, 1993.
The income tax-related regulatory assets and liabilities were eliminated as a
result of the discontinued application of Statement No. 71, effective August 1,
1994 (see Note 2).
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................. $176,586 $131,251 $124,027
State and local.......... 13,143 8,941 9,772
-------- -------- --------
Total.................... 189,729 140,192 133,799
-------- -------- --------
Deferred:
Federal.................. (50,842) 322 (8,651)
State and local.......... (2,631) 1,573 398
-------- -------- --------
Total.................... (53,473) 1,895 (8,253)
-------- -------- --------
136,256 142,087 125,546
Investment tax credits.... (6,622) (8,670) (12,397)
-------- -------- --------
Total income tax expense.. $129,634 $133,417 $113,149
======== ======== ========
</TABLE>
As a result of the increase in the federal corporate income tax rate from 34%
to 35%, effective January 1, 1993, the Company recorded a net benefit to the tax
provision of $293,000 in 1993.
The provision for income taxes varies from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The difference is attributable to the following factors:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 35.0% 35.0% 34.0%
Investment tax credits..................... (1.8) (2.2) (3.1)
State income taxes, net of federal
tax benefits.............................. 1.7 1.6 1.8
Benefit of rate differential applied to
reversing timing differences.............. (.7) (1.9) (3.3)
Reversal of previously capitalized taxes
and payroll-related construction costs . 1.1 1.7 1.7
Other, net................................. .5 -- --
---- ---- ----
Effective income tax rate.................. 35.8% 34.2% 31.1%
==== ==== ====
</TABLE>
F-16
<PAGE>
Bell Atlantic - Maryland, Inc.
Significant components of deferred tax liabilities (assets) were as follows at
December 31:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation............... $ 374,200 $ 606,400
Other...................... 29,900 19,900
--------- ---------
404,100 626,300
--------- ---------
Deferred tax assets:
Employee benefits.......... (227,600) (196,800)
Investment tax credits..... (9,200) (38,200)
Advance payments........... (10,400) (9,500)
Other...................... (38,000) (15,900)
--------- ---------
(285,200) (260,400)
--------- ---------
Net deferred tax liability.. $ 118,900 $ 365,900
========= =========
</TABLE>
Total deferred tax assets include approximately $162,000,000 and $160,000,000
at December 31, 1994 and 1993, respectively, related to postretirement benefit
costs recognized in accordance with Statement No. 106. This deferred tax asset
will gradually be realized over the estimated lives of current retirees and
employees.
For the year ended December 31, 1992, a deferred income tax benefit resulted
from timing differences in the recognition of revenue and expense for financial
and income tax accounting purposes. The sources of these timing differences and
the tax effects of each were as follows:
1992
----------------------
(DOLLARS IN THOUSANDS)
Accelerated depreciation ................. $ 6,538
Employee benefits ........................ (6,176)
Other, net ............................... (8,615)
-------
Total .................................... $(8,253)
=======
9. SUPPLEMENTAL CASH FLOW AND ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized... $ 65,688 $ 84,959 $ 87,864
Income taxes, net of amounts refunded.. 186,476 115,749 134,343
ADDITIONAL FINANCIAL INFORMATION:
Interest expense incurred, net of
amounts capitalized.................... 68,121 78,619 90,607
Capitalized interest.................... 3,271 --- ---
</TABLE>
Interest paid during the year includes $976,000 in 1994, $2,307,000 in 1993,
and $3,383,000 in 1992 related to short-term financing services provided by Bell
Atlantic Network Funding Corporation (see Note 5).
At December 31, 1994 and 1993, $18,846,000 and $16,053,000, respectively, of
negative cash balances were classified as accounts payable.
F-17
<PAGE>
Bell Atlantic - Maryland, Inc.
10. TRANSACTIONS WITH AFFILIATES
The financial statements include transactions with Bell Atlantic Network
Services, Inc. (NSI), Bell Atlantic Network Funding Corporation (BANFC), Bell
Atlantic, and various other affiliates.
The Company has contractual arrangements with NSI for the provision of various
centralized corporate, administrative, planning, financial and other services.
These arrangements serve to fulfill the common needs of Bell Atlantic's
telephone subsidiaries on a centralized basis. The Company's allocated share of
NSI costs include costs billed by Bell Communications Research, Inc. (Bellcore),
another affiliated company owned jointly by the seven regional holding companies
(as shown separately below).
The Company recognizes interest expense and income in connection with
contractual arrangements with BANFC to provide short-term financing, investing
and cash management services to the Company (see Note 5).
Operating revenues include amounts paid to other affiliates in connection with
an interstate revenue sharing arrangement with Bell Atlantic network services
subsidiaries. Operating revenues and expenses also include miscellaneous items
of income and expense resulting from transactions with other affiliates,
primarily rental of facilities and equipment. The Company also paid cash
dividends to its parent, Bell Atlantic.
Transactions with affiliates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues:
Interstate revenue sharing
to affiliates.............. $(20,374) $ (6,527) $(11,559)
Other revenue from
affiliates................. 42,436 40,828 36,988
-------- -------- --------
22,062 34,301 25,429
Operating expenses:
NSI.......................... 304,850 275,704 263,626
Bellcore..................... 16,106 23,446 31,691
Other........................ 34,023 36,902 32,786
-------- -------- --------
354,979 336,052 328,103
Interest income from BANFC....... 101 498 43
Interest expense to BANFC........ 1,025 2,042 3,252
Dividends paid to Bell Atlantic.. 233,781 218,704 195,700
</TABLE>
Outstanding balances with affiliates are reported on the balance sheets at
December 31, 1994 and 1993 as Accounts receivable - parent and affiliates, Note
payable to affiliate, and Accounts payable - parent and affiliates.
In 1994, NSI expenses included $5,730,000, representing the Company's
proportionate share of separation benefit costs associated with employees of
NSI. Bellcore expenses in 1994 included reimbursements of $8,297,000 from other
Bellcore owners in connection with their decision to participate in the Advanced
Intelligent Network (AIN) project. This project previously had been supported
entirely by Bell Atlantic's network services subsidiaries, including the
Company.
In 1993, the Company's reported charge for the cumulative effect of the change
in accounting for postemployment benefits included $1,478,000, net of a deferred
income tax benefit of $816,000, representing the Company's proportionate share
of NSI's accrued cost of postemployment benefits at January 1, 1993.
On February 1, 1995, the Company declared and paid a dividend in the amount of
$58,900,000 to Bell Atlantic.
F-18
<PAGE>
Bell Atlantic - Maryland, Inc.
11. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY
ITEMS AND
CUMULATIVE
EFFECT OF CHANGE NET
OPERATING OPERATING IN ACCOUNTING INCOME
QUARTER ENDED REVENUES INCOME PRINCIPLE (LOSS)
------------- ---------- --------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
March 31........ $ 483,580 $115,646 $ 62,859 $ 62,859
June 30......... 483,161 120,827 65,980 65,980
September 30*... 496,014 83,050 42,140 (292,979)
December 31..... 487,787 115,666 62,000 62,000
---------- -------- -------- ---------
Total........... $1,950,542 $435,189 $232,979 $(102,140)
========== ======== ======== =========
1993:
March 31**...... $ 465,228 $120,163 $ 64,489 $ 50,218
June 30......... 474,937 126,292 69,153 49,232
September 30.... 477,845 115,791 65,102 65,102
December 31..... 478,708 105,170 57,559 57,559
---------- -------- -------- ---------
Total........... $1,896,718 $467,416 $256,303 $ 222,111
========== ======== ======== =========
</TABLE>
* The loss for the third quarter of 1994 includes an extraordinary charge of
$335,119,000, net of an income tax benefit of $230,341,000, related to the
discontinuation of regulatory accounting principles (see Note 2).
** Net income for the first quarter of 1993 includes a charge of $14,271,000,
net of a deferred income tax benefit of $7,881,000, related to the adoption
of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" (see Note 7).
F-19
<PAGE>
Bell Atlantic - Maryland, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1993, and 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT CHARGED TO OTHER CHARGED TO BALANCE
BEGINNING TO ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES NOTE(a) NOTE(b) OF PERIOD
----------- --------- -------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable:
Year 1994.................. $20,028 $19,596 $22,931 $43,909 $18,646
Year 1993.................. $19,587 $25,702 $27,249 $52,510 $20,028
Year 1992.................. $17,734 $16,344 $28,773 $43,264 $19,587
</TABLE>
------------------------------------------
(a) (i) Amounts previously written off which were credited directly to this
account when recovered; and (ii) accruals charged to accounts payable for
anticipated uncollectible charges on purchases of accounts receivable from
others which were billed by the Company.
(b) Amounts written off as uncollectible.
F-20
<PAGE>
EXHIBITS
FILED WITH ANNUAL REPORT FORM 10-K
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
Bell Atlantic - Maryland, Inc.
COMMISSION FILE NUMBER 1-6875
<PAGE>
Form 10-K for 1994
File No. 1-6875
Page 1 of 1
EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission (SEC), are incorporated herein by reference as exhibits
hereto.
Exhibit Number (Referenced to Item 601 of Regulation S-K)
---------------------------------------------------------
3a Articles of Restatement of registrant filed July 30, 1990. (Exhibit
3a to the registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-6875.)
3a(i) Articles of Amendment to registrant's Certificate of
Incorporation dated January 11, 1994 and filed January 13,
1994. (Exhibit 3a(i) to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, File No.
1-6875.)
3b By-Laws of the registrant, as amended January 1, 1990. (Exhibit 3b to
the registrant's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-6875.)
3b(i) Resolution dated August 31, 1992 amending Article V,
Section 5-a regarding: Indemnification of Directors.
(Exhibit 3b(i) to the registrant's Annual Report on Form
10-K for the year ended December 31, 1992, File No.
1-6875.)
4 No instrument which defines the rights of holders of long-term debt of
the registrant is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the registrant
hereby agrees to furnish a copy of any such instrument to the SEC
upon request.
10a Agreement Concerning Contingent Liabilities, Tax Matters and
Termination of Certain Agreements among AT&T, Bell Atlantic
Corporation, the Bell Atlantic Corporation telephone subsidiaries,
and certain other parties, dated as of November 1, 1983. (Exhibit
10a to Bell Atlantic Corporation Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 1-8606.)
10b Agreement among Bell Atlantic Network Services, Inc. and the Bell
Atlantic Corporation telephone subsidiaries, dated November 7, 1983.
(Exhibit 10b to Bell Atlantic Corporation Annual Report on Form 10-K
for the year ended December 31, 1993, File No. 1-8606.)
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Bell Atlantic - Maryland, Inc. on Form S-3 (File No. 33-55852) of our report
dated February 6, 1995, which includes an explanatory paragraph stating that the
Company discontinued accounting for its operations in accordance with Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," effective August 1, 1994, and changed its method of
accounting for income taxes and postemployment benefits in 1993, on our audit of
the financial statements and financial statement schedule of the Company as of
December 31, 1994 and December 31, 1993, and for each of the three years in the
period ended December 31, 1994, which report is included in this Annual Report
on Form 10-K.
/S/COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 29, 1995
<PAGE>
Exhibit 24
POWER OF ATTORNEY
WHEREAS: Bell Atlantic - Maryland, Inc., a Maryland corporation
(hereinafter referred to as the "Company"), will file with the Securities and
Exchange Commission on or before March 31, 1995, an Annual Report on Form 10-K
pursuant to provisions of the Securities Exchange Act of 1934, as amended, and
implementing regulations thereto; and,
WHEREAS: The undersigned is an officer or director, or both, of the
Company as stated below;
NOW THEREFORE: Each of the undersigned hereby constitutes and appoints
William M. English and Randal S. Milch and each of them, as attorneys for the
purpose of executing and filing such Annual Report, and thereafter to execute
and file any amended Annual Report or supplements to such report, hereby
granting to said attorneys full power to do all things necessary to be done as
fully to all intents and purposes as if the undersigned were personally present,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF: Each of the undersigned has executed this power of
attorney on the 1st day of February, 1995.
[SIGNATURE OF GEORGE L. BUNTING, JR. [SIGNATURE OF RANDAL S. MILCH
APPEARS HERE] APPEARS HERE]
------------------------------------ ---------------------------------------
George L. Bunting, Jr. Randal S. Milch
Director Director, Vice President
[SIGNATURE OF FREDERICK D. D'ALESSIO [SIGNATURE OF JOHN W. SEAZHOLTZ
APPEARS HERE] APPEARS HERE]
------------------------------------ ---------------------------------------
Frederick D. D'Alessio John W. Seazholtz
Director, President Director, Vice President
[SIGNATURE OF RHODA M. DORSEY [SIGNATURE OF ROBERT F. TARDIO
APPEARS HERE] APPEARS HERE]
------------------------------------ ---------------------------------------
Rhoda M. Dorsey Robert F. Tardio
Director Director
[SIGNATURE OF JAMES H. MCLEAN
APPEARS HERE]
------------------------------------
James H. McLean
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND THE BALANCE
SHEET AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 308,667
<ALLOWANCES> 18,646
<INVENTORY> 10,185
<CURRENT-ASSETS> 490,875
<PP&E> 5,268,419
<DEPRECIATION> 2,574,532
<TOTAL-ASSETS> 3,228,119
<CURRENT-LIABILITIES> 559,506
<BONDS> 976,036
<COMMON> 825,420
0
0
<OTHER-SE> 124,391
<TOTAL-LIABILITY-AND-EQUITY> 3,228,119
<SALES> 0
<TOTAL-REVENUES> 1,950,542
<CGS> 0
<TOTAL-COSTS> 1,515,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,121
<INCOME-PRETAX> 362,613
<INCOME-TAX> 129,634
<INCOME-CONTINUING> 232,979
<DISCONTINUED> 0
<EXTRAORDINARY> (335,119)
<CHANGES> 0
<NET-INCOME> (102,140)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
