<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6875
BELL ATLANTIC - MARYLAND, INC.
A Maryland Corporation I.R.S. Employer Identification No. 52-0270070
One East Pratt Street, Baltimore, Maryland 21202
Telephone Number (410) 539-9900
------------------
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF BELL ATLANTIC CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
Bell Atlantic - Maryland, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES (including $7,435, $3,735,
$15,892 and $9,631 from affiliates)................ $507,916 $483,161 $1,005,645 $966,741
-------- -------- ---------- --------
OPERATING EXPENSES
Employee costs, including benefits and taxes....... 102,202 106,444 203,072 213,715
Depreciation and amortization...................... 104,645 94,753 207,460 189,520
Other (including $100,388, $93,960, $199,463
and $186,805 to affiliates)...................... 159,633 161,137 324,709 327,033
-------- -------- ---------- --------
366,480 362,334 735,241 730,268
-------- -------- ---------- --------
OPERATING INCOME..................................... 141,436 120,827 270,404 236,473
OTHER INCOME (EXPENSE), NET
Allowance for funds used during construction....... --- 1,274 --- 2,593
Other, net......................................... (941) (924) (2,287) (2,307)
-------- -------- ---------- --------
(941) 350 (2,287) 286
INTEREST EXPENSE (including $945, $256, $1,688
and $534 to affiliate)............................. 16,997 18,224 32,744 36,338
-------- -------- ---------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............. 123,498 102,953 235,373 200,421
PROVISION FOR INCOME TAXES........................... 44,521 36,973 84,969 71,582
-------- -------- ---------- --------
NET INCOME........................................... $ 78,977 $ 65,980 $ 150,404 $128,839
======== ======== ========== ========
REINVESTED EARNINGS
At beginning of period............................. $136,916 $468,194 $ 124,391 $460,246
Add: net income................................... 78,977 65,980 150,404 128,839
-------- -------- ---------- --------
215,893 534,174 274,795 589,085
Deduct: dividend.................................. 65,130 60,190 124,030 115,101
other changes............................. --- --- 2 ---
-------- -------- ---------- --------
At end of period................................... $150,763 $473,984 $ 150,763 $473,984
======== ======== ========== ========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ------------
<S> <C> <C>
CURRENT ASSETS
Short-term investments........................ $ 13,708 $ ---
Accounts receivable:
Customers and agents, net of allowances for
uncollectibles of $19,841 and $18,646...... 310,280 290,021
Affiliates................................... 42,934 49,233
Other........................................ 20,384 28,571
Material and supplies......................... 13,898 10,185
Prepaid expenses.............................. 63,551 97,730
Deferred income taxes......................... 22,684 14,942
Other......................................... --- 193
---------- ----------
487,439 490,875
---------- ----------
PLANT, PROPERTY AND EQUIPMENT................... 5,347,572 5,268,419
Less accumulated depreciation................. 2,659,696 2,574,532
---------- ----------
2,687,876 2,693,887
---------- ----------
OTHER ASSETS.................................... 43,414 43,357
---------- ----------
TOTAL ASSETS.................................... $3,218,729 $3,228,119
========== ==========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Bell Atlantic - Maryland, Inc.
BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate.................... $ 46,440 $ 15,273
Other........................................ 6,839 31,418
Accounts payable:
Affiliates................................... 154,114 160,513
Other........................................ 174,974 187,167
Accrued expenses:
Taxes........................................ 25,808 35,537
Other........................................ 76,296 82,991
Advance billings and customer deposits........ 41,797 46,607
---------- ----------
526,268 559,506
---------- ----------
LONG-TERM DEBT.................................. 973,918 976,036
---------- ----------
EMPLOYEE BENEFIT OBLIGATIONS.................... 468,204 459,789
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes......................... 133,461 133,847
Unamortized investment tax credits............ 23,285 25,358
Other......................................... 117,410 123,772
---------- ----------
274,156 282,977
---------- ----------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value,
owned by parent.............................. 825,420 825,420
Reinvested earnings........................... 150,763 124,391
---------- ----------
976,183 949,811
---------- ----------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT... $3,218,729 $3,228,119
========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Bell Atlantic - Maryland, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES......... $324,993 $310,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments............ (13,708) ---
Additions to plant, property and equipment...... (220,092) (161,404)
Other plant-related changes..................... 17,893 3,827
-------- --------
Net cash used in investing activities............. (215,907) (157,577)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
lease obligations.............................. (28,225) (3,462)
Net change in note payable to affiliate......... 31,167 (18,105)
Dividends paid.................................. (124,030) (115,101)
Net change in outstanding checks drawn
on controlled disbursement accounts............ 12,002 (16,053)
-------- --------
Net cash used in financing activities............. (109,086) (152,721)
-------- --------
NET CHANGE IN CASH................................ --- ---
CASH, BEGINNING OF PERIOD......................... --- ---
-------- --------
CASH, END OF PERIOD............................... $ --- $ ---
======== ========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Bell Atlantic - Maryland, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
by Bell Atlantic - Maryland, Inc. (the Company) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The December 31,
1994 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles. In
the opinion of management, these financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
Effective August 1, 1994, 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."
2. Dividend
On August 1, 1995, the Company declared and paid a dividend in the amount
of $77,750,000 to Bell Atlantic Corporation.
3. Reclassifications
Certain reclassifications of prior year's data have been made to conform to
1995 classifications.
5
<PAGE>
Bell Atlantic - Maryland, Inc.
Item 2. Management's Discussion and Analysis of Results of Operations
(Abbreviated pursuant to General Instruction H(2).)
This discussion should be read in conjunction with the Financial Statements
and Notes to Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income for the first six months of 1995 of
$150,404,000, compared to net income of $128,839,000 for the same period in
1994.
Major items affecting the comparison of results for the six month period
ended June 30, 1995, versus the six month period ended June 30, 1994, are
discussed in the following sections.
OPERATING REVENUES
- ------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30 1995 1994
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Transport Services
Local service............................. $ 460,032 $446,650
Network access............................ 270,303 254,064
Toll service.............................. 54,930 57,822
Ancillary Services
Directory advertising..................... 82,711 76,791
Other..................................... 39,352 36,767
Value-added Services......................... 98,317 94,647
---------- --------
Total........................................ $1,005,645 $966,741
========== ========
<CAPTION>
TRANSPORT SERVICES OPERATING STATISTICS
- ---------------------------------------
Percentage
1995 1994 Increase
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
At June 30
- ----------
Access Lines in Service (In thousands)
Residence................................ 2,076 2,022 2.7%
Business................................. 1,094 1,041 5.1
Public................................... 41 41 -
----- -----
3,211 3,104 3.4
===== =====
For the Six Month Period Ended June 30
- --------------------------------------
Access Minutes of Use (In millions)
Interstate............................... 4,720 4,504 4.8
Intrastate............................... 1,399 1,319 6.1
----- -----
6,119 5,823 5.1
===== =====
Toll Messages (In thousands)
Intrastate............................... 54,042 53,364 1.3
Interstate............................... 11,621 11,303 2.8
------ ------
65,663 64,667 1.5
====== ======
</TABLE>
6
<PAGE>
Bell Atlantic - Maryland, Inc.
LOCAL SERVICE REVENUES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 13,382 3.0%
- --------------------------------------------------------------------------------
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 primarily due to a 3.4% growth in the
number of access lines in service and increased usage and data transport by
business customers.
NETWORK ACCESS REVENUES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 16,239 6.4%
- --------------------------------------------------------------------------------
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 IXCs and end-users who have private networks, and end-user
access revenues are earned from local exchange carrier customers who pay for
access to the network.
Network access revenues increased principally due to higher customer
demand for access services as reflected by a 5.1% growth in access minutes of
use, as well as growth in revenues from end-user charges attributable to
increasing access lines in service. Increased demand for digital data transport
services and higher revenues recognized through an interstate revenue sharing
agreement with affiliated companies also contributed to growth in access
revenues. Revenues in the first half of 1995 were also positively impacted by a
temporary rate increase that was in effect from March 17, 1995 through July 31,
1995 to recover prior years "exogenous" postemployment benefit costs.
Revenue growth was partially offset by price reductions in effect from
July 1, 1994 to July 31, 1995. Further, reported growth in access minutes of use
and revenues in the first half of 1995 was negatively impacted by higher
storm-related calling volumes experienced in the first quarter of 1994.
Effective August 1, 1995, the Company implemented price decreases of
approximately $45,800,000 on an annual basis, principally for interstate access
services, in connection with the Federal Communications Commission's (FCC)
Interim Price Cap Order. These price decreases include the scheduled expiration
of a temporary rate increase of approximately $14,700,000 on an annualized basis
that was in effect from March 17, 1995 through July 31, 1995 to recover prior
years "exogenous" postemployment benefit costs. Approximately 80% of the
remaining $31,100,000 reduction results from compliance with the Interim Plan.
The remaining 20% represents reductions that the Company was required to make
under the prior Price Cap Plan. It is expected that these price decreases will
be partially offset by volume increases. As a result of the selection of a 5.3%
Productivity Factor under the Interim Plan, the Company is no longer required to
share a portion of its interstate earnings. See "Competitive and Regulatory
Environment - Federal Regulation" for a further discussion of FCC interstate
access revenue issues.
TOLL SERVICE REVENUES
(Dollars in Thousands) (Decrease)
- --------------------------------------------------------------------------------
Six Months $ (2,892) (5.0)%
- --------------------------------------------------------------------------------
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).
7
<PAGE>
Bell Atlantic - Maryland, Inc.
The decrease in toll service revenues was due to increased competition for
intraLATA toll services and price reductions on certain toll services. The
effect of a price reduction for residence toll services and the impact of
customers switching to lower priced optional calling plans more than offset
volume-related revenue growth.
DIRECTORY ADVERTISING REVENUES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 5,920 7.7%
- --------------------------------------------------------------------------------
Directory advertising revenues are earned primarily from local advertising
and marketing services provided to businesses in White and Yellow Pages
directories. Other directory advertising services include database and foreign
directory marketing.
Growth in directory advertising revenues was due primarily to higher rates
charged for these services. Changes in billing procedures and lower customer
claims and disconnects further boosted directory services revenues in the first
half of 1995. Volume growth continues to be impacted by competition from other
directory companies, as well as other advertising media.
OTHER ANCILLARY SERVICES REVENUES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 2,585 7.0%
- --------------------------------------------------------------------------------
Other ancillary services include billing and collection services provided
to IXCs and facilities rental services provided to affiliates and non-
affiliates.
Other ancillary services increased due to higher facilities rental
revenues. This increase was offset, in part, by a reduction in billing and
collection revenues as a result of a revised contract with an IXC, which no
longer includes certain billing and collection services.
VALUE-ADDED SERVICES REVENUES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 3,670 3.9%
- --------------------------------------------------------------------------------
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 certain value-added central office and voice
messaging services offered by the Company, including the introduction of Caller
ID Deluxe in the fourth quarter of 1994, increased value-added services revenues
in the first half of 1995. These increases were partially offset by lower
customer premises services revenues, primarily due to a reduction in contract
billing for certain advanced premises services for large businesses. Such
premises services, which were primarily performed by the Company until May 1994,
are now being contracted with another affiliate of Bell Atlantic.
8
<PAGE>
Bell Atlantic - Maryland, Inc.
OPERATING EXPENSES
- ------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30 1995 1994
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Employee costs, including benefits and taxes.. $203,072 $213,715
Depreciation and amortization................. 207,460 189,520
Other operating expenses...................... 324,709 327,033
-------- --------
Total......................................... $735,241 $730,268
======== ========
</TABLE>
EMPLOYEE COSTS
(Dollars in Thousands) (Decrease)
- --------------------------------------------------------------------------------
Six Months $ (10,643) (5.0)%
- --------------------------------------------------------------------------------
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 decrease in employee costs was principally due to reduced overtime pay
and repair and maintenance activity, both of which were higher in the first
quarter of 1994 as a result of unusually severe weather conditions. The effect
of lower workforce levels in 1995 also contributed to the overall decrease in
employee costs. These reductions were partially offset by annual salary and
wage increases for management and associate employees, effective April 1995
and August 1994, respectively.
The contract with the Company's union, the Communications Workers of
America (CWA), expired on August 5, 1995. As of August 7, 1995, the CWA has not
called a strike and the Company continues to make work available to associate
employees represented by the CWA at the same wages and benefits as under the
expired contract until further notice.
DEPRECIATION AND AMORTIZATION
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 17,940 9.5%
- --------------------------------------------------------------------------------
Depreciation and amortization increased due to higher depreciation rates
and growth in depreciable telephone plant. The higher depreciation rates
resulted principally from the discontinued application of regulatory accounting
principles, effective August 1, 1994. The composite depreciation rate was 8.1%
for the first half of 1995. The Company expects this composite depreciation rate
to remain substantially unchanged for the remainder of 1995.
OTHER OPERATING EXPENSES
(Dollars in Thousands) (Decrease)
- --------------------------------------------------------------------------------
Six Months $ (2,324) (.7)%
- --------------------------------------------------------------------------------
Other operating expenses consist primarily of contracted services including
centralized services expenses allocated from NSI, rent, network software costs,
operating taxes other than income, provision for uncollectible accounts
receivable, and other costs.
The decrease in other operating expenses was attributable to lower costs
for network software due to the timing of purchases; lower contracted labor and
engineering costs which were due, in part, to the effect of the severe winter
storms in the first quarter of 1994; and lower directory production costs. A
decrease in the provision for uncollectible accounts receivable also contributed
to lower other operating expenses in the first half of 1995.
9
<PAGE>
Bell Atlantic - Maryland, Inc.
These decreases were substantially offset by higher centralized services
costs allocated from NSI, primarily as a result of increased advertising and
employee costs, as well as additional costs incurred in that organization to
enhance systems and consolidate work activities at Bell Atlantic's network
services subsidiaries.
OTHER INCOME (EXPENSE), NET
(Dollars in Thousands) (Decrease)
- --------------------------------------------------------------------------------
Six Months $ (2,573)
- --------------------------------------------------------------------------------
The change in other income (expense), net, was largely attributable to a
reduction in income related to the allowance for funds used during construction.
Upon the discontinued application of regulatory accounting principles,
effective August 1, 1994, the Company began recognizing capitalized interest
costs as a reduction of interest expense. Previously, the Company recorded an
allowance for funds used during construction as an item of other income.
INTEREST EXPENSE
(Dollars in Thousands) (Decrease)
- --------------------------------------------------------------------------------
Six Months $ (3,594) (9.9)%
- --------------------------------------------------------------------------------
Interest expense decreased principally due to the recognition of
capitalized interest costs, subsequent to the discontinued application of
regulatory accounting principles, effective August 1, 1994. Partially offsetting
this decrease was additional expense resulting from higher levels of average
short-term debt and higher interest rates in the first half of 1995.
PROVISION FOR INCOME TAXES
(Dollars in Thousands) Increase
- --------------------------------------------------------------------------------
Six Months $ 13,387 18.7%
- --------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATES
For the Six Months Ended June 30
- --------------------------------------------------------------------------------
1995 36.1%
- --------------------------------------------------------------------------------
1994 35.7%
- --------------------------------------------------------------------------------
The Company's effective income tax rate was higher in the first half of
1995 principally 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, both as a result of the discontinued application
of regulatory accounting principles in August 1994.
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.
10
<PAGE>
Bell Atlantic - Maryland, Inc.
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 (Teleport)
received approval for the same waivers and interconnection rates established in
the MFS-I proceeding. An application in late 1994 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. In August 1995, Teleport
filed an application to provide residential phone service in Maryland, in
addition to the already approved business phone service mentioned above.
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 markets and geographical areas in which the
competitors 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.
Federal Regulation
On August 4, 1995, the U.S. House of Representatives passed a bill which
includes provisions that would open local exchange markets to competitors and
would permit local exchange carriers, such as the Company, to provide interLATA
services and engage in manufacturing upon meeting certain conditions. The
Senate passed a similar bill in June of 1995. A conference committee is
expected to work through the differences between the two bills in September and
October of 1995. No definitive prediction can be made as to whether or when such
legislation will be enacted, the provisions thereof or the impact on the
business or financial condition of the Company.
In February 1995, the FCC issued an Order to Show Cause with respect to
certain findings contained in an independent audit of Bell Atlantic's network
services subsidiaries' 1988 and first quarter 1989 reported adjustments to the
National Exchange Carrier Association (NECA) interstate common line pool. On May
2, 1995, Bell Atlantic filed its response to the Show Cause Order, asserting
that there is no legal basis for the FCC to institute enforcement proceedings
with respect to these findings. Resolution of this matter is expected later in
1995.
FCC Interim Price Cap Orders
On March 30, 1995, the FCC adopted its Report and Order approving an
Interim Price Cap Plan for interstate access charges. The Interim Plan, which
was effective August 1, 1995, replaces the Price Cap Plan that the FCC adopted
in 1990.
Under the Interim Plan, the Company's Price Cap Index must be adjusted by
an inflation index (GDP-PI), less a fixed percentage, either 4.0%, 4.7%, or
5.3%, which is intended to reflect increases in productivity (Productivity
Factor). Companies selecting the 4.0% or 4.7% Productivity Factor are required
to reduce future prices and share a portion of their interstate return in excess
of 12.25%. Companies selecting the 5.3% Productivity Factor are also required to
reduce prices but are not required to share. The Interim Plan also provides for
a reduction in the Price Cap Index of 2.8% to adjust for what the FCC believes
was an underestimate in its calculation of the Productivity Factor in prior
years. The Interim Plan also eliminates the recovery of certain "exogenous" cost
changes, including changes in accounting costs that the FCC believes have no
economic consequences.
On March 30, 1995, the FCC also adopted an Order relating to the Price Cap
Plan requiring local exchange carriers to include in their calculation of
interstate earnings an adjustment to add back to revenues the amounts that were
required to be
11
<PAGE>
Bell Atlantic - Maryland, Inc.
shared with ratepayers in the prior year. This adjustment, which is effective
for determination of sharing relating to earnings for 1994 and subsequent years,
increased 1994 calculated interstate returns for the purpose of determining
sharing amounts that were reflected in rate reductions that became effective
August 1, 1995.
On May 9, 1995, Bell Atlantic filed its Transmittal of Interstate Rates as
required by the March 30, 1995 Orders. In the filing, Bell Atlantic selected
the 5.3% Productivity Factor for the August 1995 to June 1996 tariff period.
The rates included in the May 9, 1995 filing resulted in price decreases for the
Company totaling approximately $45,800,000 on an annual basis. These price
decreases include the scheduled expiration of a temporary rate increase of
approximately $14,700,000 on an annualized basis that was in effect from March
17, 1995 through July 31, 1995 to recover prior years "exogenous" postemployment
benefit costs. Approximately 80% of the remaining $31,100,000 reduction results
from compliance with the Interim Plan. The remaining 20% represents reductions
that the Company was required to make under the prior Price Cap Plan. It is
expected that these price decreases will be partially offset by volume
increases.
Bell Atlantic appealed the Orders to the Court of Appeals for the D.C.
Circuit and petitioned the Court for a stay of certain aspects of the Orders
pending the results of the appeals. On July 31, 1995, the Court of Appeals
denied the Company's request for a stay.
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. On May 9, 1995, the bill was signed
into law giving the PSC such authority. The Company plans to petition the PSC
later this year concerning the election to be regulated under a method other
than rate base rate of return regulation.
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 MFJ. 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.
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 June 30, 1995, the Company had $201,800,000 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 51.3% at June 30, 1995, compared to 51.9% at
December 31, 1994.
12
<PAGE>
Bell Atlantic - Maryland, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For background concerning the Company's contingent liabilities under
the Plan of Reorganization governing the divestiture by AT&T Corp.
(formerly American Telephone and Telegraph Company) of certain
assets of the former Bell System Operating Companies with respect to
private actions relating to pre-divestiture events, including
pending antitrust cases, see Item 3 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed during the
quarter ended June 30, 1995.
13
<PAGE>
Bell Atlantic - Maryland, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BELL ATLANTIC - MARYLAND, INC.
Date: August 10, 1995 By /s/ W. M. English
---------------------------
W. M. English
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 1995.
14
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND THE BALANCE
SHEET AS OF JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1995
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<PERIOD-END> JUN-30-1995
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<SECURITIES> 13,708
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