<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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
VERIZON MARYLAND INC.
(Former Name: 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 VERIZON COMMUNICATIONS INC., 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>
Verizon Maryland Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------
(Dollars in Millions) (Unaudited) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
(including $19.5, $17.9, $58.4 and $61.8 from
affiliates) $593.1 $579.3 $1,779.7 $1,704.6
----------------------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $134.9, $110.0,
$379.5 and $346.8 to affiliates) 312.1 280.8 920.2 835.7
Depreciation and amortization 121.1 114.7 352.0 338.3
----------------------------------------------------------------------
433.2 395.5 1,272.2 1,174.0
----------------------------------------------------------------------
OPERATING INCOME 159.9 183.8 507.5 530.6
OTHER INCOME AND (EXPENSE), NET
(including $.2, $0, $.9 and $.1 from affiliate) 1.4 (.2) 7.1 .6
INTEREST EXPENSE
(including $8.4, $1.8, $19.7 and $5.3 to affiliate) 21.3 17.3 58.8 53.1
----------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 140.0 166.3 455.8 478.1
PROVISION FOR INCOME TAXES 54.3 64.8 179.8 182.1
----------------------------------------------------------------------
NET INCOME $85.7 $ 101.5 $276.0 $ 296.0
======================================================================
</TABLE>
See Notes to Condensed Financial Statements.
1
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Verizon Maryland Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(Dollars in Millions) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ --- $ 1.1
Short-term investments --- 37.1
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $37.1 and $33.4 472.6 420.6
Affiliates 37.2 52.9
Material and supplies 7.3 7.2
Prepaid expenses 91.7 61.2
Deferred income taxes .2 ---
Other 3.2 .1
---------------------------------------------
612.2 580.2
---------------------------------------------
PLANT, PROPERTY AND EQUIPMENT 7,121.1 6,672.4
Less accumulated depreciation 4,125.5 3,907.8
---------------------------------------------
2,995.6 2,764.6
---------------------------------------------
OTHER ASSETS 191.8 70.0
---------------------------------------------
TOTAL ASSETS $3,799.6 $3,414.8
=============================================
</TABLE>
See Notes to Condensed Financial Statements.
2
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Verizon Maryland Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions) September 30, 2000 December 31, 1999
--------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate $ 602.2 $ 335.2
Other 8.9 8.0
Accounts payable and accrued liabilities:
Affiliates 141.3 186.8
Other 325.6 297.5
Other liabilities 72.8 69.3
-----------------------------------------
1,150.8 896.8
-----------------------------------------
LONG-TERM DEBT 854.3 851.2
-----------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 320.9 325.1
-----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 264.8 193.9
Unamortized investment tax credits 9.5 10.5
Other 107.9 72.3
-----------------------------------------
382.2 276.7
-----------------------------------------
SHAREOWNER'S INVESTMENT
Common stock - one share, without par value, owned by parent 735.4 735.4
Capital surplus 31.7 31.7
Reinvested earnings 324.4 298.0
Accumulated other comprehensive loss (.1) (.1)
-----------------------------------------
1,091.4 1,065.0
-----------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $3,799.6 $3,414.8
=========================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Verizon Maryland Inc.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------
(Dollars in Millions) (Unaudited) 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 558.8 $ 590.3
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 37.1 32.5
Capital expenditures (570.4) (382.5)
Other, net (54.1) 3.5
---------------------------------------------
Net cash used in investing activities (587.4) (346.5)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital lease obligations (1.1) (100.9)
Net change in note payable to affiliate 267.0 57.9
Dividends paid (249.6) (209.0)
Net change in outstanding checks drawn
on controlled disbursement accounts 11.2 8.2
---------------------------------------------
Net cash provided by/(used in) financing activities 27.5 (243.8)
---------------------------------------------
NET CHANGE IN CASH (1.1) ---
CASH, BEGINNING OF PERIOD 1.1 ---
---------------------------------------------
CASH, END OF PERIOD $ --- $ ---
=============================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
Verizon Maryland Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Verizon Maryland Inc., formerly Bell Atlantic - Maryland, Inc., is a wholly
owned subsidiary of Verizon Communications Inc. (Verizon Communications). The
accompanying unaudited condensed financial statements have been prepared based
upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. These financial statements include certain
reclassifications in presentation as a result of the merger of Bell Atlantic
Corporation (Bell Atlantic) and GTE Corporation (GTE) (see Note 2). These
financial statements reflect all adjustments that are necessary for a fair
presentation of results of operations and financial position for the interim
periods shown including normal recurring accruals and other items (see Note 2).
The results for the interim periods are not necessarily indicative of results
for the full year. For a more complete discussion of significant accounting
policies and certain other information, you should refer to the financial
statements included in our 1999 Annual Report on Form 10-K.
2. Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. The merger
qualified as a tax-free reorganization and has been accounted for as a pooling
of interests. Under this method of accounting, Bell Atlantic and GTE are treated
as if they had always been combined for accounting and financial reporting
purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $26.4 million, consisting of
$12.2 million for direct incremental costs and $14.2 million for employee
severance costs. These costs include approximately $21.0 million representing
our allocated share of merger-related costs from Verizon Services Corp. (Verizon
Services), an affiliate that provides centralized services on a contract basis.
Costs allocated from Verizon Services are included in Operations and Support
Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the next
several years, we expect to incur transition costs related to the merger. These
costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These costs will include our allocated share of
merger-related costs from Verizon Services. They also include advertising and
other costs to establish the Verizon brand. Transition costs are expensed as
incurred. During the nine month period ended September 30, 2000, we incurred
$2.4 million of transition costs which were allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $.2 million charge
for other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
3. Dividend
On November 1, 2000, we declared and paid a dividend in the amount of $30.0
million to Verizon Communications.
5
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Verizon Maryland Inc.
4. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated assets and liabilities, and intercompany derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
5. Shareowner's Investment
<TABLE>
<CAPTION>
Reinvested Accumulated Other
(Dollars in Millions) (Unaudited) Common Stock Capital Surplus Earnings Comprehensive Loss
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $735.4 $31.7 $298.0 $(.1)
Net income 276.0
Dividends paid to parent (249.6)
--------------------------------------------------------------------------------
Balance at September 30, 2000 $735.4 $31.7 $324.4 $(.1)
================================================================================
</TABLE>
Net income and comprehensive income were the same for the nine months ended
September 30, 2000 and 1999.
6. Commitments and Contingencies
Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters that we currently deem to be probable and
estimable. We do not expect that the ultimate resolution of pending regulatory
and legal matters in future periods will have a material effect on our financial
condition, but it could have a material effect on our results of operations.
Federal and state regulatory conditions to the Bell Atlantic - GTE merger
include certain commitments to, among other things, promote competition and the
widespread deployment of advanced services, while helping ensure that consumers
continue to receive high-quality, low cost telephone services. In some cases,
there are significant penalties associated with not meeting these commitments.
The cost of satisfying these commitments could have a significant impact on net
income in future periods. As previously disclosed, the cost of satisfying these
commitments is likely to impact the net income of Verizon Communications on a
consolidated basis in 2000 by approximately $275 to $325 million, based on
preliminary estimates. The estimated impact on each operating telephone
subsidiary, including the Company, is currently being assessed.
6
<PAGE>
Verizon 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
We reported net income of $276.0 million for the nine months ended
September 30, 2000, compared to net income of $296.0 million for the same period
in 1999.
Our results for 2000 and 1999 were affected by special items. The special
items in both periods include our allocated share of charges from Verizon
Services Corp. (Verizon Services), an affiliate that provides centralized
services on a contract basis.
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended September 30, 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations and Support Expenses
Bell Atlantic-GTE merger direct incremental costs $12.2 $ ---
Bell Atlantic-GTE merger severance costs 14.2 ---
Bell Atlantic-GTE merger transition cost 2.4 ---
Bell Atlantic-GTE merger other related actions .2 ---
Bell Atlantic-NYNEX merger transition costs --- 5.7
Other charges and special items 11.7 ---
----------------------------------------
Net impact on pre-tax income $40.7 $ 5.7
========================================
</TABLE>
What follows is a further explanation of the nature of these special items.
Bell Atlantic - GTE Merger
On June 30, 2000, Bell Atlantic and GTE completed a merger of equals under
a definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. In September
2000, Bell Atlantic changed its name to Verizon Communications Inc. (Verizon
Communications). The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Under this method of accounting, Bell
Atlantic and GTE are treated as if they had always been combined for accounting
and financial reporting purposes.
Merger-Related and Severance Costs
Results of operations for the nine months ended September 30, 2000 included
merger-related pre-tax costs totaling approximately $26.4 million, consisting of
$12.2 million for direct incremental costs and $14.2 million for employee
severance costs. These costs include approximately $21.0 million representing
our allocated share of merger-related costs from Verizon Services. Costs
allocated from Verizon Services are included in Operations and Support Expenses.
Direct incremental costs consist of our proportionate share of expenses
associated with completing the merger transaction such as professional and
regulatory fees, compensation arrangements and shareowner-related costs.
Employee severance costs, as recorded under Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
represent our proportionate share of benefit costs for the separation of
management employees who are entitled to benefits under pre-existing Verizon
Communications separation pay plans. The separations are expected to occur as a
result of consolidations and process enhancements. Accrued postemployment
benefit liabilities for those employees are included in our balance sheet as a
component of Accounts Payable and Accrued Liabilities -Other.
Transition Costs
In addition to the direct merger-related and severance costs, over the
next several years, we expect to incur transition costs related to the merger.
These costs will be incurred to integrate systems, consolidate real estate and
relocate employees. These
7
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Verizon Maryland Inc.
costs will include our allocated share of merger-related costs from Verizon
Services. They also include advertising and other costs to establish the Verizon
brand. Transition costs are expensed as incurred. During the nine month period
ended September 30, 2000, we incurred $2.4 million of transition costs which
were allocated to us by Verizon Services.
Other Related Actions
During the second quarter of 2000, we also recorded a $.2 million charge
for other actions in relation to the merger or other strategic decisions. This
charge included the write-off of duplicate assets.
Other Charges and Special Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $11.7 million. These charges included costs for the
write-off of accounts receivable, legal contingencies and other miscellaneous
items.
Bell Atlantic - NYNEX Merger
Merger-Related Costs
In connection with the Bell Atlantic-NYNEX merger, which was completed in
August 1997, we recorded pre-tax merger-related transition costs of $5.7 million
in the first nine months of 1999. These costs included approximately $4.7
million, representing our allocated share of transition costs from Verizon
Services.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modification costs and advertising and branding costs. Transition costs were
expensed as incurred.
These and other items affecting the comparison of our results of operations for
the nine month periods ended September 30, 2000 and 1999 are discussed in the
following sections.
OPERATING REVENUE STATISTICS
----------------------------
<TABLE>
<CAPTION>
2000 1999 % Change
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At September 30,
Access Lines in Service (in thousands)*
Residence 2,496 2,432 2.6%
Business 1,552 1,501 3.4
Public 40 41 (2.4)
---------------------------------------------------
4,088 3,974 2.9
===================================================
Nine Months Ended September 30,
Access Minutes of Use (in millions) 13,249 12,408 6.8
===================================================
</TABLE>
* 1999 reflects a restatement of access lines in service
OPERATING REVENUES
------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Local services $1,068.3 $1,036.5
Network access services 505.9 461.4
Long distance services 51.8 66.7
Other services 153.7 140.0
---------------------------------------
Total $1,779.7 $1,704.6
=======================================
</TABLE>
8
<PAGE>
Verizon Maryland Inc.
LOCAL SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $31.8 3.1%
--------------------------------------------------------------------------------
Local service revenues are earned from the provision of local exchange,
local private line, wire maintenance, voice messaging and value-added services.
Value-added services are a family of services that expand the utilization of the
network, including products such as Caller ID, Call Waiting and Return Call.
Local services also includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.
Local service revenues increased in the first nine months of 2000 primarily
due to higher usage of our network facilities. This growth was generated, in
part, by an increase in access lines in service of 2.9% from September 30, 1999.
Local service revenue growth also reflects higher customer demand and usage of
our value-added services, as well as our data transport and digital services.
The increases in local service revenues were partially offset by the effect of
resold and UNE platform access lines and lower business message volumes.
The effect of an 18-day work stoppage, as described below under "Operating
Expenses - Operations and Support - Labor Agreements," adversely affected local
service revenue growth due to the delay in the installation of new services and
as a result of customers not having full access to demand-based services.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $44.5 9.6%
--------------------------------------------------------------------------------
Network access revenues are earned from end-user subscribers and from long
distance and other competing carriers who use our local exchange facilities to
provide usage services to their customers. Switched access revenues are derived
from fixed and usage-based charges paid by carriers for access to our local
network. Special access revenues originate from carriers and end-users that buy
dedicated local exchange capacity to support their private networks. End-user
access revenues are earned from our customers and from resellers who purchase
dial-tone services.
Network access revenue growth in the first nine months of 2000 was mainly
attributable to higher customer demand as reflected by growth in access minutes
of use of 6.8% from the same period in 1999. Volume growth resulting from
continuing expansion of the business market, particularly for high capacity data
services. In the first nine months of 2000, demand for special access services
increased, reflecting a greater utilization of our network. Higher network usage
by alternative providers of intraLATA toll services and higher end-user revenues
attributable to an increase in access lines in service further contributed to
revenue growth this year.
Volume-related growth was largely offset by price reductions associated
with federal price cap filings and other regulatory decisions, including the
implementation of the Coalition for Affordable Local and Long Distance Service
(CALLS) plan, effective July 1, 2000. For more information on federal access
rates, see "Other Matters - FCC Regulation and Interstate Rates."
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Nine months $(14.9) (22.3)%
--------------------------------------------------------------------------------
Long distance revenues are earned primarily from calls made to points
outside a customer's local calling area, but within our service area (intraLATA
toll). IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. These services are
regulated by the Public Service Commission of Maryland (PSC) except where they
cross state lines. Other long distance services that we provide include 800
services and Wide Area Telephone Service (WATS).
9
<PAGE>
Verizon Maryland Inc.
The decline in long distance revenues in the first nine months of 2000 was
principally caused by the competitive effects of presubscription, which enables
customers to make intraLATA toll calls using a competing carrier without having
to dial an access code. The negative effect of presubscription on long distance
revenues was partially mitigated by increased network access services for usage
of our network by alternative service providers. In response to presubscription,
we have implemented customer win-back and retention initiatives that include
toll calling discount packages and product bundling offers. These revenue
reductions were offset, in part, by additional revenues generated from higher
calling volumes.
OTHER SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $13.7 9.8%
--------------------------------------------------------------------------------
Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, public (coin) telephone, customer premises equipment (CPE)
and sales of materials and supplies to affiliates. Other services revenues also
include fees paid by customers for nonpublication of telephone numbers and
multiple white page listings and fees paid by an affiliate for usage of our
directory listings.
Other services revenues increased in the first nine months of 2000
primarily due to higher payments received from competitive local exchange
carriers for interconnection of their networks with our network and for the
purchase of unbundled network elements. These increases were partially offset by
lower revenues from billing and collection services.
OPERATING EXPENSES
------------------
(Dollars in Millions)
OPERATIONS AND SUPPORT
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $84.5 10.1%
--------------------------------------------------------------------------------
Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes. Other operating expenses
consist of contract services including centralized services expenses allocated
from Verizon Services, rent, network software costs, operating taxes other than
income, the provision for uncollectible accounts receivable, and other costs.
The increase in operations and support expenses was primarily attributable
to merger-related costs and other special items recorded in 2000. These charges
consisted of $29.0 million for merger-related costs and $11.7 million for other
special items. Operations and support expenses were further increased by annual
salary and wage increases for management and associate employees, higher
associate overtime pay and the effect of higher work force levels. Higher
interconnection and related costs associated with reciprocal compensation
arrangements with competitive local exchange and other carriers to terminate
calls on their network also contributed to the increase in expense.
These increases were partially offset by a decline in pension and benefit
costs and the effects of the work stoppage. The decline in pension and benefit
costs was due to favorable pension plan investment returns and changes in
actuarial assumptions. These factors were partially offset by changes in certain
plan provisions, including a previously reported amendment to our management
cash balance plan and a special lump sum pension payment to management and
associate retirees.
Labor Agreements
Associate employee wages, and pension and other benefits are determined
under a contract with the union representing our associate employees. On August
5, 2000, the collective bargaining agreement with the union representing our
associate employees expired, and the union initiated a work stoppage.
10
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Verizon Maryland Inc.
On August 23, 2000, Verizon Communications reached a tentative agreement
with the Communications Workers of America (CWA) on a new 3-year contract
covering our employees. The contract provides for annual wage increases of 4
percent, 3 percent and 5 percent, beginning in August 2000. Customer service
representatives will receive an additional 4 percent wage increase effective
immediately. Pension benefits for active employees will increase by 5 percent on
July 1, 2001, 5 percent on July 1, 2002 and 4 percent on July 1, 2003. The
contract resolves certain local issues, including overtime and work rules,
raised by the CWA and also includes team-based incentive awards for meeting
higher service, performance and other standards, increased funding for work and
family programs, improvements to health and other benefits and certain
provisions relating to access to work and employment security. In addition,
prior to year-end, all union-represented employees will be granted options to
purchase 100 shares of Verizon Communications' common stock.
The labor agreement with the CWA has been ratified by the union membership.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $13.7 4.0%
--------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first nine months
of 2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant and changes in the mix of plant assets. The growth
in telephone plant was largely attributable to increased capital expenditures
for software and hardware to support the expansion of our network. These factors
were partially offset by the effect of lower rates of depreciation and
amortization.
OTHER INCOME AND (EXPENSE), NET
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $6.5 1,083.3%
--------------------------------------------------------------------------------
The change in other income and (expense), net, was primarily attributable
to additional interest income associated with the settlement of a tax-related
matter in the first nine months of 2000. Other items contributing to the change
were an increase in the income recognized from our investment in SMS/800 under
the equity method and nonperformance fees received from a vendor.
INTEREST EXPENSE
2000 - 1999 Increase
--------------------------------------------------------------------------------
Nine months $5.7 10.7%
--------------------------------------------------------------------------------
Interest expense includes costs associated with borrowings and capital
leases, net of interest capitalized as a cost of acquiring or constructing plant
assets.
Interest expense increased in the first nine months of 2000 over the same
period in 1999 primarily due to higher levels of average short-term debt with an
affiliate and higher interest rates associated with this debt. These factors
were partially offset by higher capitalized interest costs resulting from higher
levels of average telephone plant under construction.
11
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Verizon Maryland Inc.
EFFECTIVE INCOME TAX RATES
Nine Months Ended September 30,
--------------------------------------------------------------------------------
2000 39.4%
--------------------------------------------------------------------------------
1999 38.1%
--------------------------------------------------------------------------------
The effective income tax rate is the provision for income taxes as a
percentage of income before the provision for income taxes. Our effective income
tax rate was higher in the first nine months of 2000 principally due to a
combination of deferred income tax benefits recorded in 1999 and non-recurring
deferred income tax expenses recorded in 2000.
OTHER MATTERS
FCC Regulation and Interstate Rates
On May 31, 2000, the FCC approved the industry proposal to restructure
access charges (known as the "CALLS plan"). Under the terms of the plan, direct
end-user access charges are increased while access charges to long distance
carriers are reduced. While the plan continues the 6.5% (less inflation) annual
reductions for most interstate access charges, it provides for a price freeze
when switched access transport prices reach $0.0055 per-minute. In addition, in
conjunction with provisions that will allow carriers to deaverage their
subscriber line charges by geographic zones, the plan establishes a new $650
million universal service fund to support interstate access rates. Of that
amount, Verizon Communications expects approximately $320 million to be used to
support interstate access services in its service territory. The price
restructuring portions of the plan are mandatory for all large local exchange
carriers, including Verizon Communications' telephone operating companies, such
as us. The price level portions of the plan are mandatory only in the initial
year of the plan. By September 14, 2000, carriers were to decide whether to
participate in the remaining four years of the plan, or whether to submit cost
studies as the basis of future price caps.
Consistent with the new access plan, Verizon Communications filed tariff
adjustments to take effect on July 1, 2000 (with modifications effective August
11, 2000). As a result of these tariff adjustments, former GTE carriers in ten
states, and former Bell Atlantic carriers in seven states reached the $0.0055
benchmark and by opting into the full five year CALLS plan, Verizon
Communications would not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
As of September 14, 2000, Verizon Communications formally opted to
participate in the full five-year term of the FCC-adopted industry plan to
restructure access rates known as the CALLS plan. As a result of this decision,
price caps on Verizon Communications' interstate access charges will be set
according to the terms of the CALLS plan.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or other
comprehensive income, depending on the designated use and effectiveness of the
instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign-currency-
denominated assets and liabilities, and intercompany derivatives.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No.
138, which we will adopt on January 1, 2001. The impact of adoption will be
affected by several factors, including the specific hedging instruments in place
and their relationships to hedged items, as well as market conditions at the
date of adoption.
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Verizon Maryland Inc.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition and, in certain circumstances, requires the
deferral of incremental costs. We will adopt SAB No. 101 in the fourth quarter
of 2000, retroactive to January 1, 2000. We are currently assessing the impact
of adopting SAB No. 101.
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Verizon Maryland Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no proceedings reportable under this Item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
27 Financial Data Schedule.
(b) Current Reports on Form 8-K filed during the quarter ended
September 30, 2000:
A Current Report on Form 8-K, dated August 23, 2000, was
filed regarding a tentative agreement on a new three-year
contract with the Communications Workers of America in the
Mid-Atlantic region.
A Current Report on Form 8-K, dated September 7, 2000, was
filed in connection with a change in our independent
accountants.
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Verizon 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.
VERIZON MARYLAND INC.
Date: November 14, 2000 By /s/ Edwin F. Hall
--------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 8, 2000.
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Verizon Maryland Inc.
EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule.
