<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, 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 BELL ATLANTIC CORPORATION (D/B/A
VERIZON COMMUNICATIONS), 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 June 30, Six Months Ended June 30,
--------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in Millions) (Unaudited) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
(including $16.3, $23.5, $38.9 and $43.9 from
affiliates) $597.4 $574.6 $1,186.6 $1,125.3
--------------------------------------------------------
OPERATING EXPENSES
Operations and support (including $139.4, $124.0,
$244.6 and $236.8 to affiliates) 332.5 282.7 608.1 554.9
Depreciation and amortization 117.3 112.5 230.9 223.6
--------------------------------------------------------
449.8 395.2 839.0 778.5
--------------------------------------------------------
OPERATING INCOME 147.6 179.4 347.6 346.8
OTHER INCOME, NET
(including $.6, $.1, $.7 and $.1 from affiliate) 1.9 .3 5.7 .8
INTEREST EXPENSE
(including $6.2, $1.5, $11.3 and $3.5 to affiliate) 19.4 18.1 37.5 35.8
--------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 130.1 161.6 315.8 311.8
PROVISION FOR INCOME TAXES 53.0 59.7 125.5 117.3
--------------------------------------------------------
NET INCOME $ 77.1 $101.9 $ 190.3 $ 194.5
========================================================
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
Verizon Maryland Inc.
CONDENSED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) June 30, 2000 December 31, 1999
--------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash $ --- $ 1.1
Short-term investments 12.4 37.1
Accounts receivable:
Trade and other, net of allowances for
uncollectibles of $40.3 and $33.4 412.5 420.6
Affiliates 44.2 52.9
Material and supplies 7.0 7.2
Prepaid expenses 35.0 61.2
Deferred income taxes .9 ---
Other 3.1 .1
----------------------------------
515.1 580.2
----------------------------------
PLANT, PROPERTY AND EQUIPMENT 6,976.8 6,672.4
Less accumulated depreciation 4,048.0 3,907.8
----------------------------------
2,928.8 2,764.6
----------------------------------
OTHER ASSETS 164.6 70.0
----------------------------------
TOTAL ASSETS $3,608.5 $3,414.8
==================================
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
Verizon Maryland Inc.
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREOWNER'S INVESTMENT
---------------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions) (Unaudited) June 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt maturing within one year:
<S> <C> <C>
Note payable to affiliate $ 436.8 $ 335.2
Other 8.7 8.0
Accounts payable and accrued liabilities:
Affiliates 166.8 186.8
Other 306.2 297.5
Other liabilities 71.5 69.3
-----------------------------------
990.0 896.8
-----------------------------------
LONG-TERM DEBT 854.8 851.2
-----------------------------------
EMPLOYEE BENEFIT OBLIGATIONS 328.6 325.1
-----------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 230.5 193.9
Unamortized investment tax credits 9.8 10.5
Other 105.9 72.3
-----------------------------------
346.2 276.7
-----------------------------------
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 321.9 298.0
Accumulated other comprehensive loss (.1) (.1)
-----------------------------------
1,088.9 1,065.0
-----------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT $3,608.5 $3,414.8
===================================
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
Verizon Maryland Inc.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
<S> <C> <C>
(Dollars in Millions) (Unaudited) 2000 1999
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 464.9 $ 419.6
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments 24.7 21.7
Capital expenditures (385.3) (246.0)
Other, net (43.1) 1.1
----------------------------
Net cash used in investing activities (403.7) (223.2)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital lease obligations (.6) (.6)
Net change in note payable to affiliate 101.6 (55.7)
Dividends paid (166.4) (131.4)
Net change in outstanding checks drawn
on controlled disbursement accounts 3.1 (8.7)
----------------------------
Net cash used in financing activities (62.3) (196.4)
----------------------------
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 Bell Atlantic Corporation (d/b/a 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. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 included merger-related pre-tax
costs totaling approximately $27.9 million consisting of $12.2 million for
direct incremental costs, $14.2 million for employee severance costs and $1.5
million for transition costs. These costs include approximately $22.5 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 - Other Operating 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 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 Employee Benefit Obligations. Transition
costs consist of our proportionate share of costs associated with integrating
the operations of Bell Atlantic and GTE. Transition costs are expensed as
incurred.
3. Dividend
On August 1, 2000, we declared and paid a dividend in the amount of $83.2
million to Verizon Communications.
4. Recent Accounting Pronouncements
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
5
<PAGE>
Verizon Maryland Inc.
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. SFAS No. 138
also amends SFAS No. 133 for decisions made by the FASB relating to the
Derivatives Implementation Group process.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No. 138.
The impact of adoption will be determined 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on our results of
operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
5. Shareowner's Investment
<TABLE>
<CAPTION>
Reinvested Accumulated Other
(Dollars in Millions) 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 190.3
Dividends paid to parent (166.4)
----------------------------------------------------------------
Balance at June 30, 2000 $735.4 $31.7 $ 321.9 $(.1)
================================================================
</TABLE>
Net income and comprehensive income were the same for the six months ended
June 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 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. Over the remainder of 2000, based on preliminary estimates, the
cost of satisfying these commitments is likely to impact the net income of
Verizon Communications on a consolidated basis by approximately $275 to $325
million. The estimated impact on each operating telephone subsidiary is still
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 $190.3 million for the six month period ended June
30, 2000, compared to net income of $194.5 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).
The following table shows how special items are reflected in our condensed
statements of income for each period:
<TABLE>
(Dollars in Millions)
Six Months Ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations and Support Expense
Bell Atlantic-GTE merger direct incremental costs $ .4 $ ---
Bell Atlantic-GTE merger severance costs 5.0 ---
Allocated Bell Atlantic-GTE merger direct incremental, severance
and transition costs 22.5 ---
Bell Atlantic-NYNEX merger transition costs --- .6
Allocated Bell Atlantic-NYNEX merger transition costs --- 2.7
Other charges and special items 11.9 ---
--------------
Total $39.8 $ 3.3
==============
</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. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger has been accounted for as a pooling of interests.
Merger-Related and Severance Costs
Results of operations for June 30, 2000 included merger-related pre-tax
costs totaling approximately $27.9 million consisting of $12.2 million for
direct incremental costs, $14.2 million for employee severance costs and $1.5
million for transition costs. These costs include approximately $22.5 million
representing our allocated share of merger-related costs from Verizon Services,
an affiliate that provides centralized services on a contract basis. Costs
allocated from Verizon Services are included in Operations and Support - Other
Operating 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 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.
Transition costs consist of our proportionate share of costs associated with
integrating the operations of Bell Atlantic and GTE. Transition costs are
expensed as incurred.
7
<PAGE>
Verizon Maryland Inc.
Other Charges and Special Items
In the second quarter of 2000, we recorded other charges and special items
totaling approximately $11.9 million in connection with consolidating operations
and combining organizations and for other nonrecurring items arising in the
quarter. 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 $3.3
million in the first six months of 1999.
Transition costs consisted of our proportionate share of costs associated
with integrating the operations of Bell Atlantic and NYNEX, such as systems
modifications 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 six month periods ended June 30, 2000 and 1999 are discussed in the
following sections.
OPERATING REVENUE STATISTICS
----------------------------
<TABLE>
<S> <C> <C> <C>
2000 1999 % Change
---------------------------------------------------------------------------------------------
At June 30,
Access Lines in Service (in thousands)*
Residence 2,487 2,410 3.2%
Business 1,543 1,480 4.3
Public 40 41 (2.4)
--------------
4,070 3,931 3.5
==============
Six Months Ended June 30,
Access Minutes of Use (in millions) 8,806 8,187 7.6
==============
</TABLE>
* 1999 reflects restatement in access lines in service
OPERATING REVENUES
------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C>
Six Months Ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------------
Local services $ 708.6 $ 682.6
Network access services 338.3 302.8
Long distance services 36.4 46.4
Ancillary services 103.3 93.5
--------------------
Total $1,186.6 $1,125.3
====================
</TABLE>
8
<PAGE>
Verizon Maryland Inc.
LOCAL SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $26.0 3.8%
--------------------------------------------------------------------------------
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 six months of 2000 primarily
due to higher usage of our network facilities. Revenue growth was generated, in
part, by an increase in access lines in service of 3.5% from June 30, 1999.
Local service revenue growth in the first six months of 2000 also reflects
higher customer demand and usage of our value-added services.
NETWORK ACCESS SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $35.5 11.7%
--------------------------------------------------------------------------------
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 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 six months of 2000 was mainly
attributable to increased demand for special access services, reflecting a
greater utilization of our network, and volume growth resulting from continuing
expansion of the business market, particularly for high capacity data services.
Higher customer demand was also reflected by growth in access minutes of use of
7.6% from the same period in 1999. 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.
In addition, network access revenues included higher revenues received from
customers for the recovery of local number portability (LNP) costs. LNP allows
customers to change local exchange carriers while maintaining their existing
telephone numbers. In December 1998, the Federal Communications Commission
(FCC) issued an order permitting us to recover costs incurred for LNP in the
form of monthly end-user charges for a five-year period beginning in March 1999.
Revenue growth was partially offset by price reductions associated with a
federal price cap filing and other regulatory decisions. The FCC regulates the
rates that we charge long distance carriers and end-user subscribers for
interstate access services. We are required to file new access rates with the
FCC each year. In July 1999, we implemented interstate price decreases of
approximately $2 million on an annual basis in connection with the FCC's Price
Cap Plan. The rates included in our July 1999 filing were in effect through June
2000. Interstate price decreases were $7 million on an annual basis for the
period July 1998 through June 1999. The rates include amounts necessary to
recover our contribution to the FCC's universal service fund which are subject
to adjustment every quarter due to potential increases or decreases in our
contribution to the fund. Our contributions to the universal service fund are
included in Other Operating Expenses. As a result of a U.S. Court of Appeals
decision last year, our contributions to the universal service fund were reduced
by approximately $7 million annually beginning November 1, 1999, and our
interstate access rates were reduced accordingly because we will no longer have
to recover these contributions in our rates.
9
<PAGE>
Verizon Maryland Inc.
LONG DISTANCE SERVICES
2000 - 1999 (Decrease)
--------------------------------------------------------------------------------
Six months $(10.0) (21.6)%
--------------------------------------------------------------------------------
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).
The decline in long distance revenues in the first six 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.
ANCILLARY SERVICES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $9.8 10.5%
--------------------------------------------------------------------------------
Our ancillary 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. Ancillary 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.
Ancillary services revenues increased in the first six 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 provided for an
affiliated company.
10
<PAGE>
Verizon Maryland Inc.
OPERATING EXPENSES
------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------------------------------------
Operations and support:
Employee costs $187.8 $169.2
Other operating expenses 420.3 385.7
-----------------
Total operations and support 608.1 554.9
-----------------
Depreciation and amortization 230.9 223.6
-----------------
Total $839.0 $778.5
=================
</TABLE>
EMPLOYEE COSTS
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $18.6 11.0%
--------------------------------------------------------------------------------
Employee costs consist of salaries, wages and other employee compensation,
employee benefits and payroll taxes paid directly by us. Similar costs incurred
by employees of Verizon Services, who provide centralized services on a contract
basis, are allocated to us and are included in Other Operating Expenses.
Employee costs increased in the first six months of 2000 primarily as a
result of higher work force levels, higher overtime payments and annual salary
and wage increases for management and associate employees. An increase in
repair and maintenance activity and merger-related costs recorded in the second
quarter of 2000 also contributed to the increase in employee costs. As described
in the Results of Operations section, we recognized approximately $5.0 million
in benefit costs for the separation of employees who are entitled to benefits
under pre-existing Verizon Communications separation pay plans. We also recorded
approximately $.4 million for direct incremental merger-related costs associated
with compensation arrangements. Merger-related costs associated with Verizon
Services were allocated to us and are included in Other Operating Expenses.
These increases were partially offset by lower pension and benefit costs.
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.
Associate employees wages, pension and other benefits are determined under a
contract with the union representing our associate employees. On August 6, 2000,
the collective bargaining agreement with the union representing our employees
expired, and the union initiated a work stoppage. As of 8:00 a.m. on August 14,
2000, we continued to negotiate a new agreement with the union.
11
<PAGE>
Verizon Maryland Inc.
OTHER OPERATING EXPENSES
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $34.6 9.0%
--------------------------------------------------------------------------------
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 other operating expenses was largely attributable to the
effect of merger-related costs and other special items recorded in the second
quarter of 2000. These charges totaled $34.4 million and were comprised of our
allocated share of $9.2 million for employee severance, $11.8 million for direct
incremental and $1.5 million for transition merger-related costs incurred by
Verizon Services, and $11.9 million for other miscellaneous expense items.
Other miscellaneous expense items included $7.4 million for the write-off of
accounts receivable, $3.2 million for legal contingencies and $1.3 million for
other items. Higher interconnection and related costs associated with
reciprocal compensation arrangements with competitive local exchange and other
carriers to terminate calls on their networks also contributed to the increase
in other operating expenses, but to a lesser extent.
These increases were partially offset by a reduction in centralized services
expenses allocated from Verizon Services, partially as a result of lower
employee costs incurred by Verizon Services.
DEPRECIATION AND AMORTIZATION
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $7.3 3.3%
--------------------------------------------------------------------------------
Depreciation and amortization expense increased in the first six months of
2000 over the same period in 1999 principally as a result of growth in
depreciable telephone plant. 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, NET
2000 - 1999 Increase
--------------------------------------------------------------------------------
Six months $4.9 --%
--------------------------------------------------------------------------------
The change in other income, net, was primarily attributable to additional
interest income associated with the settlement of a tax-related matter in the
first six months of 2000. Other items contributing to the change, but to a
lesser extent, were an increase of $.7 million 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
--------------------------------------------------------------------------------
Six months $1.7 4.7%
--------------------------------------------------------------------------------
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 six 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.
12
<PAGE>
Verizon Maryland Inc.
EFFECTIVE INCOME TAX RATES
Six Months Ended June 30,
--------------------------------------------------------------------------------
2000 39.7%
--------------------------------------------------------------------------------
1999 37.6%
--------------------------------------------------------------------------------
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 six months of 2000 principally due to a
combination of deferred income tax benefits recorded in the first quarter of
1999 and deferred income tax expenses recorded in the first six months of 2000.
OTHER MATTERS
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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. Carriers have until September 14, 2000 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, should Verizon Communications opt into the full five year CALLS
plan, they will not be subject to further annual interstate switched access
price reductions for the remaining life of the plan.
Recent Accounting Pronouncements
FASB Accounting Standards - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
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
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Verizon Maryland Inc.
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. SFAS No. 138
also amend SFAS No. 133 for decisions made by the FASB relating to the
Derivatives Implementation Group process.
We are currently evaluating the provisions of SFAS No. 133 and SFAS No. 138.
The impact of adoption will be determined 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.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." Interpretation No. 44 was
issued in order to clarify certain issues arising from Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which was
previously issued in October 1972. Interpretation No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 will not have a material impact on our results of
operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted by the
fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned, and also requires the deferral of incremental direct selling costs. We
are currently assessing the impact of SAB No. 101 on our results of operations
and financial position.
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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
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.)
3a(ii) Articles of Amendment of the Charter, dated June 30, 2000.
27 Financial Data Schedule.
(b) Current Report on Form 8-K filed during the quarter ended June 30,
2000:
A Current Report on Form 8-K, dated June 30, 2000, was filed
regarding the consummation of the merger of Bell Atlantic
Corporation and GTE Corporation.
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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: August 14, 2000 By /s/ Edwin F. Hall
--------------------------------
Edwin F. Hall
Controller
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 10, 2000.
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EXHIBIT INDEX
Exhibit Number
3a(ii) Articles of Amendment of the Charter, dated June 30, 2000.
27 Financial Data Schedule.
