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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, 2002
 
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.
 
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 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

PART I—FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
VERIZON MARYLAND INC.
 
CONDENSED STATEMENTS OF INCOME
 
      
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
(Dollars in Millions) (Unaudited)
     
2002
     
2001
     
2002
       
2001
  
OPERATING REVENUES (including $38.6, $32.5, $111.5 and $112.5 from affiliates)
     
$
628.0
     
$
614.0
     
$
1,830.5
 
     
$
1,848.1
 
      
    
    
    
Operations and support expense (exclusive of items shown below)
(including $130.6, $123.6, $372.2 and $364.7 to affiliates)
     
 
318.5
     
 
296.1
     
 
923.6
 
     
 
880.3
 
Depreciation and amortization
     
 
133.1
     
 
132.5
     
 
401.1
 
     
 
392.8
 
      
    
    
    
      
 
451.6
     
 
428.6
     
 
1,324.7
 
     
 
1,273.1
 
      
    
    
    
OPERATING INCOME
     
 
176.4
     
 
185.4
     
 
505.8
 
     
 
575.0
 
OTHER INCOME AND (EXPENSE), NET (including $0, $(.1), $(18.1) and $(30.9) from affiliates)
     
 
.2
     
 
.4
     
 
(17.1
)
     
 
(28.2
)
INTEREST EXPENSE (including $1.6, $6.9, $6.9 and $25.3 to affiliate)
     
 
20.1
     
 
19.2
     
 
58.2
 
     
 
62.4
 
      
    
    
    
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM
     
 
156.5
     
 
166.6
     
 
430.5
 
     
 
484.4
 
PROVISION FOR INCOME TAXES
     
 
61.1
     
 
64.9
     
 
175.0
 
     
 
200.0
 
      
    
    
    
INCOME BEFORE EXTRAORDINARY ITEM
     
 
95.4
     
 
101.7
     
 
255.5
 
     
 
284.4
 
EXTRAORDINARY ITEM Early extinguishment of debt, net of tax
     
 
—  
     
 
—  
     
 
(.6
)
     
 
—  
 
      
    
    
    
NET INCOME
     
$
95.4
     
$
101.7
     
$
254.9
 
     
$
284.4
 
      
    
    
    
 
See Notes to Condensed Financial Statements.

1

VERIZON MARYLAND INC.
 
CONDENSED BALANCE SHEETS
 
(Dollars in Millions)
   
September 30, 2002
   
December 31, 2001
    
(Unaudited)
     
ASSETS
              
CURRENT ASSETS
              
Short-term investments
   
$
1.4
   
$
71.2
Accounts receivable:
              
Trade and other, net of allowances for uncollectibles of $76.4 and $49.0
   
 
392.6
   
 
470.1
Affiliates
   
 
48.2
   
 
75.5
Material and supplies
   
 
12.3
   
 
12.0
Prepaid expenses
   
 
77.9
   
 
43.0
Deferred income taxes
   
 
15.2
   
 
2.2
Other
   
 
56.5
   
 
59.5
    
  
    
 
604.1
   
 
733.5
    
  
PLANT, PROPERTY AND EQUIPMENT
   
 
7,920.5
   
 
7,676.3
Less accumulated depreciation
   
 
4,893.0
   
 
4,579.0
    
  
    
 
3,027.5
   
 
3,097.3
    
  
PREPAID PENSION ASSET
   
 
325.7
   
 
225.9
    
  
OTHER ASSETS
   
 
196.0
   
 
279.3
    
  
TOTAL ASSETS
   
$
4,153.3
   
$
4,336.0
    
  
 
See Notes to Condensed Financial Statements.

2

VERIZON MARYLAND INC.
 
CONDENSED BALANCE SHEETS
 
(Dollars in Millions)
   
September 30, 2002
   
December 31, 2001
    
(Unaudited)
     
LIABILITIES AND SHAREOWNER’S INVESTMENT
              
CURRENT LIABILITIES
              
Debt maturing within one year:
              
Note payable to affiliate
   
$
327.1
   
$
763.9
Other
   
 
203.2
   
 
52.9
Accounts payable and accrued liabilities:
              
Affiliates
   
 
98.5
   
 
153.1
Other
   
 
338.7
   
 
363.0
Other liabilities
   
 
131.6
   
 
131.7
    
  
    
 
1,099.1
   
 
1,464.6
    
  
LONG-TERM DEBT
   
 
913.4
   
 
803.4
    
  
EMPLOYEE BENEFIT OBLIGATIONS
   
 
326.9
   
 
323.0
    
  
DEFERRED CREDITS AND OTHER LIABILITIES
              
Deferred income taxes
   
 
418.7
   
 
347.8
Unamortized investment tax credits
   
 
8.0
   
 
8.4
Other
   
 
140.4
   
 
155.9
    
  
    
 
567.1
   
 
512.1
    
  
SHAREOWNER’S INVESTMENT
              
Common stock—one share, without par value, owned by parent
   
 
735.4
   
 
735.4
Capital surplus
   
 
139.5
   
 
130.5
Reinvested earnings
   
 
371.9
   
 
367.0
    
  
    
 
1,246.8
   
 
1,232.9
    
  
TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT
   
$
4,153.3
   
$
4,336.0
    
  
 
See Notes to Condensed Financial Statements.

3

VERIZON MARYLAND INC.
 
CONDENSED STATEMENTS OF CASH FLOWS
 
    
Nine Months Ended
September 30,
  
(Dollars in Millions) (Unaudited)
   
2002
     
2001
  
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
$
626.2
 
   
$
647.6
 
    
  
CASH FLOWS FROM INVESTING ACTIVITIES
                  
Net change in short-term investments
   
 
69.8
 
   
 
42.7
 
Capital expenditures
   
 
(318.7
)
   
 
(486.8
)
Investment in unconsolidated business
   
 
(8.9
)
   
 
—  
 
Other, net
   
 
(2.1
)
   
 
(3.3
)
    
  
Net cash used in investing activities
   
 
(259.9
)
   
 
(447.4
)
    
  
CASH FLOWS FROM FINANCING ACTIVITIES
                  
Proceeds from borrowings
   
 
496.6
 
   
 
—  
 
Early extinguishment of debt
   
 
(185.0
)
   
 
—  
 
Principal repayments of borrowings and capital lease obligations
   
 
(52.0
)
   
 
(1.9
)
Change in note payable to affiliate
   
 
(436.8
)
   
 
45.9
 
Dividends paid
   
 
(250.0
)
   
 
(238.0
)
Capital contribution from parent
   
 
8.9
 
   
 
—  
 
Net change in outstanding checks drawn on controlled disbursement accounts
   
 
52.0
 
   
 
(6.2
)
    
  
Net cash used in financing activities
   
 
(366.3
)
   
 
(200.2
)
    
  
NET CHANGE IN CASH
   
 
—  
 
   
 
—  
 
CASH, BEGINNING OF PERIOD
   
 
—  
 
   
 
—  
 
    
  
CASH, END OF PERIOD
   
$
—  
 
   
$
—  
 
    
  
 
See Notes to Condensed Financial Statements.

4

VERIZON MARYLAND INC.
 
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.    Basis of Presentation
 
Verizon 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 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. The results for the interim periods are not necessarily indicative of results for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in our 2001 Annual Report on Form 10-K.
 
We have reclassified certain amounts from prior year’s data to conform to the 2002 presentation.
 
2.    Adoption of New Accounting Standards
 
Goodwill and Other Intangible Assets
 
Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under prescribed conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit’s goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adoption of SFAS No. 142 did not impact our results of operations or financial position because we had no goodwill or indefinite-lived intangible assets at December 31, 2001 and 2000.
 
Our other intangible assets consist of non-network software as follows:
 
    
As of September 30, 2002
   
As of December 31, 2001
    
Gross Carrying Amount
     
Accumulated Amortization
   
Gross Carrying Amount
     
Accumulated Amortization
    
(Dollars in Millions)
Non-network software (3 to 7 years)
   
$
116.0
     
$
42.4
   
$
113.9
     
$
28.0
 
Intangible assets amortization expense was $4.9 million for the three months ended September 30, 2002 and $14.4 million for the nine months ended September 30, 2002. Amortization expense is estimated to be $4.8 million for the remainder of 2002, $19.2 million in 2003, $17.9 million in 2004, $12.9 million in 2005 and $9.8 million in 2006, related to our non-network software.
 
Impairment or Disposal of Long-Lived Assets
 
Effective January 1, 2002, we adopted SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS No. 121 implementation issues. The adoption of SFAS No. 144 did not have a material effect on our results of operations or financial position.

5

VERIZON MARYLAND INC.
 
3.    Recent Accounting Pronouncements
 
Asset Retirement Obligations
 
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.
 
Debt Extinguishment
 
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of APB No. 30 are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.
 
Exit or Disposal Activities
 
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.
 
4.    Dividend
 
On November 1, 2002, we declared and paid a dividend in the amount of $85.0 million to Verizon Communications.
 
5.    Debt
 
In February 2002, we issued $500.0 million of 6.125% debentures due on March 1, 2012 at a discount. Proceeds from this sale of $496.6 million were used to repay or refinance existing indebtedness and for general corporate purposes.
 
In March 2002, we recorded extraordinary charges associated with the early extinguishment of long-term debt, which reduced net income by $.6 million (net of income tax benefits of $.4 million). These debt extinguishments consisted of the following:
 
 
·
 
$60.0 million of 5 7/8% debentures due on June 1, 2004
 
 
·
 
$75.0 million of 6 5/8% debentures due on October 1, 2008
 
 
·
 
$50.0 million of 7 1/4% debentures due on February 1, 2012
 
6.    Shareowner’s Investment
 
    
Common Stock
   
Capital Surplus
   
Reinvested Earnings
  
    
(Dollars in Millions)
  
Balance at December 31, 2001
   
$
735.4
   
$
130.5
   
$
367.0
 
Net income
                 
 
254.9
 
Dividends declared to Verizon Communications
                 
 
(250.0
)
Capital contribution from Verizon Communications
          
 
8.9
         
Other
          
 
.1