REUTERS - June 28, 2004 - Excerpts  
Fraud chance higher at less independent US boards

NEW YORK - The more independent company boards and audit and compensation committees are, the less likely companies are to commit fraud, according to a survey released on Monday.

The study, published in this month's issue of Financial Analysts Journal, sampled 133 companies charged with fraud between 1978 and 2001 and compared them with companies in similar industries and of similar size.

The researchers found that companies that committed fraud had a fewer outside directors. They also discovered that fraud was more likely when directors had personal or business ties with a company.

The independence of U.S. corporate boards became an issue two years ago after a number of financial scandals cost investors billions of dollars.

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Associated Press – June 18, 2004 - Excerpts

1,050 pension plans report shortfalls of $278.6 billion

WASHINGTON - More than 1,000 underfunded pension plans reported a total shortfall of $278.6 billion in 2003, a 9 percent drop from the previous year, based on the latest government filings.

The overall deficit was $305.9 billion the previous year, the Pension Benefit Guaranty Corp. said yesterday.

Airlines and steel companies still are among the industries with the biggest shortfalls. Overall, 1,050 underfunded plans reported $641.8 billion in assets to cover $920.3 billion in retirement benefits and other liabilities, said the Pension Benefit Guaranty Corp.

Since PBGC was created in 1974, the airline and steel sectors have accounted for more than 70 percent of the agency's claims, though they have just 5 percent of pension-plan participants.

The data are being released earlier than ever before as part of an overall agency strategy to publicize the funding crisis building in the nation's private-pension system. The PBGC also wants changes in laws to let workers and retirees know more about the state of their plans' finances.

"Workers and investors have a right to know the financial status of pension plans," said Executive Director Brad Belt. The information provided to PBGC in the reports "should be publicly available," he said

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Associated Press – June 25, 2004 - Excerpts

Audit review on Big Four cites significant problems

WASHINGTON - Limited inspections of the Big Four accounting firms uncovered significant problems in their audits of companies' books.

William J. McDonough, chairman of the independent board created to shore up investor confidence, warned auditors against the sort of short cuts or bending to pressure to please corporate clients that fueled the accounting scandals of 2002.

The Public Company Accounting Oversight Board, established by Congress to replace the accounting industry's own regulators amid the wave of scandals, has subpoena power and the authority to discipline auditors. Its inspectors did limited reviews of the Big Four firms' work in 2003, its first year of operations, but full inspections began this year.

In testimony at a House subcommittee hearing yesterday, McDonough said the four firms - Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche - agreed to the voluntary limited inspections, which used as a sample their auditing work for several "high-risk" client companies with complex finances.

In the inspections, the oversight board "identified significant audit and accounting issues," McDonough said. "There's room for improvement."  The board raised its concerns about quality control in auditing to the firms, "and we will continue to look hard at whether the firms' conduct mirrors their words," he said.                      

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The New York Times – June 13, 2004 – Excerpts
Healthier and Wiser? Sure, but Not Wealthier

By many measures, today's older workers appear better equipped for retirement than any previous generation. Their homes are worth more than their parents' homes were. Their bank accounts are fatter. And study after study suggests that typical late-middle-age employees have accumulated more wealth than their counterparts did a quarter-century ago.

But virtually all of these studies have a flaw, a crucial asset that is left out of the equation. Add it back in, and the rosy picture suddenly darkens.

That asset is the traditional pension, an employee benefit that was widely available until the early 1980's but has been vanishing from the American workplace ever since. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did. The demise of the old-fashioned pension has been much discussed, but the effect on family finances has not. That is because the impact has been hard to measure.

New evidence suggests, though, that the waning of the pension has, imperceptibly but surely, stripped older workers of an immense store of wealth - much more than they probably guessed, if they thought about it at all. Retirement benefits today, particularly the 401(k) account, simply are not worth as much as the older kind of benefits. Some studies suggest otherwise, but they tend to rely on average balances of retirement accounts, and the averages have been skewed upward by the extraordinary gains of a few wealthy households.

The advent of self-directed retirement plans, by contrast, is giving rise to an elite minority who are well prepared for retirement, and a majority who are falling behind, the numbers show.

In 1985, about 115,000 American companies had traditional pension plans. As of last year, only about 31,000 did. Of those, many are thought to have frozen the benefits, pension specialists say, so that additional years of service no longer build a bigger pension. Others have closed their plans to new employees, or reduced their benefits formulas. Precise data on such changes are nonexistent, but Daniel L. McCaw, chief executive of Mercer Human Resource Consulting, said in Congressional testimony this year that as many as a quarter of surviving pension plans were either frozen or on the brink of a freeze.

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The New York Times – June 2, 2004 - Excerpts
Actuaries Under Scrutiny 0n Pension Fund Pacts

The Department of Justice has asked several big actuarial firms for information about the terms of their client agreements, in what appears to be an effort to learn whether certain provisions violate antitrust laws.

Officials of the actuarial firms said they had received "civil investigative demands," or written requests for information that fall short of subpoenas, from the department's antitrust division.

The letters seek documents and other information related to the firms' decisions, about two years ago, to ask their pension fund clients to sign clauses limiting their ability to sue the firms. The inquiry was reported this week by Pensions & Investments, a trade publication.

Almost all American pension funds, public and private, began to have serious financial difficulties in 2001. Much of the trouble was caused by unusually adverse financial market conditions, which persisted for several years. But in some cases, retirees or others connected with the pension funds have contended that the actuaries who advised the funds added to the trouble, by making errors in judgment or in calculations.

Some pension officials, particularly trustees of public and union pension funds, said they did not want to sign away their right to sue.

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Chicago Sun-Times - May 30, 2004 – Excerpts

Companies axing retirees' health benefits

MANASSAS, Va. -- Fred Bena is reluctantly learning about Medicare prescription drug insurance, figuring that his former employer's retiree health benefits won't last and he'll be forced into a costlier Medicare plan.

The retired airline worker is among the 11 million to 12 million Americans 65 and older who receive drug coverage from their former employers.

The number of companies offering health benefits to retirees has been declining for at least 15 years. And no one knows whether the Medicare drug insurance that begins in 2006 will accelerate that trend despite a provision in the new law designed to entice companies to maintain coverage.

''I can foresee the company saying, 'This is costing us too much money, so we're bailing out,'" said Bena, 77. ''That's my big fear.''

With health costs rising fast, corporations have tried to contain their cost. Retiree benefits have been a frequent target.

In 1988, 66 percent of firms employing 200 or more workers offered health coverage to retirees. By 2003, the number had fallen to 38 percent, according to the Kaiser Family Foundation.

Lawmakers and representatives of civic groups report that retirees with health benefits are nervous that the new Medicare law will cause more companies to abandon retiree drug coverage, removing the protective barrier between them and fast-rising drug prices.

''The anxiety level is off the charts,'' said John Rother, policy director at the 35 million-member AARP, which has been sponsoring Medicare meetings, including the one in Manassas.

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Knight Ridder – May 30, 2004 - Excerpts

Company-paid health insurance for retirees now rare

ST. PAUL, Minn. - Ed Stish is not living the carefree life he envisioned when he retired from a taconite mine in Keewatin, Minn., three years ago. He has no time for lounging in a La-Z-Boy, golfing or fishing for pleasure.

Instead, Stish rises early and sets about growing vegetables, trapping beaver for pelts and harvesting wild rice on a lake near his home in Bovey. His wife, Sue, sells the bounty at farmers' markets four days a week.

They do this to survive. Just a few months after he retired at age 50 from National Steel Corp., his employer of 30 years went bankrupt, taking with it longtime promises to provide a livable pension and cheap health insurance for life.

Even though the U.S. Pension Benefit Guaranty Corp. stepped in to protect workers' pensions, Stish's monthly payment was cut almost in half to $1,350. And the buyer of the mine, U.S. Steel, never made good on the old promise to provide retiree health insurance.

That left Stish in the same predicament as countless retirees caught in an unaffordable health insurance trap they never expected. Company-paid health insurance for retirees is becoming extinct as companies try to slash costs and increase profits.

Although federal law requires companies to deliver the pensions they promised, no such legal obligation exists for health insurance.

Eleven years ago, 46 percent of large U.S. companies helped retirees with health insurance, but now just 28 percent continue to do so, says researcher Paul Fronstin of the Employee Benefits Research Institute. Among all U.S. companies, 11 percent provide retirees with health insurance.

In the past few years, retirees such as Stish were taken by surprise when an employer went broke or was acquired by another company that didn't want to continue their health benefits. Others have lost insurance because former employers wanted to avoid spiraling health insurance costs, or they could bolster corporate profits quickly through an accounting maneuver that can turn disbanded insurance liabilities into instant income.

Last year, 10 percent of companies that gave retirees health benefits eliminated them completely, and 71 percent made retirees pay a greater portion of health coverage, according to research by the Kaiser Foundation and Hewitt Associates.

Cutting retiree benefits is considered the path of least resistance. The special accounting attached to cuts in health benefits works almost magically to prop up corporate profits.

"Companies attack the segment of their stakeholders that have no defense," says Jim Norby of the National Retirees Legislative Network.

The network has asked Congress to pass laws that would mandate employers to maintain their commitments to retirees, but Norby says there's not much interest.

Meanwhile, as companies slash benefits, retirees are left in a bind. With poor job prospects and insurance costs high for older people, many retirees can't afford thousands of dollars in unexpected expenses.

Typically, when workers consider retirement, they check on their company benefits and add up monthly living expenses such as heat and property taxes. If pensions, savings and Social Security look like they will cover all the costs, they may decide it's safe to retire.

But that can be a serious mistake if unanticipated health insurance costs pop up after retirement. Early retirees, those younger than 65, may have to spend $1,000 a month for insurance. People eligible for the federal Medicare program may have to spend about $250 a month on supplemental insurance because Medicare only covers about half of the costs.

A person who retired in 2003 with employer health benefits will need between $37,000 and $750,000 in savings to pay for his supplement to Medicare, according to the Employee Benefits Research Institute. A person without any help from an employer will need $47,000 to about $1.5 million.
 

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PBGC News Release - May 21, 2004
Deficit in PBGC's Main Pension Insurance Program Stands at $9.7 Billion as of Midyear

The PBGC’s insurance program for pension plans sponsored by a single employer reported an unaudited deficit of $9.7 billion as of March 31, 2004, the midpoint of the agency's fiscal year. The program's 2003 fiscal year end deficit was $11.2 billion.

The PBGC's single-employer program insures the pensions of 34.5 million Americans in 29,500 plans. The modest improvement in the program's net position occurs against a backdrop of significant risk. As of the end of fiscal year 2003, the program had approximately $85.5 billion in "reasonably possible" exposure, defined as the amount of unfunded vested pension benefits promised by financially weak employers.

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The New York Times - May 18, 2004 – Entire Article

Lucent Fined $25 Million by S.E.C. in Fraud Case

By KEN BELSON

The Securities and Exchange Commission accused Lucent Technologies and nine former and current employees yesterday of fraudulently reporting nearly $1.2 billion in revenue. The agency also accused a former executive of  WinStar Communications of engaging in a fraud scheme in which Lucent recorded $125 million in software sales to WinStar.

The accusations, made in a civil lawsuit filed in Federal District Court in New Jersey, come after a three-year government inquiry into Lucent's inflation of its sales figures dating back to the 2000 fiscal year.

Lucent, the nation's largest maker of telecommunications equipment, and three of the nine employees have agreed to settle with the government without admitting or denying wrongdoing. Lucent will not have to make any additional adjustments to its earnings statements, but it will pay a $25 million fine for not cooperating with the investigation, the largest penalty ever levied against a corporation for failure to cooperate.

The accusation against Lucent comes after smaller fines were levied against the  Bank of America and  Xerox and is emblematic of the S.E.C.'s growing frustration with evasive and obstructive behavior by companies under investigation.

"Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interest of investors," Paul Berger, the S.E.C.'s associate director of enforcement, said in a statement.

Shares of Lucent declined 18 cents, or 5.5 percent, to close at $3.10 yesterday. The announcements helped drag the Nasdaq composite index down 1.45 percent to 1,876.

Yesterday's move against Lucent added another jolt to the embattled telecommunications industry, whose fortunes have plummeted since the technology bubble burst several years ago. Industry analysts said some of Lucent's accounting problems stemmed from pressure to show stable sales and close deals even as the boom in spending on telecommunications equipment collapsed.

Companies are still paying the price for their aggressive accounting. Last month, the S.E.C. opened formal investigations of accounting irregularities against Lucent's biggest rival,  Nortel Networks. The company, which is based near Toronto, has since fired several top executives and cut the 2003 profits it originally reported in half.

Nortel is also grappling with a host of class-action lawsuits brought by investors. And on May 14, a federal grand jury in Dallas, where Nortel has major operations, subpoenaed financial and other records from the company as part of a new criminal investigation.

The growing troubles at Nortel and the conclusion of this government case against Lucent comes amid a modest turnaround this year in the industry's financial outlook. The accounting problems, however, are starting to distract investors, who have dumped shares in Nortel and its rivals.

 "It's a serious blow to credibility to have this ugly monster rear its head when the industry smolders," said Susan Kalla, a telecommunications analyst at Friedman, Billings, Ramsey in New York. "The timing couldn't be worse."

The case against Lucent dates back to November 2000, when the company alerted financial regulators about revenues it improperly recorded. S.E.C. regulators ultimately found that $511 million in revenue and $91 million in pretax income were prematurely recorded in the 2000 fiscal year, which ended Sept. 30 that year. Another $637 million and $379 million in pretax income should not have been recognized at all.

Lucent subsequently restated $679 million in sales, an act that prompted 54 class-action lawsuits by investors, who said they were intentionally misled by the company.

In December, Lucent settled those cases by agreeing to pay $517 million in cash and shares as compensation for shareholders, bond holders and other investors.

In addition to improperly booking sales, Lucent employees on at least 10 occasions made illegal agreements with customers, including WinStar, which filed for bankruptcy protection in April 2001.

The three executives who settled with the government had worked on the WinStar account. William Plunkett, vice president for Lucent's Emerging Service Provider, will pay $110,000; Deborah Harris, who worked with Mr. Plunkett, will pay $100,000; and Vanessa Petrini, who reported to Ms. Harris, will pay a $60,000 fine and an additional $132,992 related to profits and interest on illegally booked sales.

A Lucent spokeswoman said three of the nine executives named by the government are still working for the company, but declined to name them, leaving open the question of whether some defendants are still making accounting and management decisions at Lucent.

The case against David Ackerman, the former WinStar executive, has not been settled.

The settlements with Mr. Plunkett, Ms. Harris and Ms. Petrini, though, could foreshadow a coming criminal investigation. Prosecutors often try to reach agreements with midlevel employees and offer them immunity in future cases against more important executives, legal experts say.

"If there is a criminal case, they'll need some people to testify," said Bradford C. Lewis, a partner at Fenwick & West in Mountain View, Calif., who worked for seven years as an assistant United States attorney in the Eastern District of California. "It's a typical strategy."

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SEC News Release – May 17, 2004

Lucent Settles SEC Enforcement Action Charging the Company with $1.1 Billion Accounting Fraud

Lucent Agrees to Pay $25 Million Penalty

SEC Charges 10 Individuals With Securities Fraud

FOR IMMEDIATE RELEASE
2004-67

Washington, D.C., May 17, 2004 - The Securities and Exchange Commission today charged Lucent Technologies Inc. with securities fraud, and violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC also charged nine current and former Lucent officers, executives and employees, and one former Winstar Communications Inc. officer with securities fraud and aiding and abetting Lucent's violations of the federal securities laws. The SEC's complaint alleges that Lucent fraudulently and improperly recognized approximately $1.148 billion of revenue and $470 million in pre-tax income during its fiscal year 2000.

Lucent and three of the former Lucent employees agreed to settle the case without admitting or denying the allegations. As part of the settlement, Lucent agreed to pay a $25 million penalty for its lack of cooperation.

"Companies whose actions delay, hinder or undermine SEC investigations will not succeed," said Paul Berger, Associate Director of Enforcement. "Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interests of investors."

The SEC's complaint alleges that Lucent's violations of generally accepted accounting principles (GAAP) were due to the fraudulent and reckless actions of the defendants and deficient internal controls that led to numerous accounting errors by others. In their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses, the complaint alleges, defendants Nina Aversano, Jay Carter, Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, and Michelle Hayes-Bullock, in their respective capacities as officers (Aversano and Carter), executives (Plunkett, Bratten, Dorn and Harris) and employees (Petrini, Elliott and Hayes-Bullock) of Lucent improperly granted, and/or failed to disclose, various side agreements, credits and other incentives (collectively "extra-contractual commitments") to induce Lucent's customers to purchase the company's products. These extra-contractual commitments were made in at least ten transactions in fiscal 2000, and Lucent violated GAAP by recognizing revenue on these transactions both in circumstances: (a) where it could not be recognized under GAAP; and (b) by recording the revenue earlier than was permitted under GAAP.

In carrying out their fraudulent conduct, according to the complaint, these Lucent officers, executives and employees violated and circumvented Lucent's internal accounting controls, falsified documents, hid side agreements with customers, failed to inform personnel in Lucent's corporate finance and accounting structure of the existence of the extra-contractual commitments or, in some instances, took steps to affirmatively mislead them.

The complaint also alleges that Ackerman, at the time an officer of Winstar, engaged in a scheme with Plunkett that resulted in Lucent improperly recording a $125 million software purchase by Winstar at the end of Lucent's fourth quarter of fiscal year 2000. His fraud included signing a document that disguised the timing of a side agreement in connection with that sale. By engaging in such conduct, Ackerman aided and abetted Lucent's fraud.

Lucent's Lack of Cooperation

Lucent's penalty for its failure to cooperate is based on the following conduct.

• Throughout the investigation, Lucent provided incomplete document production, producing key documents after the testimony of relevant witnesses, and failed to ensure that a relevant document was preserved and produced pursuant to a subpoena. As a result, the staff's ability to conduct an efficient and comprehensive investigation was impeded.
   
• After reaching an agreement in principle with the staff to settle the case, Lucent's former Chairman/CEO and outside counsel agreed to an interview with Fortune magazine. During the interview, Lucent's counsel characterized Lucent's fraudulent booking of the $125 million software pool agreement between Lucent and Winstar as a "failure of communication" thus denying that an accounting fraud had occurred. Lucent's statements were made after Lucent had agreed in principle to settle this case without admitting or denying the allegations concerning, among other things, the Winstar transaction. Lucent's public statements undermined both the spirit and letter of its agreement in principle with the staff.
   
• After reaching an agreement in principle with the staff to settle the case, and without being required to do so by state law or its corporate charter, Lucent expanded the scope of employees that could be indemnified against the consequences of this SEC enforcement action. Such conduct is contrary to the public interest.
   
• Lucent also failed over a period of time to provide timely and full disclosure to the staff on a key issue concerning indemnification of employees. Failure to provide accurate and complete disclosure to the staff undermines the integrity of SEC investigations.
   

Settlements

• Lucent, Plunkett, Harris and Petrini have reached settlements with the SEC. These defendants have agreed to permanent injunctions against future violations of the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws.
   
• Lucent will pay a penalty of $25 million.
   
• Plunkett also will pay a civil penalty of $110,000 and has agreed to be permanently barred from acting as an officer or director of a public company.
   
• Harris will pay a civil penalty of $100,000 and has agreed to be barred from acting as an officer or director of a public company for five years.
   
• Petrini will pay a civil penalty of $60,000 and disgorge $109,505, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $23,487.
   

The SEC will litigate this case against the remaining seven defendants.

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The Wall Street Journal – May 17, 2004 – Entire Article

SEC Gets Tough With
Settlement in Lucent Case

Five Ex-Staffers Charged,
$1 Billion in Sales Disputed;
Costly Lack of Cooperation

By DEBORAH SOLOMON and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
May 17, 2004; Page A1

WASHINGTON -- The Securities and Exchange Commission is coming down hard on Lucent Technologies Inc., both to deal with its alleged misdeeds and to send a clear signal that the agency wants nothing less than full cooperation from companies under investigation.

The securities watchdog is expected to file civil fraud charges against Lucent as early as today for improperly recognizing $1 billion in revenue and to fine it $25 million for failing to cooperate with inquiries. The cooperation issue included disputes over Lucent's indemnifying employees under investigation from some things such as legal fees, fines and penalties, a practice on which the SEC has gotten tougher.

In addition, the agency will charge at least five former Lucent executives for their alleged roles in the company's accounting problems, people familiar with the matter said. Lucent has already said it would settle the SEC's charges that it violated securities laws by improperly recognizing revenue and also agree not to engage in any future misconduct. Paying the $25 million fine, which Lucent first announced in March, will conclude the settlement.

The Lucent settlement will conclude one of the SEC's original probes into an industry that was later rocked by overbuilding and accounting misdeeds. Several telecom companies, including Qwest Communications International Inc. and Global Crossing Ltd., are still facing investigations into aggressive sales practices that improperly inflated revenue. The shakeout forced Lucent to cut tens of thousands of jobs, shutter factories and pare funds for research and development.

The exact details of the transactions contained in the $1 billion figure, including the years involved, aren't known. But the number is more than the $679 million Lucent removed from its books in late 2000. Lucent, when it announced the $25 million fine in March, said the company wasn't required to make any financial restatements as part of a final SEC settlement.

Lucent was an integral part of the tech boom -- both as a company that built Internet and telecom equipment and as a highflying stock that was once the most-owned issue in the U.S. Its shares climbed above $60, only to retreat sharply. The stock closed Friday at $3.28, down 10 cents.

Lucent has tried to put its troubles behind it, even accepting a class-action settlement with shareholders last December. But the SEC suits will probably focus more scrutiny on what happened among Lucent's top-level sales force at the height of the telecom boom.

More broadly, according to people familiar with the matter, the SEC is using the Lucent settlement and fine to send a clear message: Companies that fail to cooperate or that skirt the rules of a settlement will face consequences. The $25 million fine would be the largest penalty the SEC has levied against a company for cooperation problems.

This would also mark the second large fine in just two months against a company for being uncooperative. In March, the SEC fined Bank of America Corp. $10 million for, the agency charged, using stalling tactics and failing to produce documents promptly during an investigation of whether traders at the bank's securities unit improperly used advance knowledge of the firm's own stock research.

The SEC had originally agreed not to fine Lucent for its alleged misdeeds but decided to levy a penalty because of statements and actions by the company after it reached a settlement in principle with the agency last year, according to people familiar with the matter. In part, the SEC viewed Lucent as failing to cooperate because it agreed to indemnify some employees who were involved in the alleged accounting misdeeds -- to cover some legal costs, fines and penalties -- despite the SEC's policy that companies shouldn't do so, people familiar with the probe said.

Lucent declined to comment on any of the matters related to the SEC's actions.

The agency has taken a tough stance on indemnification policies and now includes standard language in settlement agreements prohibiting a company from covering the cost of SEC penalties levied against any employee. The agency changed its policy last year to prohibit coverage of those costs after Xerox Corp. agreed to pay some of the penalties levied against several former officials who were charged in connection with accounting improprieties. SEC officials want those who are charged with wrongdoing to pay the fines so that the penalties act as a deterrent and company shareholders don't wind up subsidizing the costs.

"Where corporate boards, officers or employees are found to have contributed to the filing of false or misleading statements, the company should be prevented from indemnifying those individuals," said Lynn Turner, a former chief accountant at the SEC.

Lucent also irked the SEC when the company's outside attorney spoke to Fortune magazine last June about a $125 million deal between Lucent and Winstar Communications Inc. that was a subject of the SEC probe. In the article, Paul Saunders of the law firm Cravath, Swaine & Moore characterized the Winstar transaction as a "failure of communication," not an accounting fraud. When asked if that failure was intentional, he responded, "I don't know. I don't think so."

Lucent was forced to issue a public retraction, saying that Mr. Saunders's comments were "both inaccurate and inconsistent. ... The transaction involved falsification of documents resulting in improper accounting, both of which were seriously wrong and cannot be justified." Cravath, based in New York, remains Lucent's principal outside counsel, according to a person familiar with the matter.

The SEC is also taking aim at some former Lucent employees for allegedly helping the company falsely inflate its revenue by engaging in a number of aggressive sales practices. Other employees, say people familiar with the matter, drafted false documents on Winstar sales that helped Lucent meet quarterly revenue guidance.

At least five former officials, including Nina Aversano, the company's former head of North American sales, will be charged for their roles in these sales practices. Edwin Schallert, a lawyer for Ms. Aversano, said his client plans to challenge the SEC's charges. "We regret that the government has taken this step, but alleging a claim is very different from proving it. We will see them in court."

William Plunkett, a former senior vice president of sales at the Murray Hill, N.J.-based company, may settle charges that he violated securities laws, according to people familiar with the matter. Other former employees the SEC plans to charge include Jay Carter, who worked in global sales; Leslie Dorn, vice president of channel sales; and Vanessa Petrini, director of business development in mobile high-speed data.

Mr. Plunkett's attorney, Bob Davis, declined to comment. Mr. Carter, Ms. Dorn and Ms. Petrini didn't return calls to their homes. It isn't known whether they will settle or fight the charges that will be filed against them.

Their alleged actions showed how desperate Lucent was to register sales in the waning days of the telecom bubble. At the time, Lucent had set a goal of 20% annual revenue growth, and the company's sales force was scrambling to land as many deals as possible.

In December 2000, the company admitted it had improperly accounted for $679 million in fiscal 2000. That admission was the first sign that the telecom market was rapidly eroding. Lucent then began a brutal restructuring from which it is still recovering.

At one point, Lucent was considering a reverse split of its stock, which was trading at less than $1.00 and faced delisting. Lucent and its shares have rebounded somewhat, and the company reported its first quarterly profit in years in October 2003. But it is struggling to find growth in a market still saturated with too many telecom companies and firms who supply them.

Write to Deborah Solomon at deborah.solomon@wsj.com and Dennis K. Berman at dennis.berman@wsj.com

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PBGC News Release - May 14, 2004
Percentage of Active Workers in Defined Benefit System Continues to Decline, According to New PBGC Pension Insurance Data Book

The ratio of active to inactive workers has fallen to roughly 1-to-1 in the defined benefit pension system, down from more than 3.5-to-1 in 1980, according to the latest edition of the PBGC's Pension Insurance Data Book.

In percentage terms, the share of active workers in single-employer pension plans reached an all-time low of 51 percent in 2001, down from 78 percent in 1980. The changing demographics of the defined benefit system are one of the many findings of the Pension Insurance Data Book. The latest edition of the Data Book also reveals that:

• The number of standard terminations reached an all-time low of 1,119 in 2003.
• The PBGC's recent claims experience has been the worst in the Corporation's 30-year history, with $11.2 billion—or 63 percent—of all claims having been filed within the past three years alone.
• More than 55 percent of the dollar claims against the insurance program—and more than half of all plan terminations—arose from plans less than 50 percent funded. Only $586 million of the $17.6 billion in total claims were from plans with funded ratios of 75 percent or higher.

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Reuters – May 12, 2004 - Excerpts

 

Most corporate pensions remain underfunded -survey

 

NEW YORK - Only 19 percent of the 331 companies in the Standard & Poor's 500 index that provide defined benefit pension plans had pension assets that matched or exceeded liabilities in 2003, according to a report published on Wednesday.

That's an improvement on 2002, when a mere 11 percent of the pensions had assets to match or exceed liabilities, but way down from 2001 and 2000, when 36 percent and 71 percent, respectively, had funding ratios over 100 percent.

The Corporate Funding Survey On Pensions by Wilshire Research said corporate pension plans improved slightly in 2003, after suffering their worst year ever in 2002.

Defined benefit pension assets for the S&P 500companies surveyed rose $139 billion to $1.03 trillion, while liabilities increased $85 billion to $1.15 trillion, the report said.

Wilshire Research said although the median "expected return on plan assets" assumption has fallen over the past three years -- to 8.50 percent in 2003 from 9.50 percent in 2000 -- "many pension accounting critics believe that this assumption is still too high."

Wilshire's own long-term forecast for the return on corporate pension assets is about 7.0 percent, "though individual pension plan expected returns could vary considerably, depending upon their own asset allocation."


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FORBES – May 6, 2004 – Entire Article

Telecommunications
Lucent Throws A Pay Party
Daniel Lyons,   05.06.04, 6:30 PM ET

 

Lucent Technologies may be a shadow of its former self, but there is one place where this company still puts world-class numbers on the board, and that's executive compensation.

 In two years since becoming chief executive, Patricia Russo has received compensation worth more than $44 million, according to Equilar, a San Mateo, Calif., firm that tracks executive compensation.

  And since January 2002, when Russo rejoined Murray Hill, N.J.-based Lucent  (nyse:  LU -  news  -  people  ) as chief executive, her four top lieutenants--all Lucent lifers--have received "cash retention payments" totaling $10 million to keep them from leaving.

 Moreover, in fiscal 2003 these four executives--Frank D'Amelio, William O'Shea, Janet Davidson and James Brewington--were paid salaries totaling $2.4 million and bonuses totaling $2.8 million. Plus they were granted 3.75 million options.

 In addition, in 2003 Russo and her top four execs were awarded $3.5 million in long-term incentive plan bonuses that won't be paid until 2005. Ultimately Russo and her team could earn as much as $11 million from this three-year plan.
 So how well has this dream team performed?

 Lucent's share price has dropped 40% since Russo took over in January 2002--from $5.87 to $3.50--and the company has lost $10 billion in market value, falling to $15 billion. Russo says Lucent's market cap has shrunk because telecom spending has declined sharply during the past two years. (And to Russo's credit, during the 2003 fiscal year, which ended Sept. 30, Lucent's stock rose nearly 200% to $2.16 from 75 cents.)

 How about earnings? In fiscal 2003 Lucent reported a net loss of $1.2 billion on sales of $8.5 billion. This year Lucent is expected to report a net profit, but there's a catch: The profit is being delivered by an accounting credit from a pension fund surplus, without which Lucent would post a net loss of several hundred million dollars this year. (Lucent argues that the pension fund credit has been an ongoing contributor to earnings, and that its earnings have been trending up.)

 To be sure, Russo's team has cut operating expenses to $623 million per quarter from $1.8 billion, boosted gross margins to 40% from 12%, and improved Lucent's customer-satisfaction scores.

 But they have also slashed the research and development budget by $2 billion, causing Lucent to fall behind in key product areas, which may become evident in 2005 and 2006.

 (Lucent's spinmeisters point out that the company's $1.5 billion R&D spending in 2003 represented 17.5% of Lucent's $8.5 billion in revenue, while its $3.5 billion R&D spending in 2001 was only 16.5% of that year's $21.3 billion in revenue.)

 Some Lucent retirees are appalled by how much top execs are making, especially since Lucent, crying poor, slashed health benefits for its 127,000 U.S. retirees last year. "I think they should reduce salaries and perks to the officers," says Ken Raschke, president of the Lucent Retirees Organization, an activist group formed in 2003. "I think they ought to be a little more noble and make some sacrifice themselves."

 Russo says Lucent employees are sharing the sacrifice--they, too, have had their benefits cut. Russo also argues that Lucent must pay competitive salaries to attract and retain talented executives, especially during hard times. "To suggest that we should not compensate people for the job they are doing in weathering the worst storm ever in our industry is just wrong-headed," Russo says.

 She adds that before 2003 Lucent's executives went three years without bonuses, and insists Lucent's compensation for top executives is in line with other companies in its industry.

 How does Lucent compare? At Cisco Systems (nasdaq:  CSCO -  news  -  people  ), a networking company with twice Lucent's sales ($18.9 billion in fiscal 2003, which ended July 26) and ten times Lucent's market value ($150 billion), the five top execs last year received cash compensation (salary and bonus) that was 50% of what Lucent paid its top five people: $4.2 million at Cisco versus $8.4 million at Lucent.

 That is in part because Cisco's chief executive, John Chambers, has taken a $1 annual salary and zero bonus since April 2001, when Cisco, like Lucent, saw its business stall as customers slashed orders.

 Last year San Jose, Calif.-based Cisco granted its top five executives 6 million options, while Lucent granted its top five execs 6.25 million options--though using Black-Scholes methodology, Equilar calculates the value of Cisco's options grants to be $65 million, nearly ten times greater than the value of Lucent's grants.

 The bottom line: At Cisco, which in fiscal 2003 earned a net profit of $3.6 billion, top executives are taking lower pay today and betting their company will be stronger in the future. At Lucent, which barely ekes out a profit, leaders are doing a touchdown dance and taking their cash right now, thank you.

 Where will these companies be in a few years? Here's a clue. Having gutted R&D, Lucent today fills holes in its product line by reselling equipment made by...Cisco. Funny old world, isn't it? 

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The New York Times – April 30, 2004 – Entire Letter

False Spin on Retirees

To the Editor:
Re "Agency to Allow Insurance Cuts for the Retired" (front page, April 23):
          In the aftermath of our 3-to-1 vote to allow employers to reduce or eliminate health benefits for retirees when they become eligible for Medicare at age 65 (I was the dissenter), my colleagues are trying to paint a rosy scenario that does not ring true.
          Having voted to allow age discrimination against older retirees, my colleagues now claim that the Equal Employment Opportunity Commission somehow acted to safeguard and preserve retiree health benefits.
         Nothing could be further from the truth.
         The E.E.O.C. acted to allow discrimination, adding to the likely accelerated cutbacks of retiree health benefits. We have done a profound disservice to millions of older Americans who counted on the government to protect them from discrimination.
STUART J. ISHIMARU
Washington, April 26, 2004
The writer is a commissioner of the Equal Employment Opportunity Commission.
 

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Forbes.Com – April 23, 2004

Lucent's CEO Continues Climb Up Compensation Ranking

Lucent Chairman and CEO Patricia Russo continues to rise in the Forbes' ranking of top paid CEO's of America's 500 biggest companies.  Her compensation is at a record high for a Lucent CEO.  Forbes' latest ranking of CEO compensation was posted April 23 on the Forbes.com website.  Ms. Russo's compensation over the last three years is as follows:

                                        Total                        Mkt. Value LU        

Year            Rank            Compensation         Shares Owned

2004            190                $4,871,000                $10,400,000

2003            232                $3,583,000                $  3,700,000

2002*          434                $1,200,000                       NA

*The New Jersey Star-Ledger reporter on September 30, 2003 that Fortune magazine ranked Patricia Russo as the No. 1 highest-paid woman executive in the S&P 500 with a $38 million pay package for 2002.  Lucent said much of Ms. Russo's compensation came in stock options. The options have an exercise price of $7.10 per share. Lucent maintains that Ms. Russo's 2002 compensation was an "anomaly," saying that her pay was adjusted to reflect bonuses and options she lost when she left Eastman Kodak to take the job at Lucent. 

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The New York Times - April 22, 2004 – Entire Article

Commission to Allow Insurance Cuts for Retired Employees

By ROBERT PEAR
WASHINGTON, April 22 — The Equal Employment Opportunity Commission voted Thursday to allow employers to reduce or eliminate health benefits for retirees when they become eligible for Medicare at age 65.

The agency approved a final rule saying that such cuts do not violate the civil rights law banning age discrimination. The vote was 3 to 1, with Republicans lining up in favor of the rule and a Democrat opposing it.

Employers and some labor unions supported the change, saying it would help preserve coverage for early retirees. But AARP, which represents millions of Americans age 50 and older, strenuously objected.

The new rule creates a potentially explosive political issue, because it will create anxiety for many of the 12 million Medicare beneficiaries who also receive health benefits from their former employers.

"We are aware of the anxieties and misperceptions that have taken root," said Cari M. Dominguez, chairwoman of the commission, which was deluged with letters opposing the rule from more than 50,000 AARP members.

Employer-sponsored health plans help retirees pay medical expenses not covered by Medicare. Those expenses could include co-payments and deductibles, the catastrophic costs of severe illness and the cost of preventive care and prescription drugs, beyond what Medicare might pay.

Debate over the rule highlights the tradeoffs employers make as they decide what benefits, if any, to provide workers and retirees at a time when health care is gobbling up a growing share of total compensation.

The rule creates an explicit exemption to the Age Discrimination in Employment Act of 1967. In practice, it allows employers to reduce health benefits for retirees when they become eligible for Medicare at the age of 65.

A federal appeals court ruled in 2000 that such age-based distinctions were unlawful.

No law requires employers to provide health benefits to workers or retirees. Employers can legally provide benefits to active workers and not to retirees. Courts have said that if an employer provides benefits, it cannot discriminate among retirees on the basis of age.

But the commission said that under the age discrimination act it had authority to make "reasonable exemptions" to the law in the public interest. The law does not define "reasonable."

Leslie E. Silverman, a member of the commission, said the appeals court decision had confronted employers with an all-or-nothing choice: "Give all of your retirees the exact same benefits, which is incredibly difficult, or eliminate your retiree health benefits altogether."

Several commission members said that employers were more likely to continue providing health benefits to retirees under 65 if they were allowed to reduce or eliminate benefits for those 65 and older.

A preamble to the final rule says it "is not intended to encourage employers to eliminate any retiree health benefits they may currently provide."

But Michele Pollak, a lawyer at AARP, said that might well occur.

"This rule will allow employers to reduce or eliminate retiree health benefits for anyone over the age of 65," Ms. Pollak said. "More than 12 million Medicare beneficiaries currently receive retiree health benefits from employers and could potentially be affected."

Ms. Pollak said the commission did not have authority to create such an exemption. Ms. Dominguez insisted that it did, though she said the power was rarely used.

Paul W. Dennett, vice president of the American Benefits Council, a trade group for large employers, welcomed the rule, saying, "It removes a cloud that has been hanging over retiree health coverage since the court decision in 2000."

The American Federation of Teachers and the National Education Association also supported the rule. School employees often retire early and rely on employer-provided health benefits until they become eligible for Medicare.

Alfred Campos, a lobbyist for the National Education Association, praised the rule, saying, "It will encourage school districts to continue providing health insurance to retired teachers under 65."

Stuart J. Ishimaru, who cast the only no vote, said: "I came to the commission as a civil rights lawyer. Before making an exemption to a major civil rights law, you need a compelling reason, which I have not seen."

The proper role of the commission, Mr. Ishimaru said, is not to make health policy, but to protect people from discrimination.

The rule is subject to comment by other federal agencies, and it will be reviewed by the Office of Management and Budget. But it is within the jurisdiction of the employment commission and is expected to stand.

The rule reverses a position that the commission took in the court case and in a national policy statement issued in October 2000.

Under the rule, employers can coordinate retiree health benefits with Medicare.

"For example," the commission said, "in order to ensure that all retirees have access to some health care coverage, employers and unions may provide retiree health coverage to only those retirees who are not yet eligible for Medicare. They also may supplement a retiree's Medicare coverage without having to demonstrate that the coverage is identical to that of non-Medicare eligible retirees."

Opponents could challenge the rule in court. AARP said it would "explore a range of different steps, including litigation," to block the rule if it is not changed.

Congress considered the issue in debating Medicare legislation last year. The Senate version of the Medicare bill included a provision similar to the commission's rule, but it was dropped from the measure ultimately signed by President Bush.

AARP insisted on elimination of that provision before it announced its support for the bill in November. That endorsement played a critical role in passage of the measure.

In recent years, many employers have reduced health benefits for retirees, in part because of soaring health costs.

Employers said that uncertainty caused by the court decision, involving retired government workers in Erie County, Pa., would accelerate the erosion of retiree health benefits if the commission did not take action.

###

China Tech News – April 12, 2004 - Experts

Lucent Knows How To Play By Both Sets Of Rules

What do Chinese businesses really want? It seems Lucent has known better than most. Lucent this past week announced it sacked the top management of its China subsidiary based in Beijing. Apparently, these executives had been providing kickbacks and offering travel services to customers who bought Lucent's products.

About 30 years ago, the U.S. passed a law known as the "Foreign Anti-Corrupt Practices Act". This law prohibits U.S. companies and their subsidiaries from paying kickbacks in foreign countries to win business.

It is not clear whether Lucent deserves credit for this voluntarily disclosure to the SEC or whether Lucent was forced to do so since the U.S. authorities were already looking into similar issues in Lucent's Middle East operations.

And Lucent played the game well. They made deals in China, while offering services on the side. The local Chinese employees sold Lucent’s wares and created a better bottom line for their investors. But when the crap hit the fan, Lucent took a page from the Asian business playbook and sacked the three employees. Were these the only offenders in the organization? Most likely not. But for a face-saving gesture, and to put themselves in the good graces of the SEC, the deed had to be done. Lucent squeezed their lemon into lemonade.

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Reuters – April 10, 2004
Bush OKs Pension Aid to U.S. Companies

CRAWFORD, Texas (Reuters) - President Bush signed into law on Saturday a measure aimed at saving U.S. companies more than $80 billion in pension contributions over two years, days before many firms make quarterly payments. 

Businesses lobbied hard for the bill, which would provide about $80 billion in pension accounting relief through the end of 2005 for some 31,000 companies with traditional "defined benefit" pension plans.  

Many traditional pension plans are underfunded because of the weak stock market the last few years and current low interest rates, and companies are struggling to keep up with the payments as profits have shrunk in part because of the struggling economy.

 
 

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The Wall Street Journal – March 29, 2004 – Entire Article

How Lucent's Retiree Programs
Cost It Zero, Even Yielded Profit

Trusts Paid the Tab -- Till Now;
Facing Need to Use Cash,
Company Imposes Cuts

A Handy Tool for Downsizing

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
March 29, 2004; Page A1

Henry Schacht, Lucent Technologies Inc.'s former chief executive and still a director, met with retirees in 10 states last fall to explain why Lucent was cutting their medical and life-insurance benefits.

In Buckhead, Ga., the retirees, some propped on canes and walkers, tottered into a meeting at the Sheraton hotel. Then, according to a handout from Mr. Schacht's presentation, he explained the burden Lucent faced from growing medical costs and rising numbers of retirees. There are now five retirees for every U.S. worker, the handout said. "Unfortunately, the numbers just don't work."

Many retirees say they resigned themselves to that conclusion. A high ratio of retirees and older workers, they figured, must be a burden that forced the company to cut benefits if it hoped to be competitive.

But an examination of Lucent's government filings shows that having a disproportionately high number of retirees hasn't been a problem for Lucent. In the first place, thanks to three benefit and pension funds that Lucent was born with when spun off from AT&T Corp. eight years ago, the big provider of telecom gear never had to dig into its own pocket to pay benefits for U.S. retirees. The funds paid every cent, both of pensions and of retirees' health care.

In addition, Lucent has been able to use assets in these funds to help it pay for repeated rounds of downsizing.

Moreover, the benefit plans -- thanks to accounting rules -- have fed Lucent hundreds of millions of dollars of income. And through a separate accounting maneuver, the cuts that Lucent made in the benefit plans last fall will contribute hundreds of millions of dollars more in income over future years.

In short, in most years the pension and retiree benefit plans have enhanced Lucent's earnings, not burdened them. But now that the surplus in the biggest fund is essentially gone, Lucent is faced with using some of its own cash to pay retiree benefits, and it is cutting those benefits.

The Lucent story is a case study of the often-bewildering world of retiree benefits. Contrary to a common perception, having a high ratio of retirees to employees doesn't necessarily raise a company's benefits burden. Lucent also shows the sundry ways companies can actually profit from their retiree plans, both to relieve demands on their cash and to produce new income that burnishes the bottom line.

For many retirees, the impact is painful. "This is like getting an enormous pay cut -- in retirement," says Howard O'Neil, 90 years old, who began work in 1939 for Lucent predecessor Western Electric in the radar group, and then was a pricing specialist for AT&T Technologies. "We're going to have a really tough time this year," says the Wall, N.J., resident, now faced with paying for Medicare "part B" coverage and dental benefits that Lucent used to cover for him and his wife, Mabel, 79. Their total increase is $183 a month.

Lucent also eliminated a death benefit it had told Mr. O'Neil he would have. The benefit was to equal his $16,600 pay in his last year, 1973, and he intended it for his burial costs. "They punish you for being old," Mr. O'Neil says.

Lucent says it adopted many techniques that other big companies also use to manage pension and benefit plans. But it makes a distinction. Most companies imposing cuts "are doing it to improve their performances or to better insulate themselves" from health-care inflation, Mr. Schacht says in an interview. "We're in an entirely different position. We can't generate the cash." Lucent's revenue is down radically from four years ago after two spinoffs and a brutal slump in demand for telecom equipment and services.

Lucent says that until now, it has never spent any cash from operations on benefits for U.S. retirees, because the trusts always paid for this. Now that Lucent can't rely on the trusts to pay all the benefits, Mr. Schacht says the company has no choice but to cut them. He says the company must commit its resources to improving the business and describes the cuts as necessary to keep Lucent strong enough to pay any benefits at all.

Cutting retiree benefits was "the least-worst of bad alternatives," he says. "We spent eight months trying to figure out how not to do" what the company ended up doing.

Lucent began life in 1996 when AT&T put together several divisions, including Western Electric and Network Systems, and spun them off as a new company. It made and sold telecom equipment, including many of the computers and switches that undergird the Internet and the U.S. telephone system. It also housed the storied Bell Laboratories, the research center that developed technologies as diverse as transistors, lasers and fax machines. Based in Murray Hill, N.J., Lucent started off with 100,000 retirees, ex-employees of these AT&T divisions.

They came with a dowry. AT&T transferred to the new company a $29.8 billion pension fund plus two special trusts to pay retiree benefits, containing $3.7 billion. Counting the estimated cost of paying all the retiree benefits to everybody entitled to them, the new company had retiree liabilities of $28.7 billion. And it had $33.5 billion in assets to pay them.

Lucent focused on growth: acquiring companies, hiring people, borrowing heavily and generally operating as if the roaring telecom market of the time would continue. It didn't. When the bubble burst in 2000, Lucent deflated too. Demand for telecom products and services went into a steep fall, exacerbated in Lucent's case by its habit of financing customers' purchases.

Accounting issues accompanied the financial troubles. Lucent disclosed in late 2000 it had improperly recognized $679 million in revenue. As recently as early this month, a federal grand jury was continuing to look into Lucent's business practices. Also this month, Lucent said the Securities and Exchange Commission will fine it $25 million for lack of cooperation after a 2003 preliminary SEC settlement, which didn't require penalties or further restatements.

Retirees Multiply

After the telecom bust, Lucent began downsizing through spinoffs of business units, layoffs and early-retirement offers. A U.S. labor force that had been 118,000 in 1999 stands at 22,000 today.

As its work force shrank, its retiree population grew. In the U.S. by last fall, retirees numbered 127,000.

One might think this would increase Lucent's pension obligation. Not so. The company had the same pension obligation to employees while they were still on the payroll as it did after they left. Having a higher ratio of retirees to active workers doesn't make a company's pension obligation worse.

That's because companies that offer pensions must fund them. They're expected to set aside enough money in a pension plan to meet all obligations to current and future retirees. As employees retire, the liability the company carries for those employees actually begins to decline, because the people are no longer building up new pension benefits.

Before the telecom bubble burst and stock market turned down, Lucent's pension plan was more than well-funded: It had a giant surplus. Its assets reached $45.3 billion at the peak, with a surplus of about $19 billion.

Pension Income

Besides the effortless payment of pensions, that rich pension plan provided a valuable resource for the company itself. First, it generated pension income. When expected returns on the assets in a pension fund exceed current costs, the difference counts as company income. While this isn't spendable money, it fattens the reported profits that drive stock prices.

In Lucent's first full year, ended Sept. 30, 1997, its earnings included $329 million of pension income. The figure more than tripled in fiscal 2000. After that, Lucent ran huge annual net losses, but most were narrowed by hundreds of millions of dollars in pension-fund income.

An exception was fiscal 2001, when the pension fund generated a billion-dollar accounting loss, thanks in part to the company's restructuring. In addition, accounting expense for other retiree programs, particularly health care, has lowered corporate income. But even after subtracting those factors, the net result was $929 million added to Lucent's bottom line over its eight-year history as a result of its benefit plans.

The pension plan also served the company as a kind of piggy bank. From 1999 to 2001, Lucent withdrew about $1 billion from pension-plan assets to pay for retirees' health care. This is perfectly legal, although companies that do it face certain restrictions if they later try to cut those health benefits.

Severance Aid

Lucent also used its pension fund for severance. For example, in 2001, to induce older employees to take early retirement, Lucent offered them beefed-up pensions. Doing so raised Lucent's pension liability by $1.95 billion, which was a big part of the reason the plan hurt rather than helped earnings that year. But offering bigger pensions let Lucent shed workers at minimum cash cost. It "was a better way to finance because we didn't have the cash," Mr. Schacht says. "It is still far better ... than if we would have just had to fire" people.

In its medical trust funds for retirees, Lucent found another useful downsizing tool. The company encouraged older employees to leave by offering them accelerated health coverage in retirement.

In 2001, Lucent offered retiree health coverage to a pool of managers who weren't yet eligible for the benefit. About 8,500 managers accepted the deal and left. "We were encouraged to take it to get the medical benefits," says Mark McGill, 48, a former sales director in Denver. Together, the pension plan and the retiree health plan limited the cost to Lucent of a radical downsizing.

But wouldn't the resulting higher number of retirees boost Lucent's health-care burden? Actually, the total bill for medical benefits didn't grow appreciably. Rather, Lucent had shifted a chunk of medical costs from the employee side of the ledger to the retiree side.

In fiscal 2003, Lucent spent about $1.11 billion on health care. This was in the same neighborhood as the $1.06 billion it spent in 1999, when its payroll was at its peak. Between the two years, the sums Lucent spent on health care for employees shrank (because there were fewer), while the amounts spent for retirees grew (because there were more).

The figures: In fiscal 1999, $517 million for employees and $539 million for retirees. In fiscal 2003, $850 million for retirees and $264 million for employees.

In terms of health care, moving a population from active to retired even has some advantages. Once employees became retirees, Lucent no longer had to pay for their health-care benefits with cash earned in its business. Now, it could pay the benefits out of assets in the pension plan and special trusts.

Cost Limits

What's more, although Lucent was exposed to health-care inflation for employees, it faced far less such exposure for retirees. For 28,000 of its managers, Lucent has ceilings on what it will ever pay toward their retirement health benefits in a year: $7,850 for a family, and $1,700 for single retirees over 65.

A spokesman for Lucent confirms that it spends roughly the same overall for medical coverage as in 1999 -- but more for retirees now and less for employees. He says that switch wasn't a strategy but just a byproduct of restructuring. In any case, Mr. Schacht says, the bill is much tougher on a company with only $8 billion-plus of annual revenue, versus the $38 billion-plus Lucent had in 1999.

Meanwhile, any cuts Lucent makes in its retirees' benefits bring it accounting gains. The cuts lower a liability recorded earlier. That generates an accounting gain, which adds to the company's income.

For example, in 1999, Lucent eliminated -- for people who had retired after 1983 -- a longstanding benefit: discounted long-distance phone rates. In lieu of this, Lucent raised their pensions $25 a month. The move, combined with other changes, lessened the retiree-benefit obligation on Lucent's books by $359 million. That produced an accounting gain, which helped Lucent's bottom line in subsequent years.

The new Medicare prescription-drug law also lets companies' retiree plans throw off still more corporate income. Under the law, those that provide drug coverage for retirees will get federal subsidies for preserving coverage instead of dumping their retirees on the Medicare program. Lucent estimates its eventual total amount of subsidies at roughly $500 million in today's dollars. This will reduce the company's liability and generate an accounting gain of that size. It will be gradually parceled out into income over about a decade.

A New Situation

Although Lucent's retirees long cost the company zero cash from its operations, Lucent says this is changing. Companies must have 25% surpluses in their pension funds to use fund assets to pay retirees' health benefits. Lucent's pension plan remains in good shape but the former huge surplus is gone. Stock-market losses are the main reason. Lucent says about 10% of the pension-fund decline is due to transferring money out to pay for retiree health care.

Lucent's two trusts for U.S. retirees' health care are also less flush. They total $2.3 billion, down 37% since Lucent's founding, after payment of benefits and losses during the bear market. Lucent says the trust for management retirees' health care is tapped out. The company expects the one for union employees to run out within two years. Lucent confirms it never put any cash into the trusts while it was prospering in the late 1990s.

The fiscal year that began Oct. 1 will be the first time Lucent must dip into its own cash from operations to pay part of the retiree-health-care tab. It estimates it will have to use $240 million of its cash for this purpose this year -- equal to about 2.7% of revenue -- and $300 million annually in 2005 and 2006.

Lucent says it can't afford this. The company has been profitable for the past two quarters and projects a profitable year. Still, executives say Lucent remains cash-flow negative -- using cash faster than taking it in.

Lucent had $4.3 billion in cash as of Dec. 31. But it says it must commit its cash to securing its future, by spending on such things as sales efforts and research and development. It also must pay competitive compensation, Mr. Schacht adds, "because that's what it's going to take to continue to attract and retain the talent required to build this company back to where we want to go."

Walt Ehmer, 67, retired chief executive of Lucent Technologies Denmark, argues that Lucent "can accomplish both goals: to take care of Lucent and the retirees. They talk about the cost of retiree benefits, but they continue to pay all these executive bonuses." Lucent paid $300 million in bonuses at the end of 2003. Mr. Schacht says that bonuses, too, are important to retaining top people.

Early-Retirement Offer

Last September, as Lucent faced the need to spend cash on retiree health benefits for the first time, the company chose to cut them. It eliminated Medicare "part B" and dental coverage, death benefits, and spousal benefits for management retirees who made more than $87,700 a year. The effect was to rescind some of the health coverage Lucent had offered people in 2001 to get them to retire early.

Jon Wallace was one who took Lucent's offer that year and left. The offer meant that Mr. Wallace, an engineer, stood to receive $6,700 a year in retiree medical coverage. Changes Lucent made in September cut this to $3,532.

His share of premiums, formerly about $1,800 a year, is now more than $6,900. With a daughter just finishing college, Mr. Wallace, 56, figures he has traded tuition payments for a higher insurance bill. Mr. Wallace says he doubts Lucent's "simplistic story" about why it had to cut benefits but also says that "I don't want Lucent to go out of business," noting that he holds 15,000 shares of Lucent and its spinoffs "in my poor, beat-up 401(k)."

Mr. Schacht says employees who took the early-retirement option in 2001 had been warned that the company could change those benefits at any time.

Cutting the retiree coverage gave Lucent a tidy financial payoff, even though it hadn't been using its own cash for the benefits. The cuts reduced its balance-sheet liability for retiree benefits by $1.1 billion, or 11.7%. This generated a $1 billion-plus pool of accounting gains that will bolster income over several years.

The benefit cut was a last resort, Mr. Schacht says. "It's not for any other reason than we don't have the cash, and won't have the cash." He discourages any thought of restoring the cuts later, saying, "We're not going to be able to grow our way out of it."

Mr. Wallace asked about that as well, at a retiree meeting last fall in Naperville, Ill. He says Mr. Schacht demurred, saying only that the company would "review" conditions in the future.

"I just looked around the room -- a lot of folks there were in their 70s and 80s -- and I thought, 'In 10 years, they're going to be gone,' " Mr. Wallace says. He says he had gone to the meeting sympathetic to Lucent, willing to hear more and understand its decisions. "But I lost the illusion that they would do the right thing. The handwriting was on the wall: that we should expect more cuts. I came away from the meeting tightening my belt."

Write to Ellen E. Schultz at ellen.schultz@wsj.com² and Theo Francis at theo.francis@wsj.com³

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Reuters – March 22, 2004 – Excerpts

Pensions Take More Risks as Shortfalls Grow-Survey

NEW YORK (Reuters) - U.S. pension plans are seeking better returns by slightly increasing their investment risk as funding shortfalls in a growing number of plans raise concerns, a report said on Monday.

Pension funds are also hiring fund managers "at an unprecedented rate" as they look for ideas to "help them keep pace with their hefty obligations," said Greenwich Associates' 2004 report on the U.S. investment management industry.

For pension funds, the stock market rebound has been largely offset by consistently low interest rates and unfavorable demographics, the report said.

 When people live longer and interest rates remain low, pension funds' future obligations increase.

The report said about 16 percent of corporate pension plans were less than 75 percent funded and 45 percent were less than 95 percent funded at the beginning of last year.

Corporate pension funding ratios fell from 121 percent in 1999 to 88 percent at the end of 2002, according to the report. "The average plan was deep in the hole at the end of 2002, and the hole is getting deeper," said Dev Clifford, a Greenwich Associates consultant.


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The New York Times – March 21, 2004 – Excerpts

Concerns Raised Over Consultants to Pension Funds

A small but growing part of the $2 trillion in state and local pension funds is being steered into high-risk investments by pension consultants and others who often have business dealings with the very money managers they recommend. After making such investments, a few of these pension funds have come up short, forcing the governments to draw on tax dollars.

The Securities and Exchange Commission is so concerned that it has begun an inquiry into the practices of pension consultants, who serve as gatekeepers for thousands of money managers.

The regulators will find not just financial consultants but a web of intermediaries — marketing agents, lobbyists, brokers and world leaders — between pension funds and the investments they choose.

Under the consultants' watch, more money is flowing into private or alternative investments, which are not publicly traded like stocks and bonds and whose performance cannot be tracked in any agreed-upon way.  Though such unregulated investments offer the potential for high returns, they carry more risk than conventional stocks and bonds. 
 

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New Jersey Star-Ledger – March 19, 2004 - Excerpts

Ex-Lucent execs named in bribery suit

Senior leaders at Lucent Technologies used bribery and other illicit means to cut a Saudi Arabian company out of lucrative telecommunications contracts, according to an amended lawsuit filed this week in federal court in New York.

The suit by National Group for Communications and Computers, a Riyadh-based contractor, adds extortion and money laundering allegations to bribery charges in the original complaint, which was filed last August. It also names former Lucent Chief Executive Richard McGinn, Avaya Chief Executive Don Peterson -- the former chief financial officer of Lucent -- and lesser company officials as key participants in the scheme.

Lucent disclosed last year that the U.S. Department of Justice and the Securities and Exchange Commission were investigating potential violations of the Foreign Corrupt Practices Act because of the Saudi bribery allegations.

In its annual report filed last month, Lucent said it had "noted some deficiencies in controls for a foreign operation, which may involve the Foreign Corrupt Practices Act." The company said it was tightening up internal audits of overseas operations and increasing training of employees.

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USA Today – March 17, 2004 - Excerpts
Health insurance premiums crash down on middle class

Nancy Sherman Soleimani fears dropping her $1,200-a-month health insurance policy almost as much as she worries about how she'll continue to pay for it.

Don Clingerman says his 62-year-old mother's retiree health coverage is so expensive — $7,900 a year — that he may recommend she drop it, gambling that she'll stay well until she's 65 and can get Medicare.

Hank Sturma, 60, says he's been without a job — and without insurance — for about a year. Sturma says he can't afford the $325 a month it would cost to add him to the policy his wife has through her job at a nursing home.

Rising health care costs are increasingly pressuring the middle class, adding a large and politically influential group to the category of those who fear they may soon have to do without.

There's little hope for relief in the short term. Health spending is expected to rise well above inflation for years to come. Employers are increasingly passing on the additional costs to their insured workers, causing some workers to opt out, saying they can't afford it. And, at some workplaces, employers are dropping coverage altogether.

"These newly uninsured Americans will be a different category of citizenry: solidly and continuously employed people who suddenly find themselves totally without a health care safety net because of soaring health care premium costs," say the authors of Epidemic of Care, George Halvorson, the CEO of Kaiser Permanente, and George Isham, medical director for insurer HealthPartners.

Today's average premium for a family insurance policy — $9,086 a year— already represents 21% of the national median household income of $42,409.

If insurance premiums continue to rise about 10% a year, today's average premium could double in just over seven years. Wages, however, are only expected to grow at about 3% a year.

Some analysts say the rising cost of premiums and increasing load of deductibles and other fees will lead more of the currently insured to drop their coverage.

Already, 19% of those whose household income is $25,000 to $50,000 are among the nation's 43 million uninsured. The percentage is even higher among those making less than that: 23%. Even those with household incomes exceeding $75,000 saw a rise in the percent uninsured in the last Census Bureau survey.


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The Wall Street Journal - March 16, 2004 – Entire Article

How Cuts in Retiree Benefits
Fatten Companies' Bottom Lines

Trimming a Health-Care Plan
Creates Accounting Gains,
Under Some Arcane Rules

A Shield Against Rising Costs

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL

The loud message comes from one company after another: Surging health-care costs for retired workers are creating a giant burden. So companies have been cutting health benefits for their retirees or requiring them to contribute more of the cost.

Time for a reality check: In fact, no matter how high health-care costs go, well over half of large American corporations face only limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will ever spend per retiree for health care. If health costs go above the caps, it's the retiree, not the company, who's responsible.

Yet numerous companies are cutting retirees' health benefits anyway. One possible factor: When companies cut these benefits, they create instant income. This isn't just the savings that come from not spending as much. Rather, thanks to complex accounting rules, the very act of cutting retirees' future health-care benefits lets companies reduce a liability and generate an immediate accounting gain.

In some cases it flows straight to the bottom line. More often it sits on the books like a cookie jar, from which a company takes a piece each year that helps it meet its earnings targets.

The art of minimizing retiree-benefit costs while creating income is arcane and poorly understood by the public -- and by the retirees. Here's a field guide to seven techniques.

Hitting the Ceiling

Big companies began in the early 1990s to set ceilings on how much they would ever spend for retiree health care, regardless of what happened to medical costs in general. ConocoPhillips, Delta Air Lines and Coca-Cola Enterprises Inc. are among the many that did so. A cap can be a fixed annual amount per retiree, a per-retiree average or, less commonly, a fixed sum for a group. In any case, once it's reached, a company is largely insulated from future medical-cost increases for those retirees.

The fate of retirees can be very different. When Robert Eggleston retired from International Business Machines Corp. 12 years ago, he was paying $40 a month toward health-care premiums for himself and his wife, LaRue, with IBM paying the rest. In 1993, IBM set ceilings on its own health-care spending for retirees. For those on Medicare, which provides basic hospital and doctor-visit coverage, the cap was $3,000 or $3,500, depending on when they retired. For those younger than 65, the cap was $7,000 or $7,500. Spending hit the caps for the older retirees in 2001, the company says, pushing future health-cost increases onto retirees' shoulders.

Mr. Eggleston, 66 years old, has seen his premiums jump more to $365 a month for the couple. Deductibles and copayments for drugs and doctor visits added $663 a month last year. "It just eats up all the pension," which is $850 a month, Mrs. Eggleston says. Her husband has brain cancer. Though he gets free supplies of a tumor-fighting drug through a program for low-income families, he has cashed in his 401(k) account, and he and LaRue have taken out a second mortgage on their Lake Dallas, Texas, home.

IBM retirees as a group saw their health-care premiums rise nearly 29% in 2003, on the heels of a 67%-plus increase in 2002. For IBM, with its caps in place, spending on retiree health care declined nearly 5%, after a drop of 18% the year before.

IBM confirms that retirees' spending has risen as its own has fallen. It describes the retirees' increased cost in 2003 as not very dramatic, averaging $158 a year, or $13.15 a month, for each of the 190,000 retirees and dependents who participate in the plan. IBM says its costs are down because more retirees are older and eligible for Medicare, so the company's contribution is lower. It says that this year it established a "zero premium" plan for retirees, although this plan carries deductibles double those of other plans.

Caps Plus Cuts

Just because companies have shelter from retiree health-cost inflation doesn't mean they can't also cut their retirees' health benefits.

In January last year, Aetna Inc. said it would phase out health-care benefits for workers who retire starting this year. "Health-care costs have increased," says a spokesman for the company. Yet federal filings show Aetna's spending on its retirees' health benefits had not been rising substantially, thanks to ceilings Aetna imposed a decade ago. From 1998 through 2002, its annual spending for retiree health benefits ranged between $35 million and $39 million.

Aetna says it made the January 2002 benefit cut to strengthen its business. "Wherever it makes sense, we've been trying to reduce expenses in order to be competitive," says its spokesman, adding that Aetna's overall benefits remain "very competitive." Aetna recorded losses early this decade but has turned around, reporting fourth-quarter profits double those of a year earlier.

Aetna's spending on health benefits for 12,000 retirees did rise the following year, 2003, to $44.2 million. A company spokesman said it was unclear why.

Profits From Cuts

For many big U.S. companies, cutting benefits doesn't merely relieve them of future spending. More important, though less visible, is the instant income the cuts can create. It's all because of an accounting rule adopted nearly 14 years ago.

The rule said an employer that provided a retiree health benefit had to estimate what it would cost to pay that benefit over the lives of the retirees. The total became a liability. It created a big obligation on the balance sheet. But at a time when legions of companies were taking this hit, it was generally ignored by securities analysts. There was even some advantage to putting a jaw-dropping obligation on the books: Employers could point to it as a reason that, to survive, they needed to slash benefit levels.

But when a company now changes one of the assumptions that went into that liability, it gets to reduce the liability. In accounting, reducing a liability generates a gain. Voilà: income.

As an accounting credit, this isn't money that can be spent. But it looks the same in the bottom line -- which affects the stock and often management's pay incentives.

Just setting a spending cap typically brings an accounting gain, because it reduces the amount the company expects to pay out over time for the benefits. A company that goes further and cuts the benefit structure reaps more paper gains. It may sound strange that a company can get income from cutting benefits it hasn't paid and may never pay, but that's how it works.

These sums can bump earnings up significantly. Caterpillar Inc. in 2002 added $75 million to income -- 9.4% of pretax earnings -- with the accounting gain it got from boosting the health-care premiums its retirees had to pay and making other changes to retiree benefits. The move will lift pretax earnings about $45 million a year for several more years. Caterpillar confirms the information but says it didn't cut benefits to boost earnings; rather, it did it to help retirees -- by keeping the plan more affordable for the company. "The best way to protect the health care for the long term was to make some of these changes now," says a spokeswoman.

 Whirlpool Corp. picked up $13.5 million in earnings, or 19 cents a share, in last year's second quarter from accounting gains, after imposing both caps and cuts in health care for its retirees. This gain more than offset charges of 16 cents a share primarily for a recall of microwave-oven products. Whirlpool then just beat consensus estimates of $1.31 in second-quarter earnings. Whirlpool confirms the information but says it didn't cut retiree benefits to help it meet earnings targets.

Cuts Redux

Gradually, the pools of accounting gains generated by early rounds of benefit cuts and caps run out. When that happens, companies sometimes cut further, replenishing the pool.

International Paper Co. capped its spending soon after it adopted the retiree health-care liability required by the accounting rule, Financial Accounting Standard 106, in 1991. This cap reversed much of the liability. It generated a pool of accounting gains that trickled into the company's financial statements -- to the tune of $17.7 million a year -- until 2000.

Then the stockpile was used up. International Paper again cut benefits in 2000, 2001 and 2002, primarily by capping the benefits of retirees of newly acquired companies. This generated a new batch of accounting gains. They have added a total of $65 million to International Paper's income so far.

A company spokeswoman confirms the figures, noting that they reflect standard accounting practices. She says the company "simply made plan design changes as part of our focus on controlling our costs while maintaining a competitive benefits program."

New Formulas

When a company's liability for retiree health care soars, it's usually just because of some change in the assumptions that went into the liability formula -- a change the company itself made.

Most commonly, it involves interest rates. Liability calculations assume a particular rate at which the assets used to pay benefits will grow. A lower rate leads to a higher liability. Think of it this way: If the return on the money you set aside for an obligation is going to be lower, you have to set more money aside.

For instance, UAL Corp.'s liability for retirees' health care surged more than $1 billion in 2002. Reason: The airline had lowered the rate used in its liability calculation -- known as the discount rate -- to 6.75% from 7.50%. Companies have considerable latitude in picking the interest rate they use and deciding when to make a change, though rates were certainly declining when UAL made its change.

A shift could be in store. If interest rates rise from current historic lows, billions of dollars in corporate liabilities for retiree health care will vanish.

Also feeding into this murky mix is a company's estimate of health-cost inflation. As with the interest rate, companies have wide leeway to change their assumptions about health-cost trends -- giving their liability figure either a bump up or a push down. For example, in 2002, Motorola Inc. boosted its assumption of annual health-care inflation to 12% from 6%. This was a key reason its liability for retiree health care jumped by $122 million.

Rather than focusing on health-care liability, which companies have so much latitude to adjust, shareholders might want to look at what a company actually spends year-to-year for retiree medical benefits. At Bank of America Corp., for example, the liability for retiree health benefits rose by $69 million, to $1.1 billion, in 2003. But federal filings show that what the bank actually spent for these benefits in 2003 declined to $63 million from $84 million the year before, a 25% drop. Retirees' portion rose 27% to $62 million.

Contrary to conventional wisdom, it isn't uncommon for companies to report declines in their actual spending on retiree health care. Those whose filings reveal lower "benefits paid" last year include Altria Group Inc. (down 5%, to $246 million); R.J. Reynolds Tobacco Holdings Inc. (down 11%, to $63 million); Clorox Co. (a 33% fall, to $4 million); Ball Corp. (down 21%, to $8 million), and Black & Decker Corp. (down 28%, to $13 million).

This "benefits paid" figure still doesn't tell whether a company is spending more or less per retiree. The total might be up simply because there were more retirees, perhaps because the company had layoffs or did an acquisition.

But it's still a better measure of the burden of health care than one other number that companies report: their "expense" for retirees' health care. This is essentially an accounting measure of how much a benefit plan pushes corporate income up or down, driven largely by changes in liability.

Dropout Roulette

When employers cap or cut retiree medical programs, the companies don't benefit just by spending less and reaping accounting gains. They also can benefit from a spiral of dropouts.

As retirees see their out-of-pocket costs rising, some of the healthier retirees quit the company program. Their good health lets them buy cheaper coverage elsewhere. But their departures concentrate the remaining pool with sicker people, costs go up, more dropouts ensue, and the pool gets more concentrated again, in what the industry sometimes calls a death spiral.

Each dropout reduces a company's immediate outlays, since it no longer has to pay even a capped benefit for that person. Dropouts also generate accounting gains for the company, since the concern gets to reverse the liability it had booked for covering those retirees for life.

A company in this situation -- with its own expenses capped -- has little incentive to negotiate the lowest possible prices with medical providers. In fact, it has an incentive not to: Rising expenses not only won't hurt the company but will tend to drive more retirees from the program.

At Sears Roebuck & Co., thousands of retirees have dropped out of a retiree health-benefit plan in recent years, at a time when retirees' share of costs was going up. While no one is saying Sears sought this dropout spiral, the dropouts follow a series of caps Sears established in the 1990s to limit its own expenses. The number of retirees taking part in its health plan has fallen 18% since 2000, to 51,500. Sears has 115,000 retirees in all. It can't say how many are eligible.

Sears says that while cost may prompt some retirees to drop out of the health plan, a more significant factor is that older retirees are dying and fewer people are eligible. Benefits Vice President Liz Rossman says Sears works hard to keep its plan affordable for retirees.

Sears has fed $383 million into earnings since 1997 from accounting gains that arose when the company capped its spending and retirees dropped the increasingly costly coverage.

In January, Sears announced it was further tightening the cap on its spending on retirees' health care, and also eliminating future retiree health benefits for most current employees. Sears says the steps will make it more competitive but declines to say how much they will generate in accounting gains.

What makes such moves different from other accounting quirks is that retirees end up paying the price. In Jeannette, Pa., in early January, about 100 retirees of GenCorp Inc., formerly called General Tire & Rubber, met in a union hall to discuss the latest rise in their health-care premiums. The new cost of coverage for a couple was $568 a month. For most, this exceeded their company pensions. Because of the higher cost, many of the retirees at the meeting, whose ages hovered around 80, said they were dropping their employer's coverage.

Mabel Kramer began working at the company in 1944 making gas masks for World War II soldiers, and met her husband there. Now a widow, she collects a pension of $179 a month based on his 34 years with the company. Her GenCorp retiree medical benefits cost her $284 a month, consuming the pension and part of her $810 Social Security check. "If they raise it any more, I'll drop it," says Mrs. Kramer, 78. "It's enough to make you sick."

Others don't dare drop it. Edward Peksa, who spent 24 years in GenCorp's tennis-ball department, said he needs the coverage to help pay for five drugs his wife, Anna, takes for arthritis, hypertension and thyroid and cholesterol problems. The couple's premium more than erases his GenCorp pension of $320 a month. To make ends meet, Mr. Peksa, 75, works 30 hours a week as a greeter at Wal-Mart Stores.

These retirees were paying nothing for their health-care coverage until 2000, when the company began charging them. Their premiums have risen steadily since then. GenCorp says the reason is the ceilings it placed in 1995 and 1997 on its own spending on retirees' health care.

GenCorp's spending on the retiree health-care benefit has fallen over the past six years, its filings to the Securities and Exchange Commission show. It paid $30 million for the benefit in 1997 but just $25 million in 2003, according to its annual report. The liability on its books for retiree health care is down 40% since 1995.

Among the reasons is that no one hired since the mid-1990s will get the retiree benefit, GenCorp says. It adds that the liability also shrinks as retirees die or drop out of the health-care plan because they have "other options or coverage available, or possibly because they can't afford it any more."

Medicare Checks

Medicare's new prescription-drug benefit is giving companies a whole new source of accounting-generated income that boosts their earnings.

And some employers may get federal subsidies even after transferring costs to their retirees.

Congress was worried that if Medicare paid for prescription drugs, companies would cut retiree health-care benefits even faster than they already were. So when it passed a Medicare drug benefit last year, Congress added subsidies for companies that retain retiree drug coverage. The U.S. will reimburse employers for 28% of the cost of retiree prescription-drug spending over $250, up to a subsidy of $1,330 per retiree per year.

This means companies can reduce the liability they're carrying on their books for drug coverage. They won't get the subsidy until 2006. But accounting rules let them estimate how big a subsidy they'll get over the lives of current and future retirees and deduct this figure from their liability right now -- and start dropping immediate accounting gains to their bottom lines.

General Motors Corp. estimates the Medicare prescription-drug plan will cut $4 billion from its liability for retiree health care. Other companies' estimated cuts include $1.3 billion at Verizon Communications Inc., $572 million at BellSouth Corp., $415 million at AMR Corp., $450 million at U.S. Steel Corp., and $280 million at UAL. All of these will boost the companies' income.

The new Medicare law means some companies can get federal subsidies (and thus fresh accounting gains and earnings) even if they shift part of the cost of their retiree drug coverage to the retirees themselves. That's because the way the law is written, the subsidy is based on the whole cost of a company's retiree drug program -- including the part retirees have to pay for.

Write to Ellen E. Schultz at ellen.schultz@wsj.com and Theo Francis at theo.francis@wsj.com

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The Wall Street Journal - March 8, 2004 - Excerpts

Worst 5-Year Performer: Lucent Technologies

For the second year in a row, the maker of telecommunications equipment ranks as the worst five-year performer in the Shareholder Scoreboard. With an average compound annual return of minus 41.6%, a $1,000 investment in Lucent at the end of 1998 would be worth a measly $68 five years later, compared with $972 if the same amount had been invested in the Standard & Poor's 500-stock index.

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Reuters – February 29, 2004 – Excerpts
Lifting the Lid: the Buck Stops with Pension Plan Trustees

 NEW YORK (Reuters) - Largely ignored in the probes of improper trading in mutual funds have been the trustees of pension plans. But that may soon change.

 Massachusetts' top securities regulator reminded trustees this week that they, too, have fiduciary duties and must ensure the investments they oversee are protected.

 William Galvin, the Massachusetts secretary of the Commonwealth, told Reuters on Tuesday that those who make decisions for other employees or workers could come under scrutiny -- the same as the companies that manage mutual funds.

 Galvin's comments are a timely reminder for pension plan trustees -- who have received little guidance from the Labor Department, which regulates pensions.

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The Atlanta Journal-Constitution – February 28, 2004 – Excerpts

Retirees worried over pension uncertainties

The pension crisis in America is enough to give retirees gray hair.
  
 While Congress struggles to complete a temporary fix, Walter Ehmer and Jim Gray sweat about getting all the retirement benefits they were promised.
  
 "Companies are trying to get out of their responsibilities," said Ehmer, pointing to employer-supported legislation that would reduce pension funding.
  
Ehmer, retired from Lucent Technologies, and Gray, a former Delta pilot, represent the human side of a debate that largely has focused on the big picture: a troubled pension system and financially strapped employers.
  
The system is in trouble because the stock market's decline from early 2000 to early 2003 reduced the value of pension fund investments used to pay benefits.
 
 At the same time, there was a drop in the interest rate used to calculate whether employers need to add money to pension funds. The decline automatically increased what companies needed to contribute to keep funds fat enough to meet pension obligations.
  
 "In theory, the money to fund your pension should already be set aside," said Rebecca McEnally, vice president of global advocacy at the Association for Investment Management and Research in Charlottesville, Va. "As a practical matter, it may or may not be set aside."
  
 That concerns people like Ehmer and Gray. Their biggest fear is a takeover of their pension plans by the federal Pension Benefit Guaranty Corp. because of bankruptcy. That would mean less to live on, since each receives more than the maximum $44,386 in annual pension the agency guarantees.
  
 "If there is no other reason to change the rule than to make a fund look more profitable than it is, then it is a gimmick," countered Ehmer.
  
 Lucent, which has made money the last two quarters, does not expect it will need to make a contribution through 2006.
  
 Ehmer, who ran fiber-optics plants for Lucent, worries that the proposed relief would simply prolong the funding shortfall and eventually hurt people like him.
  
 "When pension plans are underfunded, the promised benefits we worked for could disappear," he said.
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Christian Science Monitor – February 27, 2004 – Excerpts

Baby boomers face retirement squeeze

WASHINGTON - A number of factors - including a sobered stock market, deficit pressures, and corporate cutbacks - may be putting the retirement security of baby boomers at greater threat than at any time in a quarter century.

This week's provocative call by Federal Reserve chairman Alan Greenspan to scale back future Social Security benefits to help cover a growing federal budget deficit, is just part of the concern.

Evidence is mounting that the other two pillars of retirement security - private-sector pensions and personal savings - are no longer adequate to ensure that most Americans will have enough to live on when then retire.

At the problem's root is a long-term shift that politicians are reluctant to face: With Americans living longer, the senior population is growing faster than the number of young workers to cover their needs. Benefit levels are getting harder to sustain.

It's a calculus that is as challenging for corporate pension plans as it is for Medicare and Social Security programs.

The defined retirement benefit, the pension that was once a standard perk in a big firm, is a rapidly disappearing option for many Americans. The number of Fortune 100 companies offering a fixed-benefit pension has dropped from 68 percent in 1998 to 50 percent in 2002, according to Watson Wyatt Worldwide. And federal data show a steady fall in private-sector workers who have pensions: from 38 percent in 1980 to 21 percent in 1998.

That decline, in part, reflects the trials of old-line manufacturing industries, airlines, and automakers.

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Bloomberg News – February 26, 2004 - Excerpts

Lucent's Russo Seeks to Cut $850 M ln Retiree Health-Care Cost

 

Lucent Technologies Inc. the largest U.S. maker of telephone equipment is seeking ways to cut its $850 million annual retiree healthcare bill an amount almost three times its estimated profit this fiscal year. Chief Executive Officer Patricia Russo has yet to detail how she plans to lower the cost of coverage for the company's 230,000 U.S. retirees and their dependents. The benefits will be an ``issue we're going to have to address'' when Lucent negotiates a new agreement with its 4,000 union employees this fall spokesman Bill Price said.

Trusts Running Dry
Through last year retiree medical dental and prescription drug coverage was paid by trusts inherited during Lucent's spinoff from AT&T Corp in 1996. The trust supporting management retirees ran out and unless changes are made Lucent will contribute $240 million this year and $300 million next year Price said. A trust that supports health benefits for retired union workers is expected to run out in fiscal 2006 or 2007 Price said.

Unions
Most union retirees don't have to contribute Price said. The retiree benefits will be an issue when union employees most of whom are represented by the Communications Workers of America negotiate a contract that expires at the end of October.

###

The Chicago Tribune – February 24, 2004 – Excerpts

Retirees losing medical benefits from former employers

LOS ANGELES - (KRT) - Tommy Johnson remembers the day when he opened the letter from his former employer.

"It was a year ago that I got the letter from AT&T," the retired computer engineer recalled. "It was nice. Just before Christmas."

The letter informed Johnson that the company-paid health insurance benefits he and his wife had been guaranteed when he retired after 34 years with the company were being cancelled. The company informed Johnson, then 60, that continued coverage would cost him $411 a month.

"The only choice I've got is to pay the $411, or else there would be no insurance for me and my wife," he said.

Millions of Americans find themselves in the same situation as corporations seek to control costs by ending, or curtailing medical coverage for retirees.

Experts warn that continued increases in health care costs and the looming retirement of Baby Boomers ensures that the problem will grow.

###

Reuters - February 18, 2004

Lucent shareholders vote to cap exec severance

By Ben Klayman

CHICAGO (Reuters) - Shareholders of Lucent Technologies Inc. , one of the world's largest makers of telecommunications equipment, Wednesday voted in favor of a nonbinding proposal to limit severance compensation for senior executives.

Company officials said they would consider the proposal, which they had opposed, although it is not required to adopt it. About 65 percent of the shares cast at the annual meeting in Wilmington, Delaware, favored the proposal, while 32 percent were opposed.

Shareholders across Corporate America have become increasingly concerned about executive compensation over the past couple of years. Many have tried to rein in some forms of compensation at various companies following the accounting scandals at such companies as Enron and WorldCom.

Also at the meeting, Lucent Chairman and Chief Executive Patricia Russo and other executives were criticized by several shareholders and retirees for the company's drastic cost cuts, which have included slashing 12,500 jobs in fiscal 2003 and reducing health-care benefits.

Russo said the moves were necessary to ensure Lucent's return to profitability, which occurred in the fiscal fourth quarter ended last September.

In response to criticism that executives were not sharing the pain experienced by workers and retirees, Russo said the company sets compensation to compete with its rivals, and that no bonuses to senior executives based on company performance had been paid in the three years prior to fiscal 2003.

Executives, including Russo, have received bonuses over the past several years as part of hiring and retention agreements.

Officials with the Communications Workers of America union, which represents about 3,600 Lucent hourly workers, warned company officials they would not allow future shifting of health-care costs to its active and retired members.

The proposal to limit severance, or "golden parachute," payments that exceed 2.99 times an executive's combined base salary and bonus was supported by corporate governance watchdog Institutional Shareholder Service (ISS). The ISS said earlier this month that such a move would "prevent excessive 'pay for failure' packages."

Lucent had said taking such an approach would hinder its ability to attract and retain executives, and added that its current policy already limits such payments to an executive's annual base salary plus his or her bonus. ISS said, nevertheless, that the proposal would ensure good future corporate governance.

Other proposals that shareholders supported at the Murray Hill, New Jersey-based company's annual meeting included allowing the election of the entire board in the same year and the removal of board members without cause, as well as extending for another year the board's ability to authorize a reverse stock split.

A shareholder proposal to stop awarding stock options and severance payments to the top five executives was opposed by 68 percent of the votes cast while about 28 percent supported it.

Lucent's Russo repeated that she is "cautiously optimistic" about the telecom sector stabilizing and showing signs of growth in certain areas. She reiterated that Lucent expects a profit, before one-time items, in fiscal 2004.

The votes are preliminary, and final results will be available in the next few days, the company said.

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ABC Evening News – February 5, 2004 - Excerpts

“Broken Promises” To Retirees 

The segment opened with Mr. Jennings stating: “ We are going to take a look tonight at some Americans who retired believing that their retirement health benefits would carry them through their later years.  In 1993, 46 percent of large U.S. companies offered health care coverage to their retirees.  By last year only 28 percent did so.  And, most of the companies that still provide benefits are charging employees increasingly more.  A lot of retired employees are bitter, and angry, and frightened.”

Following Mr. Jennings introduction, Dean Reynolds, ABC News Chicago reporter, profiled the increased costs of health care coverage to two retirees—one from Lucent Technologies and the other from Johns-Manville.

Narrator's voice over video of Mr. and Mrs. Bob Jerich in their home:  "Sixty-one-year-old Bob Jerich once thought he was set for life.  Even though his wife has Parkinson's disease, he felt secure enough to take early retirement from Lucent Technologies back in 2001, confident that his company's health insurance would be there to protect them financially.  Big mistake!"

Interview with Bob Jerich:  "I would have never retired if I had known what I know today."

Narrator: "Because today he picks up the bill for most of his health insurance instead of his old employer."

Continuing Bob Jerich's Interview:  "Two and a half years ago, my monthly medical deduction was $32.  Today, it is $577.  And God knows were it is going.

Narrator:  "And Lucent declined to answer that question, but said in the statement 'we simply do not have the money to continue our historic levels of subsidies'.  In fact, of 408 large companies surveyed last year by the Kaiser Family Foundation, 71 percent said they have forced retirees to pay a bigger share of insurance premiums."

David Messick, a Northwestern University professor, stated in a sound bite: “To say that the economic situation is a rough one is not an excuse for (companies) lying or breaking promises.”

A 67-year-old Johns-Manville retiree who retired in 1988 read from his retirement handbook that his health care plan would be fully paid for by his company.  That has proven to be false.  This year the cost to him personally increased by more than 450 percent.

The story concluded with a voice over by the reporter:  “To some the obvious answer is a government supported plan, but that could be expensive, require new taxes and be politically risky.  And yet politicians searching for solutions may want to keep in mind an important statistic.  The older you get, the more likely you are to vote.”

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 The New York Times - February 3, 2004 – Excerpts

Companies Limit Health Coverage of Many Retirees

Employers have unleashed a new wave of cutbacks in company-paid health benefits for retirees, with a growing number of companies saying that retirees can retain coverage only if they are willing to bear the full cost themselves.

Scores of companies in the last two years, including the telecommunications equipment giants Lucent Technologies and Alcatel and a big electric utility, TXU, have ended medical benefits for some or all of their retirees and instead offered to let them buy coverage through a group plan. This coverage is often more expensive than many retirees can afford.

Experts expect that the trend, driven by the fast-rising cost of health care, will continue, despite the billions of dollars that the government will distribute to companies that maintain retiree health coverage when the new Medicare drug benefit begins in two years. In contrast to pension financing, companies are not obligated to set aside funds to pay for retirees' health benefits, and the health plans can usually be changed or terminated at the company's choosing, with no appeal available to the retirees.

The costs can be a shock. According to surveys by benefits consultants, companies that offer health benefits to retirees typically have subsidized about 60 percent of the premium. Losing that support all at once can mean hundreds of dollars a month in unexpected costs.

Moreover, in dropping their subsidies, many companies push retirees into insurance pools that are separate from those of younger, healthier workers, executives said. That lowers the company's costs for insuring its current workers, while raising the premiums charged to retirees even further.

James Norby, president of the National Retiree Legislative Network, an advocacy group that is urging Congress to strengthen legal protections for retired workers, said companies that charged for formerly covered benefits had found "a clever way of getting out of the contract they made to people who had been retired for 15 or 20 years."

Last year, only 36 percent of companies with 500 or more workers still offered a retiree medical plan to at least some retirees not yet eligible for Medicare, down from 50 percent in 1993, according to a recent survey by Mercer Human Resource Consulting.

Last month, a study for the Kaiser Family Foundation by Hewitt Associates found that among employers that have maintained retiree coverage, about 15 percent have required at least some retirees to assume the full cost of their insurance in the last two years. Another 31 percent said they would probably adopt these so-called access-only health plans within the next three years.

According to the Kaiser-Hewitt survey, the average monthly health insurance premium for an employee who took early retirement last year was $845, including coverage for the spouse. So early retirees who lost the typical 60 percent subsidy would face added costs of more than $500 a month.

The impact would be less severe for people 65 or older who are covered by Medicare; retiree benefits for them, when they are offered, are usually the equivalent to so-called Medigap supplements to Medicare. In the Kaiser-Hewitt survey, the average premium for employees who retired at 65 last year was $419, including coverage for a spouse.

Lucent Technologies, whose business went into a free fall with the popping of the telecommunications bubble, adopted an access-only health plan this year, but only for the spouses of 9,000 management retirees who had retired since March 1990 with annual pay of $87,000 or more.

Many retirees are bitter about such changes. "I took the offer to retire in 2001 mainly because they were protecting health care benefits," said Edward Beltram, 58, a former Lucent human resources manager who lives in Woodland Park, Colo., and must now pay $375 more a month to maintain coverage for himself and his wife.

Mr. Beltram, who worked for Lucent and for units of a predecessor company for 31 years, added, "I feel they have reneged on their promises."

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CBS MarketWatch.com – January 21, 2004 - Excerpts

The death of employee benefits
Commentary: Unfulfilled promises leave retirees on own
 
BOSTON (CBS.MW) -- These are tough times to be an older retired American. Or even a younger working American for that matter.

In the past week, we learned that fewer and fewer employers plan to offer current workers any retiree health care coverage and that more and more employers plan to ask current retirees to chip in more toward their employer-provided retiree health-care premium.

It really is a jungle out there. So, what's a person to do?

Become more personally responsible, that's what. Well, at least that's what President Bush is pushing these days. Don't depend on government to help you pay the extra few dollars that it may take to maintain your retiree healthcare coverage. It all starts and ends with you.

Now don't get me wrong. I am as much for people becoming personally responsible for their own financial and physical well being as the next independent-registered voter. But where's the money supposed to come from? Many Americans, even personally responsible Americans, didn't plan on their former employers asking them to shoulder this burden.

Yes, older Americans are now paying the price for their years of helping former employers become great companies, for their years of helping this country become the economic powerhouse that it is. Sadly, the "contracts" that existed between worker and employers or citizen and government have been broken.

True, companies like Lucent have no legal obligation to pay for future or current retires health care. But having made the decision to offer such coverage, I would argue that the company now has a moral obligation to its current retirees or any current employees to whom it has made the offer to pay for such coverage.

Yes, many will argue that firms such as Lucent would suffer economically if it absorbed all of the rising health-insurance premiums for current and future retirees. Maybe Lucent would even go out of business. Well, too bad.

Whose fault is it that the company offered such an attractive employee benefit? The employees? No, yet that is who is being asked to pay for the mistake of the company's employee-benefits department. Frankly, it was the company's fault that it failed to project accurately future health-care costs. And now, retired employees, many of whom would have happily planned to pay for their health care needs had they known this was coming, are left holding the proverbial bag.

And it is no trivial bag. In fact, it's bag worth about $200,000. That's the figure some say a couple retiring today at age 65 without insurance will need to pay for medical expenses.
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Associated Press – January 14, 2004 – Excerpts

Hewitt-Kaiser Research Study:
Cos. Slash Retiree Health Benefits
 

NEW YORK (AP) - Companies continued to slash retiree health benefits over the last year, with 10 percent of firms eliminating coverage for future retirees and 71 percent increasing retirees' contributions for their coverage, according to a new study.

The survey of 408 large companies released Wednesday found that a fifth of companies said they were likely to terminate health coverage for future retirees in the next three years. Eighty-six percent of companies said they would increase retiree coverage contributions over that period.

The survey was conducted between June and September 2003 by benefits consulting firm Hewitt Associates and the nonprofit Henry J. Kaiser Family Foundation. A similar survey the firms did in 2002 found that in a two-year period, 13 percent of companies eliminated health benefits for future retirees and 44 percent increased retiree contributions to premiums.

A separate Hewitt study of employers with more than 1,000 employees found that in 2003, 57 percent of firms offered health benefits to Medicare-eligible retirees, down from 80 percent in 1991.

"The bleeding hasn't stopped," foundation president Drew Altman said. "I think it is significant that employers are telling us to expect more of the same."

Altman said employers' actions on retiree health benefits indicate their inability to significantly lower overall health care costs. The survey found the cost for employers and retirees for health benefits surged an estimated 13.7 percent, while the cost of providing health benefits to active employers rose 14.7 percent.
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The Washington Post – December 7, 2003 – Excerpts

A Lost Retirement Dream for Boomers?

There has certainly been no shortage of alarms sounded recently about the financial status of future American retirees, especially the giant baby boom generation, which begins turning 65 in 2011.

But a big new study released last week has now put some numbers on the shortfall -- and they are grim.

In the aggregate, retirees in this country in the year 2030 will be at least $45 billion short of the income they need to cover basic living expenses plus expenses associated with nursing-home or even home health care. From 2020 to 2030 the aggregate deficit will be at least $400 billion, according to the study, which was done by the Employee Benefit Research Institute here, in collaboration with the Milbank Memorial Fund, a New York-based foundation.

Those numbers may not seem very meaningful to individuals -- who can, and apparently do, say, "It won't happen to me." But they should make policymakers' hair stand on end, especially at the state level. They are what government in some form will have to come up with unless there is some breakthrough in medical costs or a substantial change in savings behavior by younger people. If those things don't happen, government will have to find the money or, as Milbank Memorial Fund President Daniel M. Fox said, "tolerate more human suffering."

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Dow Jones Newswire – December 3, 2003 – Excerpts

Lucent Technologies Boosts CEO Russo's Bonus by 80%

Lucent Technologies Inc.'s return to profitability earlier this year helped increase its chairman and chief executive's annual bonus by 80%.

The Murray Hill, N.J., telecommunications-equipment maker paid CEO Patricia F. Russo a bonus of $3.2 million for the latest fiscal year, compared with a bonus of $1.8 million a year earlier, according to documents filed with the Securities and Exchange Commission. Lucent's fiscal year ends Sept. 30.

Ms. Russo was paid $1.2 million in base salary. Her base salary for a year earlier was $887,692. Ms. Russo was appointed president and CEO of Lucent in January 2002. She was named chairman in February 2003.

Lucent also awarded Ms. Russo options to purchase 2.5 million shares of company stock at $1.42 a share. The options expire Dec. 15, 2009. She had slightly more than 3.8 million in exercisable options and almost 7.9 million in unexercisable options as of Sept. 30.

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  Fortune Magazine – October 27, 2003 - Excerpts

Save an Arm and a Leg ; How can you prepare for soaring health-care costs? Follow these three steps.

When Ed Beltram retired in 2001 after more than 30 years as a manager at Lucent Technologies, paying for health care was the least of his worries. But then Lucent announced in September that it was slashing retiree health coverage, a move that means his monthly premiums will soar from $140 to $515. For Beltram, 58, it brought home a painful reality: "Lucent could eliminate all my health-care benefits," he says.

     In time Lucent, along with the rest of corporate America, probably will. With health costs rising at their fastest rate in a decade, companies are taking an ax to retiree medical coverage. That's because seniors, who tend to have chronic health problems and are big consumers of prescription drugs, are simply more costly to cover than active workers.

  
     The statistics are bleak. The percentage of large firms covering retired employees fell to 38% this year, from 66% in 1988, according to the Kaiser Family Foundation, a nonprofit research group. And large employers will pay just 10% of retirees' medical costs by 2031, according to Watson Wyatt, a consultant. That's down from more than 50% of total retiree medical expenses they pay for today.

    Ironically the picture isn't likely to improve with congressional efforts to add a prescription-drug benefit to Medicare. The Congressional Budget Office estimates that as many as one-third of the 12 million Medicare recipients with retiree health insurance could lose their drug coverage under bills passed in June by the House and the Senate. That's because employers--who aren't required to cover prescription drugs for retirees--would have a clear disincentive to supplement the new drug benefit, leaving recipients with inferior coverage from the government, say health experts. 

     The bottom line? The Employee Benefit Research Institute (EBRI), a nonprofit research organization, figures that a 65-year-old who retires today without employment-based insurance and lives to age 80 can expect to pay well over $100,000 for health care. If that figure sounds too high (or too low), you can estimate your own costs using EBRI's retirement health savings calculator at www.choosetosave.org. Once you've run your numbers, use the following tips to start saving now. Your golden years should be about much more than just paying for the doctor. 

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WEEKLY EDITORIAL

This editorial will air on AM 1410 WLSH on Wednesday, October 15 and Thursday, October 16 2003

LAST THURSDAY WE READ IN THE MORNING CALL WHERE FORMER LUCENT CEO HENRY SCHACHT WARNED NON-UNION RETIREES NOT TO TRY TO FORCE LUCENT TO HONOR PROMISES IT MADE ABOUT HEALTHCARE BENEFITS. IT'S DISAPPOINTING WHEN A COMPANY RENEGES ON PROMISES MADE TO ITS WORKERS.

BUT WHEN A COMPANY OFFICAL WARNS RETIREES NOT TO TAKE ANY KIND OF REMEDIAL ACTION, THAT'S DOWNRIGHT DEPRESSING. THE MORNING CALL SAYS LAST WEEK'S CLOSED-DOOR MEETING WAS THE 8TH MEETING HELD IN 2 WEEKS. LUCENT SCREENED EVERYONE IN ATTENDANCE. PHOTO ID'S WERE REQUIRED. RECORDING DEVICES & CAMERAS WERE BANNED. POLICE STOOD GUARD OUTSIDE THE MEETING ROOM. SCHACHT CLAIMS THE SECURITY MEASURES WERE PARTLY IN RESPONSE TO E-MAILS HE RECEIVED. SCHACHT SAYS LOTS OF PEOPLE ARE UNHAPPY.

CAN YOU BLAME RETIREES BEING CUT OFF AT THE KNEES FOR BEING UNHAPPY? IN SEPTEMBER, LUCENT CEASED REIMBURSEMENTS FOR MEDICARE PART B PREMIUMS, CUT DENTAL COVERAGE, & STOPPED SUBSIDIES FOR DEPENDENTS OF MANAGEMENT RETIREES EARNING $87,000 OR MORE A YEAR WHO RETIRED AFTER FEBRUARY,
1990. LUCENT SAYS THIS ROUND OF CUTS IS MOST LIKELY NOT THE LAST & UNION WORKERS MAY BE NEXT IN LINE FOR CUTS NEXT YEAR. THE LUCENT RETIREES ORGANIZATION, A NON-PROFIT ADVOCACY GROUP, SAYS NON-UNION RETIREES CAN SEE MONTHLY HEALTH INSURANCE PREMIUMS FOR FAMILY COVERAGE SOAR FROM $140 TO $516 IN 2004.

LUCENT SAYS MANAGERS PAYING BETWEEN $75 & $150 A MONTH WILL SEE RATES GO UP IN A RANGE OF $190 TO $370 A MONTH. SOME RETIREES SAY THEY WOULD HAVE WORKED LONGER TO EARN MORE IF THEY WEREN'T PROMISED THOSE BENEFITS. MANY RETIREES AFFECTED BY THE CUTS RETIRED FROM AT&T BUT RECEIVE BENEFITS FROM LUCENT. THAT WAS PART OF A DEAL WHEN THE EQUIPMENT PART OF AT&T WAS SPUN OFF IN
1996 & BECAME LUCENT. MANY RETIREES ARE OUTRAGED LUCENT "WHITE HATS" CONTINUE TO RAKE IN HIGH SALARIES & PERKS WHILE JOBS & BENEFITS ARE CUT. THE LUCENT RETIREES ORGANIZATION SAYS IT'S STUDYING WHETHER A CLASS ACTION LAWSUIT IS VIABLE. IT'S ALSO LOOKING INTO LEGISLATION THAT MIGHT KEEP RETIREE BENEFITS SECURE.

HENRY SCHACHT, WHO SITS ON THE LUCENT BOARD & EARNED $30,000 A MONTH UP TO LAST MONTH AS A CONSULTANT,ACCORDING TO THE MORNING CALL, SAYS ANY MOVE BY RETIREES TO FORCE LUCENT TO PAY THE BENEFITS COULD FURTHER DESTABILIZE THE COMPANY. SCHACHT SAYS LUCENT DOESN'T HAVE THE CASH. THE MORNING CALL REPORTS LUCENT ATTORNEYS EXAMINED THE AGREEMENTS & DETERMINED LUCENT CAN LEGALLY CURTAIL BENEFITS THUS MAKING PROMISES MADE TO RETIREES NULL & VOID. LUCENT ESTIMATES ITS HEALTH CARE COSTS WILL BE $850 MILLION THIS YEAR...UP 85% OVER THE LAST 6 YEARS.

LUCENT SAYS IN 4 YEARS THE COMPANY HAS GONE FROM A $38 BILLION BUSINESS TO AN $8 BILLION COMPANY. LUCENT SHAREHOLDERS HAVE SEEN THEIR STOCK IN RECENT YEARS TUMBLE. THE STOCK WAS OFFERED AT $27 A SHARE IN APRIL,
1996. IT TOPPED OVER $70 IN THE FALL OF '99. LAST FALL LUCENT BOTTOMED OUT AT .55 A SHARE. IT CLOSED LAST FRIDAY AT $2.36 LUCENT CEO PAT RUSSO SAYS ON THE LUCENT WEBSITE THE COMPANY EXPECTS TO RETURN TO PROFITABILITY IN FISCAL 2004.


THE QUESTION IS: WILL COMPANY PROFITABILITY RETURN BY BRAKING PROMISES TO ITS WORKERS. WE SYMPATHIZE WITH LUCENT RETIREES..MANY OF WHICH WILL BE FORCED TO FIND PART-TIME JOBS TO PAY FOR THEIR BENEFITS. LUCENT RETIREES WILL JOIN RETIRED BROTHERS & SISTERS FROM BETHLEHEM STEEL SEEKING WAYS TO MAKE ENDS MEET IN THEIR RETIREMENT YEARS. WE FEEL LEGISLATION IS NECESSARY TO FORCE CORPORATE AMERICA TO HONOR PROMISES MADE TO WORKERS. IN THIS WORLD OF CORPORATE MERGERS & TAKEOVERS, IT'S TOO EASY TO MAKE A PROMISE TO MAKE A DEAL GO THROUGH. IT'S A SHAME LEGISLATION IS NEEDED TO FORCE COMPANIES NOT TO WEASLE OUT OF THEIR PROMISES TO WORKERS. IT'S WORKERS' TIME & SWEAT EQUITY THAT MAKE A COMPANY STRONG.

FOR THESE WORKERS TO ENDURE BROKEN PROMISES WHEN COMPANY EXECUTIVES CRY POVERTY & EXECS CONTINUE TO EARN HIGH SALARIES, PERKS, BENEFITS & GOLDEN PARACHUTES IS DISGUSTING. LUCENT SAYS IT CAN LEGALLY RENEGE ON PROMISES MADE TO ITS RETIREES. BUT, IS SUCH A MOVE HONORABLE & ETHICAL IN THIS LAND OF PROSPERITY CALLED AMERICA?

I'M MARK MAREK WITH THIS WEEK'S AM 1410 WLSH EDITORIAL.

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Chicago Daily Herald – October 8, 2003 - Excerpts

Lucent retirees' benefit subsidies may be cut again

 

Nearly 800 management retirees of Lucent Technologies packed a Lisle hotel Tuesday seeking answers about why subsidies to their medical benefits were either trimmed or eliminated.

Instead, retirees were warned more cuts are possible.

"This is the most difficult problem I have seen in 41 years," Henry Schacht, Lucent's former chief executive officer, said in an interview. "The dimension of this problem is so big, we just don't have the money available to handle it anymore."

Schacht, Lucent's founding CEO, serves on the board of directors and on its Pension and Benefits Task Force. For that work, he has been paid $55,000 a month from January through July, then voluntarily took a cut to $30,000 per month through September when the so-called stipend ended.

Why would Schacht accept more than $400,000 from the struggling telecom?

"That's a personal judgment," Schacht said. "I agreed to remain and to handle what we call legacy issues, such as rebuilding the board and handling the retiree benefits. I've been working full time and voluntarily reduced that payment until it's now zero."

For the past five years, Lucent has made various changes to retirees' medical coverage, including increases in co-payments.

The most dramatic was on Sept. 8, when Lucent filed with the U.S. Securities and Exchange Commission a plan to eliminate certain medical benefits affecting about 60 percent of its 50,000 management retirees, including roughly 5,000 in Illinois.

In 2004, Lucent plans to eliminate the reimbursement for management retirees and their dependents for the cost of Medicare Part B. Lucent also will discontinue subsidies for dependents of management retirees who retired after March 1, 1990, and whose base salary was $87,000 or higher. Also, the subsidy for dental coverage will be eliminated.

Lucent will save about $75 million annually with the cuts.

###

The New York Times – September 30, 2003 - Excerpt

BIG INCREASE SEEN IN PEOPLE LACKING HEALTH INSURANCE

The number of people without health insurance shot up last year by 2.4 million, the largest increase in a decade, raising the total to 43.6 million, as health costs soared and many workers lost coverage provided by employers, the Census Bureau reported 

###

Dow Jones Newswire – September 29, 2003 - Excerpts
Lucent Retirees To Meet Former CEO Over Benefit Cuts

NEW YORK (Dow Jones)--Lucent Technologies is putting one of its former CEOs on the hot seat to defend benefit cuts at the company.  Former Lucent Chairman and Chief Executive Henry Schacht - currently a company director - will represent it at upcoming nationwide meetings with retirees to discuss health-care and pension cuts made this year.

 

Moves that have inflamed retiree anger include Lucent's decision to stop reimbursing some 50,000 management retirees for Medicare B premiums, eliminate dental coverage, and discontinue health-care insurance subsidies for many retiree dependents, according to the Lucent Retirees Organization, a group that formed earlier this year after the company said it would cut death
benefits for spouses.

In a letter to Schacht, LRO president Ken Raschke voiced criticism of the cuts in light of the large salaries Lucent executives still receive.

"Lucent executives continue to draw multimillion-dollar salaries, retention bonuses and pensions - all on the backs of its retirees, without whom there would be no Lucent," Raschke wrote in the letter.

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LightReading.Com – September 26, 2003 – Excerpts

Lucent Retirees Get the Schacht

Lucent Technologies Inc. is sending former CEO Henry Schacht to face retirees in eight U.S. cities who are enraged over their loss of benefits.

Schacht, who himself turns 69 on October 16, will attempt a dialogue with thousands of pensioners who are "mad as hell" over Lucent subsidy cuts. While not actually retired from Lucent himself, Schacht has ceased working there full time. Instead, he has been acting as a board member and advisor since Patricia Russo took over as CEO and board chairman in February 2002.

It won't be an easy trip. The Lucent Retirees Organization says its members are "outraged and disgusted" by what they see as Lucent backing down on its commitments after they based career and retirement choices on staying with the company.

"At the same time Lucent has shrunk to 25 percent of its former size, have executive salaries and perks been reduced proportionately by 25 percent? The answer is no," said LRO president Ken Raschke in a prepared statement. "Lucent executives continue to draw multi-million-dollar salaries, retention bonuses and pensions -- all on the backs of its retirees, without whom there would be no Lucent."

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Chicago Daily Herald – September 12, 2003 – Entire Article

Retirees angry at Lucent for cuts
By Anna Marie Kukec

Chicago Daily Herald Staff Writer
September 12, 2003

The Lucent Retirees Organization Thursday lashed out at Lucent Technologies after the struggling telecom slashed medical benefits to management retirees to save about $75 million annually.

"Lucent executives inflict pain time after time on retirees and continue to pay themselves excessive salaries and maintain their expensive perks in the absence of a return to profitability," LRO President Ken Raschke said in a prepared release.

On Monday, Lucent Technologies filed with the U.S. Securities and Exchange Commission its plan to eliminate certain medical benefits that would impact about 60 percent of its 50,000 management retirees, including about 5,000 in Illinois. Lucent has 127,000 retirees, including 11,000 in Illinois.

In 2004, Lucent will eliminate reimbursement for management retirees and their dependents for the cost of Medicare Part B. Also, Lucent will discontinue subsidies for dependents of management retirees who retired after March 1, 1990, and whose base salary was $87,000 or higher.

In addition, dental coverage will be eliminated, but retirees can obtain it at group rates if they choose, said Lucent spokesman John Skalko.

"We have an obligation to maintain the viability of this company going forward," Skalko said Thursday. "It's tough to make these types of decisions, but we cannot avoid them any longer. We continually look at our expenses and where we can control them."

This year, Lucent paid $850 million toward medical coverage for retirees.

As for the comment about executive pay, Skalko said Lucent is doing what's necessary to get the company back on track. "We need good quality people in tough times," he said. "So we need to pay them competitive salaries and benefits."

Over the last five years, Lucent has made other changes to retirees' medical coverage, including increases in co-payments.

"This just means we're going to have to spend more money out of our pensions and our Medicare checks to retain the same health-care coverage," said LRO spokesman Ed Beltram.

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 New Jersey Star-Ledger – September 9, 2003 – Entire Article

Lucent to cut back retirees' health benefits

BY JEFF MAY
Star-Ledger Staff

Lucent Technologies yesterday said it is trimming retiree health-care benefits to save as much as $75 million a year, and more cost-saving moves are expected in the years ahead.

The reductions affect 50,000 management retirees who will no longer be reimbursed for some Medicare premiums, dental coverage or certain subsidies for dependents, the Murray Hill-based company said in a filing with the Securities and Exchange Commission. Starting next year, the average out-of-pocket expenses for those retirees will rise from a range of $75 to $190 a month to as much as $370, the company said.

"This was obviously a tough decision, but one that we can't avoid," said Lucent spokeswoman Kathy Fitzgerald. "Unfortunately, a company of our size and revenue can't afford to absorb costs that are on a path to get close to a billion a year."

Lucent inherited a tradition of gold-plated benefits from its parent, AT&T, but is no longer the company it once was. In the midst of the worst slump in telecommunications, the company has posted losses for 13 consecutive quarters and shed tens of thousands of jobs. It now pulls in less than $9 billion in sales, down from $38 billion four years ago.

Yet retiree health costs are taking a bigger bite than ever: they have increased 85 percent over the past six years, even as the retiree population grew only 22 percent, the company said.

Other businesses are under the same pressure -- Aetna, Motorola and JC Penney -- are among big companies that have recently trimmed retiree health benefits. Last year, 60 percent of large U.S. companies increased health-care premiums for retirees, according to survey by The Kaiser Family Foundation.

Some former Lucent employees say they took retirement packages or buyouts based on promised levels of benefits, and now feel betrayed.

"We're shocked that Lucent is attempting to place so much of its recovery on the backs of retirees," said Ed Beltram, a spokesman for the Lucent Retirees Organization, a grass-roots group of former employees.

Company officials met with the group twice this year and said some changes were necessary, said Beltram, a 31-year veteran of Lucent. But the scope of the cuts is bigger than expected, and the group plans to investigate if the changes are legal, he said.

Lucent said it also expects to seek retiree health-care reductions when it negotiates a new contract with its unions next year. Before the $75 million in savings was announced, the company said it expected to contribute $300 to $350 million to fund its retiree health costs next year.

Fitzgerald said the company still offers a better set of retiree benefits than 90 percent of corporate America, with average spending of $7,000 a year for each of its 127,000 former workers.

Under the changes, Lucent retirees will have more flexibility to opt-in or opt-out of health coverage, and can take advantage of a new pharmaceutical-only plan, she said.

Jeff May can be reached at jmay@starledger.com or (973) 392-4282.

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Lucent News Release – March 27, 2003 – Excerpts

Lucent Reaches Agreement To Settle Shareowner Class Action Lawsuits

MURRAY HILL, N.J. - Lucent Technologies today said that it reached an agreement to settle all pending shareowner and related litigation against the company, its current and former officers and directors, and certain other defendants. The company did not admit any wrongdoing as part of the settlement, which is subject to final court approval.

The agreement is a global settlement of what were 54 separate lawsuits, including the consolidated shareowner securities class action lawsuit in the U.S. District Court in Newark, N.J., and all related ERISA, bondholder, derivative and state securities cases. The lawsuits alleged that the company violated federal securities laws and related state laws.

Under the agreement, Lucent will pay $315 million in common stock, cash or a combination of both, at the company's option. Lucent will also seek partial recovery of this amount from its fiduciary insurance carriers under certain policies that are worth up to $70 million.

When the settlement proceeds are distributed, the company will also issue 200 million warrants to purchase an equal number of shares of common stock at a strike price of $2.75 with a three-year expiration from issuance. The company estimates the current fair value of these warrants at approximately $100 million, using a Black-Scholes model.

The company expects the settlement approval and claims administration process to last up to 18 months and doesn't expect to distribute any proceeds until sometime in fiscal 2004. Lucent will pay up to $5 million for the cost of settlement administration.

In addition to the cash, stock and warrants that Lucent will contribute, certain of Lucent's other insurance carriers have agreed to pay $148 million in cash into the total settlement fund. Lucent spin-off Avaya is contractually responsible for a portion of the settlement. Its contribution to the settlement is still being determined and will be added to the total settlement fund.

Lucent expects to record a charge in the second quarter of fiscal 2003 for approximately $420 million, or 11 cents per share, related to the settlement. This charge may be adjusted in future quarters if Lucent is able to recover a portion of the settlement from its fiduciary insurance carriers, as well as to reflect changes in the fair value of the warrants.

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Lucent News Release – March 27, 2003 – Excerpts

Lucent Reaches Agreement To Settle Shareowner Class Action Lawsuits

MURRAY HILL, N.J. - Lucent Technologies today said that it reached an agreement to settle all pending shareowner and related litigation against the company, its current and former officers and directors, and certain other defendants. The company did not admit any wrongdoing as part of the settlement, which is subject to final court approval.

The agreement is a global settlement of what were 54 separate lawsuits, including the consolidated shareowner securities class action lawsuit in the U.S. District Court in Newark, N.J., and all related ERISA, bondholder, derivative and state securities cases. The lawsuits alleged that the company violated federal securities laws and related state laws.

Under the agreement, Lucent will pay $315 million in common stock, cash or a combination of both, at the company's option. Lucent will also seek partial recovery of this amount from its fiduciary insurance carriers under certain policies that are worth up to $70 million.

When the settlement proceeds are distributed, the company will also issue 200 million warrants to purchase an equal number of shares of common stock at a strike price of $2.75 with a three-year expiration from issuance. The company estimates the current fair value of these warrants at approximately $100 million, using a Black-Scholes model.

The company expects the settlement approval and claims administration process to last up to 18 months and doesn't expect to distribute any proceeds until sometime in fiscal 2004. Lucent will pay up to $5 million for the cost of settlement administration.

In addition to the cash, stock and warrants that Lucent will contribute, certain of Lucent's other insurance carriers have agreed to pay $148 million in cash into the total settlement fund. Lucent spin-off Avaya is contractually responsible for a portion of the settlement. Its contribution to the settlement is still being determined and will be added to the total settlement fund.

Lucent expects to record a charge in the second quarter of fiscal 2003 for approximately $420 million, or 11 cents per share, related to the settlement. This charge may be adjusted in future quarters if Lucent is able to recover a portion of the settlement from its fiduciary insurance carriers, as well as to reflect changes in the fair value of the warrants.

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The Christian Science Monitor – November 4, 2002 – Excerpts

Weak economy puts more pensions in peril

Like the heroine from the silent film saga, "The Perils of Pauline," the American economy faces yet another danger: underfunded corporate pension plans.

The traditional pension plans offered by 360 of the 500 companies in Standard & Poor's 500 index are underfunded by about $243 billion, according to a study by Credit Suisse First Boston. These companies will have to make this up in the years ahead by cutting costs, investing less, or paying smaller dividends.

A large chunk of the money in pension funds was tied to the stock market. But unlike Pauline, the funds haven't been rescued by a hero. A major upturn in stock prices certainly would help.

For some big companies, the underfunding of pensions presents other problems. Last month, Standard & Poor's downgraded debt issued by General Motors to BBB, a grade just two notches above junk status. A major reason for this humiliation was that GM's pension underfunding is expected to rise to more than $21 billion at the end of the year, up from $9 billion last year.

That's happening despite a $2.2 billion injection by GM into its $67 billion pension fund this year. That additional cash equates to more than $400 per car sold this year. That's money that can't be invested into new models or paid in dividends.

Somewhat less underfunded are the pension plans of the other big American auto companies – Ford and Chrysler.

IBM is also underfunded. In announcing third-quarter earnings, it said it would add $1.5 billion annually over the next three years to fully fund its pension plan by 2005. That represents about 20 percent of IBM's free cash flow in the past four quarters.

Over the past 15 years, defined-benefit pension plans have declined in importance. There were 112,000 such plans in 1985 and only 35,000 last year. The drop is attributed to more and more companies switching to cheaper, defined-contribution plans, like 401(k)s. With these plans, the employee takes the investment risk, not the company. The assets in these plans are portable. An employee switching jobs can take them along if he or she does the paperwork. But they are not insured.

With stock prices down, and Republican plans to privatize Social Security on hold, some Americans are concerned about the security of their retirement nest eggs.

Paul Weinstein, an economist at the Progressive Policy Institute in Washington, is promoting a universal pension plan to help the 50 percent of Americans with no pension aside from Social Security. It would be subsidized by government and simplify the present complex system. A few key Democrats have taken up the idea, introducing legislation, even using it on the campaign trail. But it's a long way from reality.

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The New York Times – November 20, 2002 – Excerpts

Another Cloud on the Horizon for Lucent Retirees

They have already watched their 401(k) savings evaporate, stood by as offices were closed, seen countless jobs disappear. But now, tens of thousands of Lucent Technologies retirees sense that the pain is not over yet.

As Lucent struggles to cut costs and meet its obligations, the next thing that they fear will be lost is retirement medical coverage, a valuable benefit that more than 100,000 retirees now receive from the company.

Further off, some retirees foresee that if Lucent is ultimately forced to file for bankruptcy protection — a step that Lucent says it will avoid even though analysts warn of the real possibility — some of them could lose part of their pensions. Lucent's pension plans, the old-fashioned type that pay a defined benefit at retirement and are largely insured by the government, cover more than 275,000 people.

This comes on top of a drastic decline in workers' 401(k) savings plans, which have lost more than half their value since the end of 1999, largely because so much was invested in Lucent stock.

Lucent's travails capture an untold story: the misery that corporate financial distress can wreak on retirees. Lucent's efforts to restore profitability are touching thousands of older people who do not come to work anymore, cannot be laid off and will not show up in the unemployment statistics.

"What can you do?" asked James Fitzgerald, 65, a Lucent retiree who recently needed eye surgery. His wife, Margaret, has lupus, a chronic disease. Their medical bills will not stop coming just because their coverage may end, he said.

It would not take a bankruptcy to deprive retirees of their health coverage. Companies are required to set aside assets to cover pension promises, but there are no such requirements for retiree health insurance. Companies simply provide retiree health care on a "pay as you go" basis.

During the recent boom years, the sums were available. Lucent, for one, was able to use the ample excess in its pension plans to purchase retiree coverage, even as the company's overall finances sagged. Pension-funding regulations permit this when plans have at least 125 percent of the assets they will need to make anticipated pension payments.

Now, though, pension surpluses are shrinking, both at Lucent and at other companies. With little money in reserve and health care costs rising at the fastest rate since the early 1990's, dozens of stronger companies, including Ford and Sears, have trimmed their retiree medical benefits this year.

Doubts about medical care are particularly disturbing to Lucent's retirees. Many of them began working for Lucent's corporate predecessors, Western Electric and AT&T, in an era when telephone service was a regulated monopoly and the cost of comprehensive employee benefits was built into state-approved rates. Under that regimen, few gave well-being in old age a second thought.

"It totally goes against the grain of how I was raised," said Bart Dellabella, 62, a retired Lucent draftsman who has begun driving a truck after losing virtually the entire balance of his 401(k) account, which was stuffed with Lucent stock.

"We were all brought up in an era when it was the world's largest company," he said. "It paid dividends all through the Depression. It was the cornerstone of everybody's retirement plan. Why would I doubt this company? In my life, I never doubted it."

Because there are several ways to measure pension assets and liabilities — each used by accountants for different purposes — it is possible for one method to show a surplus while another shows a deficit.

Retirees unschooled in the arcana of pension accounting are understandably confused. To them, the sheer size of Lucent's charge — $3 billion — is ominous, and they cannot shake the fear that the decline in pension assets signals the demise of their health insurance.

"I see them as going hand in glove," Mr. Dellabella said. "If I lose my medical coverage, I'd have to go out and buy insurance. That's just like taking a cut in the pension."

Lucent retirees estimated that if they had to pay for comparable health coverage, they would have to spend from $300 a month for individual coverage to $800 a month for a family. They based these estimates on what Lucent has told them it has been paying for their coverage.

Last month, Lucent retirees received a letter saying that in December Lucent would withdraw $365 million from their pension plan to pay for their health coverage. The letter said the transfer would cover benefits through Sept. 30, 2003.
 
Even after all that has happened at Lucent, its retirees have assumed until now that their pensions were inviolate. Unlike 401(k) plans, traditional company pensions are guaranteed by the federal government. If a company's plan goes insolvent, the government will step in and take over the payments.

That guarantee is still in place, to be sure. But the government limits what it will pay retirees in such cases, according to a schedule based on each person's age and stipend. A pensioner who is 65 or older when the government steps in can receive up to $42,954 a year. But a worker who is 55 would get no more than $19,329 a year upon retirement, and the maximum for 43-year-olds is $9,879.
 
Mr. Fitzgerald said he wanted to believe that but somehow could not.

"Will we know when they're down so low that we're in trouble?" he wondered. "I don't know. I think a lot of people are going to wake up some morning and have a real surprise."

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The CPA Journal - November 19, 2002 - Excerpts

Abusive Earnings Management and Early Warning Signs

By Lorraine Magrath and Leonard G. Weld

Fraudulent Accounting Leads to Staggering Losses

Over the last three years, SEC investigations have uncovered earnings management practices that have pushed the boundaries of GAAP, even to the point of out-right fraud. In some instances, independent auditors were blamed for not catching or correcting accounting irregularities. In others, it is clear that management intended to deceive outside auditors and audit committees. Regardless of fault, when earnings management and fraudulent accounting schemes are uncovered, the monetary losses can be staggering.

Enron's stock fell from its high of $90.75 to $0.68 after the SEC began investigating Enron's accounting practices. After the collapse in the market value of its stock, Enron was forced to seek bankruptcy protection, resulting in the largest bankruptcy in U.S. history. A recent Financial Executives International (FEI) report indicates that the stock market lost more than $34 billion during the three-day period during which the three most egregious cases of abusive earnings management in 2000 (Lucent Technologies, Cendant, and MicroStrategy) surfaced.

While SEC documents indicate that the accounting irregularities at Lucent, Cendant, and MicroStrategy were primarily "abusive" earnings management schemes or outright fraud, all three companies began their abusive and fraudulent practices by engaging in earnings management schemes designed primarily to "smooth" earnings to meet internally or externally imposed earnings forecasts and analysts' expectations. Earnings management practices can be designed either to assist managers in fulfilling their obligations to stakeholders or to deceive investors. The SEC's concept of "abusive" earnings management suggests analytical approaches to uncovering such practices. In addition, the accounting profession has taken steps to educate accountants about earnings management practices and their effects and consequences.

Meeting Analysts' Expectations

In general, analysts' expectations and company predictions tend to address two high-profile components of financial performance: revenue and earnings from operations. The pressure to meet revenue expectations is particularly intense and may be the primary catalyst in leading managers to engage in earnings management practices that result in questionable or fraudulent revenue recognition practices. One FEI study indicates that improper revenue recognition practices were the cause of one-third of all voluntary or forced restatements of income filed with the SEC from 1977 to 2000. The Lucent, Cendant, and MicroStrategy restatements mentioned earlier were due primarily to improper recognition of revenues.

Detecting Earnings Management

Fraudulent accounting practices involving restructuring charges, reserves, creative acquisition accounting, and manipulation of GAAP are very difficult for outsiders to detect. Insiders responsible for earnings management are intent on hiding such activities, particularly when the earnings management practices escalate beyond improper revenue recognition. As the charges in several SEC investigations indicate, when managers engage in abusive earnings management practices they must lie to auditors, analysts, investors, and their own coworkers to cover these fraudulent activities.

Cash flows. One of the most obvious warning signs that companies are engaging in improper revenue recognition is a lack of correlation between cash flow from operations and earnings. If revenue is properly recognized, cash flows should closely follow revenue recognition; that is, the business cycle will be completed and cash will be available for reinvestment when customers discharge their obligations in a timely manner. Cash flow lagging significantly behind revenues could be a sign that companies are inflating revenues by recognizing sales in inappropriate periods, making sales to non-creditworthy customers, or recording fictitious sales.

Receivables. Investors should also compare receivables and cash flow from operations with revenues and earnings. Receivables rising more quickly than revenues could be a sign that customers are experiencing financial distress. It could also be a sign that a company is engaging in abusive earnings management by recording fictitious sales or otherwise inflating revenues and accounts receivable. For example, a June 2000 Wall Street Journal article suggested that Lucent Technologies might be engaging in creative accounting practices, noting that Lucent's receivables were rising at 49% while revenues were rising at only 20%.

Allowance for uncollectible accounts. Analyzing reserves for uncollectible accounts could also provide clues of abusive earnings management. Receivables growth not also reflected in the allowance could be a sign that managers are aware that revenues were recorded prematurely. It could also be a sign that managers have deliberately understated their reserves for uncollectible accounts or recorded fictitious revenues. Both Lucent and Cendant decreased their reserves for uncollectible accounts at times when revenues and receivables were rising.

Other reserves. Using reserves to appropriately match earnings with associated costs is a fundamental accrual accounting concept. GAAP requires that reserves be established for uncollectible accounts, warranties and guarantees, future commissions, and a host of other legitimate business purposes. These reserves are designed to ensure proper matching of revenues (or gains) and related costs. GAAP also allows, under stringent criteria, the establishment of restructuring reserves to reflect the beneficial effect of the restructuring on income in future periods. Reserves are established before circumstances requiring their use are known with certainty and, therefore, require informed judgments. High-level managers, who are in the best position to understand their customers, company, and industry, frequently control the terms and conditions by which reserve accounts are changed. Investors should carefully scrutinize all disclosure notes and other discussion materials related to reserves to determine if changes in reserve accounts are consistent with good business practices. For example, Cendant manipulated its cancellation and commission reserves downward at a time when revenues were increasing. Lucent manipulated its pension reserves and significantly inflated earnings by changing its accounting policies. Both companies manipulated or overstated acquisition and purchase reserves.

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