Healthcare Benefits

1. Is this first cut at dependent healthcare benefits just the first layer at eliminating all healthcare benefits in future years?
   
   We have no plans to eliminate retiree healthcare benefits. Our goal is to be able to provide access to and a level of subsidy for healthcare coverage for our retirees in line with what the company can provide, but it is clear that retirees will be bearing more of the costs in the future.
    
2. If and when Lucent returns to profitability can retirees expect healthcare benefits to be re-established in proportion to that regained profitability?
   
   While we would like to do that, in all honesty, it's unlikely that the company will be able to generate enough cash to handle $1 billion of healthcare costs in the foreseeable future.
   
   We do intend to continue providing access to and a level of subsidy for healthcare coverage for our retirees in line with what the company can afford. And if our situation improved dramatically, we would look at everything. But, with healthcare costs continuing to rise at double-digit rates, our best hope is to be able to reduce less.
   
   But we intend to give every retiree and their dependent access to a generous and comprehensive health plan at group rates. You may opt in and out as often as you want without a physical and without penalty. Ask your friends or ask the retirees of the 90% of the companies that don't provide healthcare how much a similar policy would cost — if you can get it. On average, our group rates are currently about half the cost of comparable coverage, and in many cases our rates are even better than that.
    
3. Does Lucent plan to keep lowering the salary cap until no dependent receives a subsidy for healthcare benefits?
   
   We anticipate making other changes in 2005 and beyond, but we cannot be more specific at this point since they will depend on the healthcare legislative climate and practices in general, as well as the economic health of the company.
    
4. Have the healthcare benefits of Lucent's officers' dependents been suspended in a similar way to what is being done to dependents of some management retirees?
   
   All of our management employees have the same healthcare benefits, regardless of their level.
   
   We have already made a number of benefit changes for active management employees. They already pay the same co-pays as retirees and will be affected by the same plan design changes that affect retirees, including changes that impact emergency room co-pays and deductibles and the drug plan. Active management employees already elect and pay for dental benefits separately. However, we are not eliminating subsidies for active management employees' dependents because we need to keep our benefits competitive with those offered by other employers.
    
5. Have Lucent's active managers earning $87,000 or more lost Lucent's contribution to the healthcare coverage costs for dependents? If not, why are retirees in this earnings category being asked to bear all the burden of the needed reduction?
   
   Our active management employees already make significant contributions to their healthcare costs. And no management employee hired after June 30, 1986 will be eligible for retiree healthcare subsidies.
   
   Section 420 rules — government regulations that cover the transfer of funds from pension plans — allow a company to eliminate coverage only for 10 percent of the covered participants in a given year, and specify that the reduction must be targeted to a particular group. Although we lobbied in Washington for the flexibility to spread the reduction across all management retirees and their covered dependents, we have not yet been successful.
   
   For this particular situation, we chose to eliminate the subsidy for retirees' dependent coverage.
    
6. Couldn't the impact of the reductions on healthcare benefits be spread in such a way that coverage would be partially provided for the combined retiree and active managers group with less impact on the more aged portion of those in the income category?
   
   Section 420 rules specify that the reduction must be targeted to a particular group. Although we lobbied in Washington for the flexibility to spread the reduction across a larger population, we have not yet been successful. And for those who retired before March 1, 1990, the only changes were to dental coverage and Medicare B. They still pay no premiums for healthcare coverage.
    
7. Lucent has regularly stated that Lucent's healthcare benefits for retirees are better than 90% of American companies. What is Lucent's definition of a company? Many small businesses offer no benefits. How does Lucent compare with companies that have more than 30,000 employees and thousands of retirees?
   
   According to a study by the Agency for Healthcare Research and Quality, an organization within the Department of Health and Human Services, in 2000:
     • Only 12% of U.S. companies offered healthcare coverage to retirees younger than age 65.
     • Fewer than 11% of U.S. companies offered healthcare coverage to retirees age 65 and older.
   
   It's important to note that our largest, major competitors provide no retiree medical benefits to their U.S. employees, and many have significant portions of their workforce in countries with comprehensive government-funded healthcare programs. For example, neither Cisco nor Nokia provide retiree healthcare benefits to their U.S. retirees.
   
   While we don't have data for the segment you requested, I can tell you that in the last several years a number of large companies and organizations have grappled with the same issue and reduced retiree healthcare benefits including General Motors, General Electric, United Technologies and the Ohio State Teachers Association.
    
8. Regarding the $87,000 cut-off for healthcare subsidies for dependents, weren't these targeted retirees probably the high performers when they were employees — the people who went the extra mile, the harder and most dedicated workers? When you chose to punish them, what message were you sending to current active employees?
   
   Since Section 420 rules required that we choose one population for the reduction in benefits, we made the decision to use a salary qualification in an attempt to minimize the impact to those who retired at lower salaries. We don't want to punish anyone and no matter what segment we chose for the reduction there would be similar arguments about the pros and cons of the decision.
    
9. How does Lucent plan to maintain and attract outstanding employees to return their business to greatness, with a reputation for betraying its promises to retirees?
   
   We intend to focus on maintaining a viable business with a rewarding and challenging work environment. We will continue funding competitive levels of investment in research and development, marketing, information technology and in our current employee compensation and benefits.

    

10. The cut in healthcare subsidies is not shared equally between all retirees. Some retirees are paying as much as 4 times to keep the same coverage, while others either won't be affected or at most pay double their current costs. Why wasn't this spread equally between ALL retirees?
    
    Section 420 rules specify that the reduction must be targeted to a particular group. Although we lobbied in Washington for the flexibility to spread the reduction across a larger population, we have not yet been successful.
     
11. Has Lucent confirmed in writing that if a retiree or dependent elect to drop healthcare coverage for one year, that they can get back in without a physical at some future enrollment period?
    
    Our enrollment materials today state that if retirees or their dependents opt out of healthcare coverage, they can opt back in without a physical at some future enrollment period. While we do not anticipate changing this position, as a matter of practice, we always reserve the right to change our plan. In the unlikely event that we change the "opt-in/opt-out" provision at some point in the future, we commit to giving retirees two years advance notice before the change would become effective. All eligible retirees - including those who have opted out of the plan - will be notified of the pending change at the time it is announced and each year preceding its effective date so they have ample opportunity to come back into the plan if they choose. This commitment will be expressed in our retiree healthcare Summary Plan Description as it is updated.
     
12. Over the years, Lucent has had agreements with suppliers such as Carlson Travel where Lucent received "rebates, "Spiffs, etc." from the supplier based on the volume of business. Does Lucent receive any rebates, spiffs, etc. from the insurance companies or Medco? If so, where does it go?
    
    We get periodic rebates from Medco, which we anticipate and build into our overall costs as we design the healthcare plans. These rebates are netted from our total costs and hence are used for the benefit of the plan participants. For the retirees subject to the cap, the reduced costs help lower their costs. Since we are self insured, we don't get rebates from insurance companies who act as our agents.
    
    Management of Lucent
    
     
13. In 1999, Lucent had 153,000 employees with Agere and Avaya (and approximately 80 officers). In Lucent's 8K, it projected 35,000 employees in 2003 (and 32 officers). Is the ratio of officers to employees going up?
    
    In late 2000, we had 86 officers; today we have 32 (and that number is going down). That represents roughly a 63% reduction as opposed to about 66% for all employees. There are certain core functions that our officers perform for the company that cannot be reduced beyond a certain level-like Treasurer and Controller — if we are to sustain a viable, competitive business.
     
14. Lucent has cut its work force by more than 100,000 employees. Why does Lucent need 32 officers to direct a company with 35,000 employees?
    
    While we continue to reduce the number of officers, there are certain core functions that our officers perform for the company that cannot be reduced beyond a certain level — like Treasurer and Controller — if we are to sustain a viable, competitive business.
     
15. Why have funds from the pension plan been used to pay for other things, such as severance packages for employees?
    
    Under ERISA laws, Lucent may transfer funds from the pension to cover expenses related to retiree medical coverage (only if the plan is funded at 125% or more) and early retirement benefits for our restructuring plan. The money was used to conserve cash.
    
    For your information, the $800 million of transfers would not have made a difference in our pension's ability to be 125 percent over funded. The bulk of the reason for the decline in pension funding was the drop in the equity markets, which affected assets, and the drop in interest rates, which affected liabilities.
    
    This is not an issue specific to Lucent. The declining equity markets have affected most pension plans throughout the corporate world in 2002.
     
16. Since Lucent's split from AT&T, exactly how much money was taken from pension plan funds to pay for other than retiree benefits and pensions? Please provide details of all such expenditures.
    
    None. Every cent paid from the pension plans was used to provide pension (including early retirement enhancements) or retiree medical benefits.
     
17. What percent of the value of the Pension Trust was lost because of the devaluation of Lucent stock?
    
    While the pension plan does not outright invest in Lucent stock, the funds are invested in the equity markets — some of which have Lucent stock as part of their portfolios.
    
    ERISA guidelines state that a company can't have more than 10 percent of its pension plan invested in its own stock. We are in compliance with these guidelines — in fact we have always been well under the limits — and continue to monitor our investments closely.
     
18. From 2001 to 2002 the salaries of the five top executives under Ms. Russo (Holder, O'Shea, D'Amelio, and Rawson) increased by an average of more than $100,000. With the company in such economic trouble, how can you justify salary increases of this magnitude?
    
    All of those executives assumed additional responsibilities in 2001: Mr. Holder became COO; Mr. O'Shea became Bell Labs President; Mr. D'Amelio became CFO and Mr. Rawson added Human Resources to his responsibilities.
    
    Even if we eliminated the salaries for every officer in the company today, it would only address about 1 percent of the retiree healthcare cost issue. The fact is that the money Lucent spends on executive compensation has already been reduced significantly in recent years. There have been no annual performance bonuses for Lucent's officers since 1999. In addition to no performance bonuses and given the fact that approximately 60% of executive compensation is at risk in options and long term incentives, the average Lucent officer makes about 20% to 30% of what he or she did four years ago.
     
19. What is the dollar value that Lucent officers have been awarded in bonuses, retention bonuses and stock options since 2000?
    
    No Lucent officer has received a performance bonus since 1999.
    
    When Henry Schacht returned to Lucent three years ago, he offered a limited number of officers retention payments if they stayed for two years to help turn the business around. This was designed to reduce their personal risk if a new CEO determined that he or she needed an entirely new team. At that point, there were sectors of the market that were doing well and these leaders all had the potential to go to more secure employment if they chose to do so.
    
    It was a decision that was made almost three years ago, and the final portions of those commitments were paid out last year. And it kept the leadership team in place who developed and executed the plan that kept the company in business during the deepest and most prolonged market slump in the industry's history. During that time, the company reduced the cost structure by 75%; doubled the gross margin rate; reduced vendor financing commitments by 91%; reduced cash burn from $1.3 billion in the first quarter of fiscal 2001 to less than $100 million in our last quarter; and, perhaps most importantly, enabled the company to post the highest customer satisfaction results in years. We are not going to share the exact figure but in terms of retiree health care, it wouldn't have addressed a fraction of 1% of the retiree healthcare costs in those years.
     
20. Why did Lucent give out raises and bonuses last year, when we are still not making a profit?
    
    While our financial results would not have required the company to fund a bonus, the significant operational progress we made in positioning our business for the future prompted our Board of Directors to approve funding for some level of bonuses. No Lucent officer has received a performance bonus since 1999.
    
    Raises and bonuses for other employees were based both on performance and competitive market position in terms of current compensation.
    
    We made the decision to use our resources to focus on having a properly sized and appropriately paid workforce.
     
21. Is Lucent contributing to the employees' 401K plan?
    
    The company has a fixed and variable match for employee contributions. For every dollar an employee contributes, up to the first 6% of eligible compensation, the company contributes a fixed match of 50 cents in cash, up to an annual maximum of $2,500.
    
    That amount may increase via the variable match, which is based on the company's overall financial performance. The company did not have a variable match in 2002, 2001 or 2000 due to its financial performance.