Walt Ehmer's Report On Lucent's Annual Meeting - 2/21/04

     I was pleased to represent the LRO Board of Directors at the Lucent Annual Meeting on February 18 in Wilmington, Delaware. It was particularly meaningful for me because last August the LRO encouraged me--as a Lucent shareowner--to submit the LRO-sponsored proxy that would seek shareholder approval for future "Golden Parachute" severance agreements for Lucent executives exceeding 2.99 times an executive’s base salary plus bonus. You can imagine my satisfaction when I learned at the Annual Meeting that 65 percent of the Lucent shareowners had voted "For" this proxy against the recommendation of Lucent management. 
     The meeting lasted a total of about 2 hours and 15 minutes. Lucent Chairman and CEO Patricia Russo presided over the meeting. During the Q&A portion of the meeting, LRO members Ed Prescott, from the Allentown area, Howard Jow, from New Jersey, and I were able to address questions to Ms. Russo on issues of concern to Lucent retirees. In my opinion, her answers were not very enlightening. I was pleased to see that the CWA (Communication Workers of America) had a significant presence at the meeting. Their attendance was very evident, with members wearing their red jackets and caps. They all wore red stickers that said "Cutting our Health Care is a Sick Idea", "Health Care For All". 
     CWA leader Ralph Maly stated that they would not tolerate a cut in health care benefits for CWA members. When he was cut off by Ms. Russo, she received harsh criticism from some in the audience. The next CWA questioner stated that if she did not make a public apology to the CWA, they would stack the next Annual Meeting with CWA members and not let anyone else get time at the microphones. Ms. Russo did not make a public apology to the CWA, but explained that she was trying to treat every questioner equally. When Ms. Russo ended the meeting there were still at least 10 people waiting to ask questions. 
     The other LRO questions were submitted in writing and they promised to get back to us with answers. Understand though that the answers we got at the Annual Meeting were not substantive and are in line with the standard Lucent party line. The benefit of asking the questions at the meeting was that the Board heard the questions. I doubt that they ever see the questions submitted in writing after the meeting. Somehow we have to get the Board to agree to extend future Annual Meetings until all questions are asked. The Board Members sit in the front row and never turn around or give any evidence of hearing the questions. It is like they are frozen in place. They don't make any effort to talk to shareholders. 
     Following the meeting, I spoke with Ms. Russo and urged her to encourage meetings with the LRO to help find solutions to the problems we have raised. She said she understood my message. I also spoke with Rich Rawson, Lucent's Corporate Attorney, and told him I would get him additional information on some Pension Fund issues that I had raised during the Q&A session. Neither he or Chief Financial Officer Frank D'Amelio, professed any knowledge of a loan associated with the Pension Fund. Henry Schacht, Lucent Board Member, did not acknowledge or try to seek me out.

    As a result of submitting the LRO-sponsored proxy and being at the meeting, I have been contacted by reporters for the Wall Street Journal and the Baltimore Sun.

    It was a good experience and I strongly encourage greater participation by LRO members at the next Annual Meeting. This would make it possible for us to ask more questions and generate more applause on retiree issues. In addition, it would enable us to meet and talk to the Lucent Board Members as they are exiting the meeting. I met with Mr. Maly and opened the door for future cooperation between the LRO and the CWA.

    The LRO questions that were either asked at the meeting or submitted in writing following the meeting are below.

 

Walt Ehmer, LRO Southeast Region Director

 

 

 

Q1. This question is directed to the independent Directors.  Lucent has cut benefits and seems to have plans for more cuts. Explain in ethical terms retirees can understand why Lucent has told the LRO that even when things are better for Lucent, none of the benefits taken away will be restored to retirees. The financial burden upon Lucent will diminish with time as retirees die off. The financial burden upon retirees will not diminish while they live.

 

Q2. This question is directed to the independent Directors. I understand that Lucent is the sole trustee for monies to fund retirees pensions. On behalf of retirees, I would like to know whether or not Lucent will agree for an independent auditor, jointly selected but paid for by retirees, to audit thoroughly the manner in which monies in pension plans have been administered since funding was transferred from AT&T. If Lucent will not agree to an independent audit, at no expense to itself, why not if it has nothing to hide? Will the Board act on this?

 

Q3. This question is directed to the independent Directors. You are familiar with the prescription drug benefit now a part of Medicare because Lucent supported its passage. As you know also, it is filled with costly gaps to retirees. Does Lucent management feel any moral or ethical obligation to continue prescription drug coverage for retirees or to fill those gaps with coverage? If not, why not? And, if not, will Lucent accept the subsidies provided in the Federal Legislation?

 

Q4. This question is directed to the independent Directors. The LRO has made a number of attempts to establish a process of communication with Lucent on critical government and legislative issues of interest to both parties. Such issues include pension reform, Medicare reform, prescription drugs and so forth. While there may not be agreement on many of these issues, cooperation and mutual understanding may be possible. Furthermore, such a process may help restore some measure of retirees' trust - which has been sadly undermined - in the good faith and ethical practices of Lucent. However, the Company has not been willing to start such an open dialog with the LRO. Why not?, and will the Board take action to see that this happens?

 

Q5. This is addressed to the top management of Lucent. During the past year Management Retirees and the surviving spouses of retirees - many in their 70's. 80's and 90's - have been unilaterally deprived of long-standing and promised benefits. This has been done to bail out Lucent, now a small business that we are told cannot afford what these retirees were given every reason to expect. The impact has been devastating for many, many of these largely elderly people. At the same time, you, the top executive leadership of this now small company, continue to enjoy lavish salaries and exorbitant bonuses. It seems to me that real leadership would also make sacrifices, and not accept a large part of this compensation to demonstrate your loyalty to Lucent, and your determination to have this now small company survive and prosper. In the U.S. Army and Marines, leaders go first and command "Follow Me!". What do you think of this type of leadership and why have such sacrifices not been made by top Lucent executives?

 

Q6.  This question is for the executive Compensation Committee of the Board. It has to do with the compensation of the CEO as it relates to Lucent's stated positions about it's sharp decrease in company size, emphasized in an 8-k SEC filing in September 2003, which stated "Lucent, its market and the general economy have changed dramatically over the past few years...Today we are a company with annual revenues running at a rate of about $8 billion to $9 billion, off a peak of $38 billion in 1999."

 

This was a principal rationale for reducing retiree's health benefits in that 8-K.  When we review CEO compensation, this same rationale is clearly missing. In this year's proxy statement, the CEO's annual salary is set at an all time high ($1.2 M), while revenues are at an all time low. Similarly, salary plus bonuses is higher than in the 5 years when Lucent had over $20 billion in revenue.   Could the Board's Compensation Committee provide a simple explanation as to why the "dramatic changes in Lucent's market size" has been translated into an increase in CEO compensation? From both a shareholder's perspective and a retiree's perspective, there clearly is a double standard in Lucent's policies.

 

Q7.  To the Independent Directors. Lucent Management and the Board has not acted to add funds to Pension or Healthcare Trusts, ever. The Management Healthcare Trust is gone. Management cannot assert Pension Plan or Healthcare Trust funds were ever the assets of Lucent. They are the earned assets of former AT&T employees, now Lucent active or retired employees. There is a need to recognize this money as a potential source for retiree Cost Of Living Adjustments (COLA) so current and future retirees can pay Healthcare premiums. Therefore, will the Independent Directors move to set aside further attempts by Lucent management to claim participant and beneficiary Pension Trust assets, instead preserving them for the true owners? The law, GAAP and FASB rules permit this wise judgment. Will you act now?

 

Q8.  This question is for the Audit Committee of the Lucent Board. In September, 2003, Lucent published an 8K that declared that the health care trusts for management retirees had been exhausted, and that $300 million or more would be paid from operating expenses in 2004 to maintain required health benefits.. This will be a drain on profitability for all shareholders.

 

In reviewing the trust information available from the Department of Labor, I note that there is a loan of more than one-half billion dollars from the asset of the health trust. Repaying this will be an additional drain on Lucent's assets.  Will the Audit committee explain the nature of this loan and what the financial implications on
shareholder value is?

 

Q9.  This question is to the Chairman and the Board and is a three-part question.  Can you provide information regarding the status of the buildings and property in Warren, Murray Hill and Holmdel?  Have we sold them are we leasing or what?

 

Does Lucent have any ownership even a fractional one in the Hamilton Farm golf club?  Employees currently employed at Lucent have stated that due to a problem with the sale of the golf club Lucent has acquired back some ownership in the golf club.  Can you provide details on this?

 

Lucent through one of their holding companies Peapack DG properties, PPDG, LLC, is seeking final site plan approval for a proposed office complex on Route 206 consisting of a 386,000 square foot office complex that would be situated on 89 acres adjacent to Hamilton Farm golf course on Route 206 just south of Pottersville Road.  Can you provide details as to what Lucent’s intention is with this?  Are you planning on making this your headquarters should the variance/zoning be approved?  Why would we be building now when we had a corporate complex  in Warren?

 

If this is to be a corporate complex, in light of the major changes in the costs of benefits to retirees how can the Board justify a new corporate complex, if this is your intent?