<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ..X No .....
At April 30, 1996, 1,606,891,000 common shares were outstanding.
<PAGE>
<PAGE> 2 AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Revenues
Communications services.................... $12,476 $11,821
Financial services ........................ 480 560
Total revenues............................. 12,956 12,381
Operating Expenses
Access and other interconnection........... 4,168 4,453
Network and other communications services.. 1,953 1,784
Depreciation and amortization ............. 665 620
Selling, general and administrative ....... 3,365 2,956
Total communications services expenses.... 10,151 9,813
Financial services expenses................ 431 491
Total operating expenses .................. 10,582 10,304
Operating income .......................... 2,374 2,077
Other income - net ........................ 102 43
Interest expense .......................... 123 104
Income from continuing operations
before income taxes ..................... 2,353 2,016
Provision for income taxes ................ 910 751
Income from continuing operations ......... 1,443 1,265
Discontinued Operations:
Loss from discontinued operations
(net of tax benefits of $300 in 1996 and
$24 in 1995) ............................. (81) (67)
Net income ................................ $ 1,362 $ 1,198
Weighted average common shares
outstanding (millions).................. 1,608 1,580
Earnings per common share:
Income from continuing operations ........ $ 0.90 $ 0.80
Loss from discontinued operations ........ (0.05) (0.04)
Net income ............................... $ 0.85 $ 0.76
Dividends declared per
common share............................ $ .33 $ .33
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 3 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31, December 31,
1996 1995
ASSETS
Cash and cash equivalents .............. $ 205 $ 129
Receivables less allowances
of $1,284 and $1,267
Accounts receivable................... 9,242 8,457
Finance receivables................... 9,892 10,665
Deferred income taxes................... 1,722 2,437
Other current assets.................... 757 753
Total current assets.................... 21,818 22,441
Property, plant and equipment, net
of accumulated depreciation of
$18,021 and $17,729 ................... 16,321 16,375
Licensing costs, net of accumulated
amortization of $786 and $743......... 8,037 8,056
Investments............................. 3,698 3,646
Long-term finance receivables........... 765 768
Prepaid pension costs................... 1,887 1,793
Other assets............................ 2,598 2,524
Net assets of discontinued operations... 5,267 7,047
TOTAL ASSETS............................ $60,391 $62,650
(CONT'D)
<PAGE>
<PAGE> 4 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions)
(Unaudited)
March 31, December 31,
1996 1995
LIABILITIES
Accounts payable....................... $ 4,742 $ 5,174
Payroll and benefit-related
liabilities.......................... 2,252 2,914
Debt maturing within one year.......... 9,683 12,176
Dividends payable...................... 530 527
Other current liabilities.............. 4,403 3,923
Total current liabilities.............. 21,610 24,714
Long-term debt......................... 8,486 8,545
Long-term benefit-related liabilities.. 2,854 2,871
Deferred income taxes.................. 4,852 5,458
Other long-term liabilities and
deferred credits..................... 3,932 3,788
Total liabilities ..................... 41,734 45,376
SHAREOWNERS' EQUITY
Common stock - par value $1 per share.. 1,606 1,596
Authorized shares: 2,000,000,000
Outstanding shares:
1,605,769,264 at March 31, 1996
1,596,005,351 at December 31, 1995
Additional paid-in capital............. 17,116 16,614
Guaranteed ESOP obligation............. (228) (254)
Foreign currency translation
adjustments.......................... 53 5
Retained earnings (deficit)............ 110 (687)
Total shareowners' equity.............. 18,657 17,274
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $60,391 $62,650
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 5 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Operating Activities
Net income .............................. $ 1,362 $ 1,198
Add: loss from discontinued operations .. 81 67
Income from continuing operations ....... 1,443 1,265
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Depreciation and amortization for
communications services............. 665 620
Provision for uncollectibles.......... 532 513
Increase in accounts receivable....... (400) (395)
Decrease in accounts payable.......... (430) (231)
Net increase in other operating
assets and liabilities.............. (179) (110)
Other adjustments for non-cash
items - net......................... 160 34
Net cash provided by operating
activities of continuing operations.... 1,791 1,696
Investing Activities
Capital expenditures................... (577) (498)
Proceeds from sale or disposal of
property, plant and equipment........ 19 15
Decrease in finance receivables........ 612 443
Acquisitions of licenses............... (23) (268)
Net increase in investments............ (151) (26)
Disposition of joint venture........... 160 -
Other investing activities - net....... (109) 57
Net cash used in investing activities
of continuing operations................ (69) (277)
(CONT'D)
<PAGE>
<PAGE> 6 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Financing Activities
Proceeds from long-term debt issuances. 2 1,449
Retirements of long-term debt.......... (462) (91)
Issuance of common shares.............. 512 581
Dividends paid......................... (527) (518)
Decrease in short-term
borrowings - net..................... (2,068) (2,769)
Other financing activities - net....... 1,247 (37)
Net cash used in financing activities
of continuing operations............... (1,296) (1,385)
Effect of exchange rate
changes on cash........................ (22) (17)
Net cash used by discontinued
operations............................. (328) (188)
Net increase/(decrease) in cash and
cash equivalents........................ 76 (171)
Cash and cash equivalents
at beginning of year................... 129 220
Cash and cash equivalents
at end of period....................... $ 205 $ 49
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 7 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
("AT&T" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of man-
agement, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of the consolidated re-
sults of operations, financial position and cash flows for each period
presented. The consolidated results for interim periods are not
necessarily indicative of results for the full year. These financial
statements should be read in conjunction with AT&T's 1995 Annual
Report to Shareowners, Form 10-K for the year ended December 31, 1995
and Form 8-K dated March 21, 1996.
(b) DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segmentof a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") the consolidated
financial statements of AT&T have been restated to reflect the
probable dispositions of Lucent Technologies Inc. ("Lucent"), NCR
Corporation ("NCR") and AT&T Capital Corporation ("AT&T Capital").
Accordingly, the revenues, costs and expenses, assets and liabilities,
and cash flows of Lucent, NCR and AT&T Capital have been excluded from
the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows.
The net operating results, net assets and net cash flows of these
entities have been reported as "Discontinued Operations" in
theaccompanying financial statements. In addition, the consolidated
results for continuing operations have been reclassified to reflect
the results of the ongoing AT&T businesses and to improve
comparability within the communications services industry.
<PAGE>
<PAGE> 8 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Summarized financial information for the discontinued operations is as
follows:
For the Three
Months Ended
March 31,
1996 1995
Revenues $5,819 $5,881
Loss before income taxes (381) (91)
Net loss (81) (67)
At Mar. At Dec.
31, 1996 31, 1995
Current Assets $15,814 $17,068
Total Assets 32,503 34,090
Current Liabilities 14,976 14,658
Total Liabilities 27,236 27,043
Net assets of discontinued
operations $ 5,267 $ 7,047
The loss before income taxes includes interest expense of $28 million
and $27 million for the quarters ended March 31, 1996 and March 31,
1995, respectively, allocated to discontinued operations based on the
ratio of net assets of discontinued operations to total AT&T
consolidated assets.
On April 10, 1996 Lucent sold 112 million shares of common stock in an
initial public offering. The shares sold represent 17.6 percent of
the shares outstanding, reducing AT&T's ownership to 82.4 percent. In
accordance with AT&T's previously announced separation plan, subject
to certain conditions, AT&T expects to distribute its remaining
interest in Lucent to AT&T shareowners by the end of 1996. AT&T's
goal is to also distribute all of the Company's interest in NCR to
AT&T shareowners and to complete the public or private sale of all or
the substantial portion of its interest in AT&T Capital by the end of
1996, subject to certain conditions and approvals.
(c) CREDIT HOLDINGS
In connection with a March 31, 1993 legal restructuring of AT&T
Capital Holdings, Inc. (formerly AT&T Capital Corporation), AT&T
issued a direct, full and unconditional guarantee of all the public
debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit Corporation)
and certain public debt of its majority owned subsidiary, AT&T Capital
Corporation, outstanding at March 31, 1993. At March 31, 1996 $401.6
million of the guaranteed debt remained outstanding.
AT&T Credit Holdings, Inc. holds the majority of AT&T's investment in
AT&T Capital Corporation and the lease finance assets of the former
AT&T Credit Corporation. The following table shows summarized
<PAGE> 9 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
consolidated financial information for AT&T Credit Holdings, Inc.,
which consolidates the accounts of AT&T Capital Corporation.
Consistent with AT&T's presentation, the net operating results and net
assets of AT&T Capital have been reported as "Discontinued
Operations". The summarized financial information includes
transactions with AT&T that are eliminated in consolidation.
For the Three
Months Ended
March 31,
1996 1995
Total revenue from
continuing operations $ 33 $ 36
Interest expense 2 3
Selling, general and
administrative expense 1 1
Income from continuing operations 7 5
Income from discontinued operations 26 20
Net income 33 25
At At
March 31, December 31,
1996 1995
Finance receivables $1,141 $1,149
Net assets of discontinued
operations 841 835
Total assets 2,363 2,355
Total debt 91 100
Total liabilities 1,322 1,343
Total shareowner's equity 1,041 $1,012
(d) OPERATING EXPENSES OF FINANCIAL SERVICES
Operating expenses of the financial services segment, which now
excludes AT&T Capital, are comprised of the following:
For the Three
Months Ended
March 31,
1996 1995
Interest Expense $ 123 $ 159
Provision for losses and
other costs 263 288
Selling, general and
administrative 45 44
Total $ 431 $ 491
<PAGE>
<PAGE> 10 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
On September 20, 1995, AT&T Corp. ("AT&T" or the "Company") announced a
plan, subject to certain conditions, to separate into three independent,
publicly held, global companies: communication services (which will retain
the AT&T name), communications systems and technology (which has been named
Lucent Technologies Inc., "Lucent") and transaction-intensive computing
(formerly Global Information Solutions, now NCR Corporation, "NCR"). Also
announced as part of the plan was the Company's intent to pursue the sale
of its remaining 86% interest in AT&T Capital Corporation ("AT&T Capital").
On March 21, 1996, AT&T received a favorable Private Letter Ruling from the
Internal Revenue Service approving the tax-free status of the planned
Lucent stock distribution to AT&T shareowners. On April 10, 1996, Lucent
sold 112 million shares of common stock in an initial public offering. The
shares sold represent 17.6 percent of the shares outstanding, reducing
AT&T's ownership to 82.4 percent. In accordance with its plan, subject to
certain conditions, AT&T expects to distribute its remaining interest in
Lucent to AT&T shareowners by the end of this year. AT&T's goal is to also
distribute all of the Company's interest in NCR to AT&T shareowners and to
complete the public or private sale of all or the substantial portion of
its interest in AT&T Capital by the end of 1996.
The Company believes that spinning off Lucent and NCR and selling AT&T
Capital will enhance its ability to focus on strategic businesses that add
value to customers, to take advantage of new opportunities and to improve
operating efficiencies. However upon separation, the ongoing AT&T will no
longer have the benefits of vertical integration of its manufacturing and
services businesses (i.e., the ability to purchase equipment at cost to
manufacture). Accordingly, depreciation associated with equipment
purchases and other costs associated with the AT&T network may increase
over time.
As a result of the above activities, AT&T has restated its Consolidated
Financial Statements pursuant to Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") to reflect the probable
dispositions of Lucent, NCR and AT&T Capital. Accordingly, the revenues,
costs and expenses, assets and liabilities, and cash flows of Lucent, NCR
and AT&T Capital have been excluded from the respective captions in the
Consolidated Statements of Income, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows. The net operating results of these
entities have been reported, net of applicable income taxes, as "Loss from
discontinued operations"; the net assets of these entities have been
reported as "Net assets of discontinued operations"; and the cash flows of
these entities have been reported as "Net cash used by discontinued
operations". In addition, the consolidated results for continuing
operations have been reclassified to reflect the results of the ongoing
AT&T businesses and to improve comparability within the communications
services industry.
<PAGE> 11 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For a detailed discussion of the results for Lucent and AT&T Capital, refer
to their separate Form 10-Qs filed with the Securities and Exchange
Commission.
AT&T's reported revenues from continuing operations grew 4.6 percent to
$12,956 million in the first quarter compared with $12,381 million in the
first quarter of 1995.
Operating income increased by $297 million or 14.3 percent to $2,374
million compared to the prior year's first quarter operating income of
$2,077 million. Operating margin improved to 18.3 percent for the first
quarter of 1996 compared with 16.8 percent for the first quarter of 1995.
Quarterly income from continuing operations was $1,443 million, or $.90 per
share. This represents a 14.1 percent increase in income from continuing
operations and a 12.2 percent increase in earnings per share compared with
the prior year income from continuing operations of $1,265 million, or $.80
per share.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
COMMUNICATIONS SERVICES
Communications services revenues increased $655 million or 5.5 percent for
the quarter compared with the first quarter of 1995.
Three months
COMMUNICATIONS SERVICES ended
March 31,
In millions 1996 1995
Wireline services revenue $11,313 $10,736
Wireless services revenue 794 652
Products and other services
revenue 369 433
Total communications
services revenues $12,476 $11,821
Operating income $ 2,325 $ 2,008
Operating margin 18.6% 17.0%
Wireline services revenue, which includes toll calling, network management,
satellite services, messaging and other network enabled services, increased
$577 million or 5.4 percent compared with the first quarter of 1995. The
revenue increase was driven by long distance volume growth of 7.7 percent,
led by continued growth of business inbound services and consumer services.
<PAGE> 12 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The increase in consumer services revenues and volumes reflected the
continued appeal of the True programs and strength in calling card
revenues.
Volume growth slowed slightly from the 8.4 percent growth in the first
quarter of 1995 reflecting increased competition in certain consumer market
segments. The increased competition in the consumer markets experienced in
the first quarter of 1996 could impact the volume growth rate for the
second quarter of 1996. Volume growth exceeded revenue growth for the
quarter by 2.3 percent reflecting the targeted use of promotional
discounts, the slower movement of customers to optimal calling plans and
the impact of targeted pricing actions. The gap between revenue and volume
growth for the first quarter 1996 is lower than both the first quarter 1995
gap of 5.6 percent and the fourth quarter 1995 gap of 2.8 percent.
Wireless services revenues, which include cellular, messaging services and
air-to-ground services, grew $142 million or 21.8 percent in the first
quarter of 1996 compared with the same prior year period. This increase
was fueled by additional cellular service subscribers. Cellular customers,
reported on the same basis as consolidated wireless services revenue,
increased 36.7 percent to 4.232 million at March 31, 1996 from 3.095
million at March 31, 1995. Total cellular customers served by companies in
which AT&T has or shares a controlling interest increased 32.3 percent to
5.859 million at March 31, 1996 from 4.430 million at March 31, 1995.
Average revenue per subscriber continued to decline in the first quarter of
1996 reflecting industry wide pricing pressures, experienced by cellular
service providers, as well as lower average usage per subscriber. The
lower average usage per subscriber is attributed to growth in subscribers
for emergency and other personal use. Consistent with the industry,
average revenue per subscriber is expected to decline throughout 1996.
Messaging subscribers increased 32.2 percent during the quarter to 1.018
million at March 31, 1996.
Products and other services revenues decreased $64 million or 14.8 percent
in the first quarter of 1996 compared with the first quarter of 1995. The
decline was driven by the de-emphasis of sales of cellular phones and lower
sales of submarine system products.
<PAGE>
<PAGE> 13 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating expenses for communications services increased $338 million or
3.5% for the first three months of 1996 compared with the first quarter of
1995. The expense increase was driven by higher selling, general and
administrative expenses and network and other communications services
expenses partially offset by lower access and other interconnection
expenses. The operating margin for communications services increased to
18.6 percent from 17.0 percent in the first quarter of 1995. Earnings
before interest, taxes, depreciation and amortization, excluding other
income, ("EBITDA") for communications services increased $362 million, or
13.8 percent, from the first quarter of 1995.
Access and other interconnection expenses decreased $285 million, or 6.4
percent, reflecting lower unit costs in access and a reduction in
international settlement costs. Wireline access and other interconnection
expenses as a percentage of wireline services revenue declined to 36.6
percent for the first quarter of 1996, from 41.2 percent for the first
quarter of 1995.
Network and other communications services expenses increased $169 million,
or 9.4 percent, quarter over quarter, mainly due to higher volumes.
Depreciation and amortization increased $45 million, or 7.4 percent, from
the first quarter of 1995 reflecting the amortization of intangibles from
the purchase of the remaining 48 percent of LIN Broadcasting in October
1995 as well as increased capital expenditures for the AT&T network.
Selling, general and administrative expenses ("SG&A")increased $409
million, or 13.8 percent, from the first quarter of 1995. The higher SG&A
expenses are primarily related to customer care programs, increased
spending on sales initiatives and sales support expenses as well as
additional expenses to support the growth in additions to the cellular
subscriber base. Increased competition in the marketplace in the first
quarter of 1996 caused the number of customers won and lost in the period
to increase, which results in increased sales and sales support expenses.
<PAGE>
<PAGE> 14 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL SERVICES
Financial services revenues decreased $80 million, or 14.2 percent, for the
quarter compared with the year-ago period. The decline was primarily a
result of the Universal Card Services Corp. ("Universal Card")
securitization program.
Universal Card securitized $3.5 billion of cardholder receivables in the
second half of 1995 in order to diversify its sources for funding growth.
Three months
FINANCIAL SERVICES ended
March 31,
In millions 1996 1995
Financial services revenue $480 $560
Operating income $ 49 $ 69
Operating margin 10.4% 12.3%
Universal Card Information:
At March 31,
In millions 1996 1995
Total book finance receivables $ 9,914 $11,811
Total managed finance receivables $13,414 $11,811
Cardholder accounts 17.9 15.5
Universal Card book receivables, which exclude the $3.5 billion of
receivables that were securitized last year, were $9.9 billion at the end
of the first quarter. Universal Card retained the servicing and customer
relationships of the securitized credit card accounts.
Financial services expenses decreased $60 million, or 12.3 percent, in the
first quarter of 1996 as compared with the first quarter of 1995. The
decrease reflects a decline in interest expense of $36 million and a $25
million decrease in provision for losses and other costs. Selling, general
and administrative expenses of $45 million were essentially flat compared
to the year-ago quarter.
Financial services operating income decreased $20 million compared to the
first quarter of 1995 and the operating margin percentage dropped to 10.4
percent for the first quarter of 1996 from 12.3 percent in the first
quarter of 1995. The lower operating margin for financial services was due
to a decline in portfolio credit performance.
<PAGE>
<PAGE> 15 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME STATEMENT ITEMS
Other income increased $59 million in the first quarter of 1996 as compared
to the first quarter of 1995. The increase was primarily due to gains on
the sale of cellular interests in Mexico, the sale of a real estate joint
venture and increased equity earnings from non-consolidated cellular
subsidiaries.
Interest expense increased $19 million, or 18.0 percent, quarter over
quarter primarily reflecting interest on additional debt for the purchase
of the remaining interest in LIN Broadcasting in October 1995.
The provision for income taxes increased $159 million for the quarter,
reflecting the higher income before income taxes and higher effective tax
rate. The effective tax rate for the first quarter of 1996 was 38.7
percent, up from 37.3 percent in the year-ago period. The increased rate
was partially due to lower investment tax credit amortization and the
absence of research tax credits in 1996 due to the statutory expiration of
the research and experiment provision of the Internal Revenue Code.
Loss from discontinued operations increased $14 million for the first
quarter of 1996 compared with the same period last year. The loss from
discontinued operations includes the results of Lucent, NCR and AT&T
Capital. Discontinued operations also includes the elimination of
intercompany transactions, an allocation of AT&T's interest expense (based
on the ratio of net assets of discontinued operations to total AT&T
consolidated assets), and a portion of AT&T's consolidated taxes
attributable to discontinued businesses.
Included in the loss from discontinued operations for the first quarter of
1996 is a nonrecurring tax benefit of $155 million. This benefit is the
result of reversing deferred tax liabilities on the undistributed earnings
of Lucent's non-United States consolidated subsidiaries. The subsidiaries
have the ability and specific intention to permanently reinvest such
undistributed earnings. These deferred tax liabilities previously reduced
income from discontinued operations in earlier years.
<PAGE>
<PAGE> 16 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
MARCH 31, 1996 VERSUS DECEMBER 31, 1995
Assets attributable to continuing operations decreased $479 million, or
less than one percent. This decrease is due to a decline in current assets
of $623 million. The current asset decline was driven by decreases in both
finance receivables and current deferred income tax assets partially offset
by an increase in accounts receivable. Total assets, including net assets
of discontinued operations, decreased $2,259 million, or 3.6 percent in the
first three months of 1996.
The increase in accounts receivable was primarily due to the retention of
accounts receivable by AT&T as part of the restructuring plan. This
resulted in an increase to AT&T's continuing operations accounts receivable
with an offsetting decrease to net assets of discontinued operations.
Finance receivables decreased from December 31, 1995 mainly due to the
normal seasonal decline as a result of higher levels of consumer purchases
in the last months of the year with increased payments resulting in the
first quarter. The decrease in current deferred income tax assets is due
to long-term deferred income tax liabilities at December 31, 1995 becoming
current deferred income tax liabilities at March 31, 1996. Since current
deferred income taxes are in an asset position, this results in a decrease
to current deferred income tax assets and a decrease to long-term deferred
income tax liabilities.
Working capital, defined as current assets less current liabilities,
increased $2,481 million from year-end due to a $2,493 million decrease in
debt maturing within one year. Debt maturing within one year decreased due
to Lucent directly obtaining $1.9 billion in external financing combined
with an $807 million decline in short-term debt for financial services.
Previously, AT&T funded primarily all of its operations on a centralized
basis. With Lucent directly funding its own operations, the related debt
is now part of net assets from discontinued operations. The decline for
financial services was driven by decreased finance receivables. The
decrease in current assets, noted above, was primarily offset by a decrease
of $662 million in current benefit-related liabilities thereby having
minimal impact on working capital.
Current benefit-related liabilities decreased $662 million due to the
annual payment of year-end employee bonuses in the first quarter of 1996.
Other current liabilities increased $480 million primarily reflecting
increased taxes payable due to timing of estimated corporate tax payments.
Long-term deferred income tax liabilities declined $606 million due to the
reclassification of deferred income taxes to current as discussed above.
Shareowner's equity increased primarily due to the first quarter's net
income of $1,362 million and the issuance of additional shares under
employee plans.
<PAGE> 17 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net assets of discontinued operations decreased $1,780 primarily due to the
receivable retention noted above.
The ratio of total debt to total capital (total debt and equity) decreased
to 49.3 percent at March 31, 1996, compared with 54.5 percent at December
31, 1995. Excluding financial services operations, the debt ratio was 35.2
percent at March 31, 1996 compared with 41.3 percent at December 31, 1995.
The decrease reflects the impact of Lucent directly obtaining external
financing as previously discussed.
In the normal course of business, AT&T uses certain derivative financial
instruments, mainly interest rate swaps and foreign currency exchange rate
contracts. The interest rate swaps and foreign currency contracts and
options allow the Company to manage its exposures to changing interest
rates and currency exchange rates. AT&T does not use derivative financial
instruments for speculative purposes. Credit policies are designed to
limit the risks of dealing with other parties to these instruments. In
management's view, the risks to AT&T from using these derivative financial
instruments are small and the benefits include more stable earnings in
periods when interest rates and currency exchange rates are changing.
CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
Cash flows provided by operating activities from continuing operations
increased slightly compared with the same three-month period of 1995
primarily due to an increase in income from continuing operations of $178
million partially offset by cash payments of $153 million in the first
quarter of 1996 related to the 1995 restructuring and other charges. Of
the 17,000 positions related to continuing operations included in the
fourth quarter 1995 restructuring charges, approximately 3,200 people have
left the payroll as of March 31, 1996.
In the first quarter of 1996, AT&T's continuing operations net use of cash
in investing activities decreased $208 million compared with the first
quarter of 1995. This year over year decrease is attributable to a lower
level of license acquisitions, an increased decline in finance receivables
and the disposition of a consolidated real estate joint venture in 1996.
These changes were partially offset by increases in cash outflows for
capital expenditures related to the AT&T network and for other investing
activities.
<PAGE>
<PAGE> 18 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash flows used in financing activities for continuing operations decreased
slightly in the first quarter of 1996 compared to the first quarter of
1995. An increase in net reductions of long and short-term debt was more
than offset by an increase in other financing activities. Other financing
activities in the first quarter of 1996 related to cash collections of the
$2.0 billion in accounts receivable retained by AT&T continuing operations
as part of the restructuring plan.
On April 30, 1996 the Company issued another $1.0 billion of notes under
the Master Trust Agreement which were securitized with Universal Card
receivables.
Future financing is contemplated to be arranged as necessary to meet AT&T's
capital and other requirements with the timing of issue, principal amount
and form depending on the Company's needs, prevailing market and general
economic conditions.
AT&T anticipates obtaining all necessary external financing through
issuances of commercial paper, long-term debt and equity, asset-backed
financings (i.e. securitizations) and available lines of credit.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
TELECOMMUNICATIONS ACT OF 1996
In February 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") became law. The Telecommunications Act, among
other things, preempted state and local requirements which prohibit or have
the effect of prohibiting an entity from providing local telecommunications
services. In addition, the Telecommunications Act requires incumbent local
exchange carriers, including the Regional Bell Operating Companies
("RBOCs"), to implement a checklist of conditions that are designed to
foster local exchange competition.
The Telecommunications Act also permits an RBOC to petition the Federal
Communications Commission ("FCC") at any time for permission to provide
interexchange services originating in any state in its region. The FCC
cannot approve such a request unless, among other things, (i) approval is
consistent with the public interest, (ii) the RBOC has implemented the
Telecommunications Act checklist of conditions throughout such state and
(iii) generally, the RBOC faces facilities-based competition for business
and residential customers within such state. Once authorized to provide
interexchange services in a single in-region state, an RBOC is also
permitted to begin manufacturing telecommunications equipment.
Furthermore, the Telecommunications Act permits immediate RBOC provision of
interexchange services outside of its home service areas and certain
incidental interexchange services, such as those provided in conjunction
with commercial mobile and cellular services, information services, alarm
monitoring and video and audio programming services within their home
service area.
<PAGE> 19 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In April 1996, the FCC began a proceeding to adopt rules and regulations to
implement the local competition provisions of the Telecommunications Act.
AT&T believes that, properly formulated, these rules and regulations,
particularly with respect to the terms and conditions of interconnection
with LEC networks, the degree of unbundling of LEC networks, and the
standards governing the price of network elements and wholesale services,
could promote service competition in the LEC's monopoly markets. However,
there can be no assurance as to the content of the final rules and
regulations or that, when adopted, such rules and regulations will achieve
their intended purpose. To the extent that the RBOCs obtain in-region
interLATA authority before the Telecommunications Act's checklist of
conditions have been fully implemented and adequate facilities-based local
exchange competition exists, there is a substantial risk that AT&T and
other interexchange service providers would be at a disadvantage to the
RBOCs in providing both local service and combined service packages.
Beyond the adoption of implementing rules and regulations by the FCC, there
are a number of conditions to be satisfied at the state level before AT&T
and others can provide local exchange service, including certification to
provide telecommunications service by state regulatory agencies and
negotiations with LECs over interconnection agreements that are to be
arbitrated and approved by state regulatory agencies.
By March of 1996, AT&T had applied for permission to provide local service
in all 50 states. At April 30, 1996, AT&T had received authority to
provide service in 16 states, with the remaining applications still
pending. While the Telecommunications Act makes clear that no state can
prohibit AT&T or any other entity from providing local services, AT&T
cannot be certain as to when it will receive certification in each state
and the conditions that might attach to each such certification.
In addition to the matters referred to above, various other factors,
including market acceptance, start-up costs associated with entering new
markets and local conditions and obstacles, could adversely affect the
timing and success of AT&T's entrance into the local exchange services
market and AT&T's ability to offer combined service packages that include
local service. Any competitive disadvantage or delays in providing local
service or combined service packages could adversely affect AT&T's future
revenues and earnings. In addition, the simultaneous entrance of numerous
new competitors for interexchange services is likely to adversely affect
AT&T's long-distance revenues and could adversely affect earnings.
MODIFICATION OF FINAL JUDGMENT OF 1982
The Telecommunications Act effectively supersedes future operation of the
Modification of Final Judgment of 1982 (the "MFJ") and, in particular,
governs the provision of interexchange services by the RBOCs.
Consequently, on April 11, 1996, Judge Harold Greene issued an order
terminating the MFJ and dismissing all pending waiver requests.
<PAGE>
<PAGE> 20 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COMPETITION
AT&T currently faces significant competition and expects that the level of
competition will continue to increase. The competitive environment has
intensified in recent months as current and potential competitors have
taken actions to position themselves for the implementation of the
Telecommunications Act, such as entering into long-term contracts with
business customers in currently monopoly markets. As public policy and
technological changes occur, including those occasioned by enactment of the
Telecommunications Act, AT&T anticipates that new and different competitors
will enter and expand their position in the communications services market.
These may include entrants from other segments of the telecommunications
and information services industry and/or global competitors seeking to
expand their market opportunities. Many such new competitors are likely to
enter with a strong market presence, well recognized names and
pre-existing direct customer relationships. Furthermore, consolidation of
monopoly local exchange carriers through the recently announced mergers of
Bell Atlantic Corp./Nynex Corp. and SBC Communications Inc./Pacific Telesis
Group will, if allowed to proceed, eliminate competition in the
construction of local facilities in the states of the combining RBOCs, and
potentially aggravate the RBOCs' advantage in providing interexchange
services due to the high level of telecommunications traffic conducted
between formerly distinct in-region areas.
RECENT PRONOUNCEMENTS
In 1996 AT&T will adopt Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." The standard
establishes a fair value method for accounting for stock-based compensation
plans either through recognition or disclosure. The standard is effective
for financial statements for fiscal years beginning after December 15,
1995. For AT&T, this means the standard is effective for 1996. AT&T will
adopt this standard by disclosing the pro forma net income and earnings per
share amounts assuming the fair value method was adopted on January 1,
1995. As a result, the adoption of this standard did not impact results of
operations, financial position or cash flows.
<PAGE>
<PAGE> 21 AT&T Form 10-Q - Part II
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The annual meeting of the shareholders of the registrant was held on
April 17, 1996.
(b) Election of Directors
Votes
(Millions)
Nominee For Withheld
Robert E. Allen 1,211 65
Kenneth T. Derr 1,245 31
M. Kathryn Eickhoff 1,245 30
Walter Y. Elisha 1,232 44
Belton K. Johnson 1,245 31
Ralph S. Larsen 1,245 30
Alex J. Mandl 1,245 31
Donald F. McHenry 1.244 32
Michael I. Sovern 1,201 74
Joseph D. Williams 1,201 75
Thomas H. Wyman 1,201 75
(c) Holders of common shares voted at this meeting on the following
matters, which were set forth in the registrant's proxy statement
dated February 27, 1996.
(i) Ratification of Auditors
For Against Abstain
Ratification of the firm 1,258 10 8
of Coopers & Lybrand L.L.P. (99.2%) (.8%)
as the independent auditors
to audit the registrant's
financial statements for
the year 1996.(*)
(ii) Directors Proposals
For Against Abstain
That the Shareholders 1,202 58 16
approve the AT&T 1996 (95.4%) (4.6%)
Employee Stock Purchase
Plan.(**)
*Percentages are based on the total common shares voted.
Approval of this proposal required a majority of the common
shares voted.
**Percentages are based on total number of outstanding common
shares.
Approval of this proposal required a majority of the
outstanding common shares.
<PAGE>
<PAGE> 22 AT&T Form 10-Q - Part II
(iii)Shareholder Proposals
Broker
For Against Abstain Non-Votes
That the management will be 73 922 102 178
required to advise the share- (7.4%) (92.6%)
holders how many corporate
dollars are being spent for
political purposes and to
specify what political causes
the management seeks to
promote with these funds.(*)
That the company directors 103 964 31 178
consider the discontinuance (9.7%) (90.3%)
of all options, rights, SAR's,
etc. after termination of
existing agreements with
management and directors.
This does not include other
employees of the company. (*)
That the board adopt policies 85 878 135 178
for dealings with China and (8.8%) (91.2%)
the former Soviet Union
regarding the use of slave or
forced labor to produce goods
and services purchased by
the company, its subsidiaries,
affiliates,or joint ventures,
and regarding the distri-
bution the Company's products
and services to facilities
utilizing slave or forced
labor, and that the Company
shall pursue the right of
on-site inspection, and the
Company shall cooperate with
the United States and
international organizations
in their laws or policies to
discourage the use of slave
or forced labor. (*)
*Percentages are based on the total common shares voted.
Approval of this proposal required a majority of the
common shares voted.
<PAGE>
<PAGE> 23 AT&T Form 10-Q - Part II
Item 5. Other Information
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") the consolidated 1995
quarterly statements of income of AT&T have been restated to
reflect the probable dispositions of Lucent Technologies Inc., NCR
Corporation and AT&T Capital Corporation.
In the fourth quarter of 1995, AT&T recorded a pre-tax charge to
income from continuing operations of $3,140 million. This charge
reduced fourth quarter 1995 income from continuing operations by
$2,104 million or $1.31 per share. The charge was recorded as $909
million of network and other communications services, $934 million
of depreciation and amortization, $1,291 million of selling,
general and administrative expenses, and $6 million of financial
services.
In addition, charges of $1,172 million (net of tax), or $.74 per
share, in the third quarter and $2,077 million (net of tax), or
$1.30 per share, in the fourth quarter are reflected in loss from
discontinued operations. The third quarter charge related to NCR's
operations, while the majority of the fourth quarter charge related
to Lucent's operations.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three Months Ended
Mar. Jun. Sep. Dec.
31, 30, 30, 31,
1995 1995 1995 1995
Revenues
Communications services............$11,821 $12,196 $12,547 $12,549
Financial services ................ 560 565 585 551
Total revenues..................... 12,381 12,761 13,132 13,100
Operating Expenses
Access and other interconnection... 4,453 4,482 4,364 4,319
Network and other communications
services........................ 1,784 1,733 1,929 2,974
Depreciation and amortization ..... 620 635 671 1,621
Selling, general and administrative 2,956 3,164 3,220 5,097
Total communications services
expenses........................ 9,813 10,014 10,184 14,011
Financial services expenses........ 491 494 541 448
Total operating expenses .......... 10,304 10,508 10,725 14,459
Operating income .................. 2,077 2,253 2,407 (1,359)
Other income - net ................ 43 59 114 52
Interest expense .................. 104 111 135 128
Income from continuing operations
before income taxes ............. 2,016 2,201 2,386 (1,435)
Provision for income taxes ........ 751 828 857 (420)
Income from continuing operations . 1,265 1,373 1,529 (1,015)
(CONT'D)
<PAGE> 24 AT&T Form 10-Q - Part II
CONSOLIDATED STATEMENTS OF INCOME (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three Months Ended
Mar. Jun. Sep. Dec.
31, 30, 30, 31,
1995 1995 1995 1995
Discontinued Operations:
Loss from discontinued operations
(net of tax of $(24)in 1Q95, $22
in 2Q95, $(419) in 3Q95 and $(799)
in 4Q95).......................... (67) (18) (1,267) (1,661)
Net income ........................$ 1,198 $ 1,355 $ 262 $(2,676)
Weighted average common shares
outstanding (millions).......... 1,580 1,589 1,594 1,602
Earnings per common share:
Income from continuing operations.$ 0.80 $ 0.86 $ 0.96 $(0.63)
Loss from discontinued operations. (0.04) (0.01) (0.80) (1.04)
Net income .......................$ 0.76 $ 0.85 $ 0.16 $(1.67)
Dividends declared per
common share....................$ 0.33 $ 0.33 $ 0.33 $ 0.33
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
10 Employee Benefits Agreement by and between AT&T and
Lucent Technologies Inc., dated as of February 1,
1996, and amended and restated as of March 29, 1996.
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated January 2, 1996 was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).
Form 8-K dated March 21, 1996 was filed pursuant to Item 5.
<PAGE>
<PAGE> 25 AT&T Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AT&T Corp.
Date May 13, 1996
M. B. Tart
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE> 26 AT&T Form 10-Q
Exhibit Index
Exhibit
Number
10 Employee Benefits Agreement by and between AT&T and
Lucent Technologies Inc., dated as of February 1,
1996, and amended and restated as of March 29, 1996.
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE> Exhibit 10
EMPLOYEE BENEFITS AGREEMENT
This EMPLOYEE BENEFITS AGREEMENT, dated as of February 1, 1996, and amended
and restated as of March 29, 1996, is by and between AT&T and Lucent.
Capitalized terms used herein (other than the formal names of AT&T Plans (as
defined below) and related trusts of AT&T) and not otherwise defined shall
have the respective meanings assigned to them in Article I hereof or as
assigned to them in the Separation and Distribution Agreement (as defined
below).
WHEREAS, the Board of Directors of AT&T has determined that it is in the best
interests of AT&T and its shareholders to separate AT&T's existing businesses
into three independent businesses;
WHEREAS, in furtherance of the foregoing, AT&T, Lucent and NCR have entered
into a Separation and Distribution Agreement, dated as of the date hereof (the
"Separation and Distribution Agreement") and certain other agreements that
will govern certain matters relating to the Separation, the IPO, the
Distribution and the relationship of AT&T, Lucent and NCR and their respective
Subsidiaries following the IPO and the Distribution; and
WHEREAS, pursuant to the Separation and Distribution Agreement, AT&T and
Lucent have agreed to enter into this agreement allocating assets, liabilities
and responsibilities with respect to certain employee compensation and benefit
plans and programs between them.
NOW, THEREFORE, the parties, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement the following terms shall have the following
meanings:
1.1 414(l)(1) AMOUNT is defined in Section 3.2(b)(i)(A).
1.2 1992 COLLECTIVE BARGAINING AGREEMENT is defined in Section 5.18.
1.3 AGREEMENT means this Employee Benefits Agreement, including all the
Schedules and Exhibits hereto.
1.4 AGGREGATE LUCENT STOCK VALUE means the Lucent Stock Value multiplied by
the number of shares of Lucent Common Stock issued and outstanding as of
Immediately after the Distribution Date.
1.5 ASA is defined in Section 8.11.
1.6 ASA AGREEMENT means the agreement with ASA described in Section 8.11.
1.7 ASO CONTRACT is defined in Section 5.7(a)(i).
1.8 ASSIGNED SPLIT DOLLAR POLICIES is defined in Section 6.9.
1.9 ATTIMCO means the AT&T Investment Management Corporation, a Delaware
corporation.
1.10 AT&T DEFERRED SEVERANCE ACCOUNT means an account established on the
financial books and records of AT&T or an AT&T Entity to reflect a liability to
pay a deferred severance benefit to an AT&T Executive.
<PAGE>
1.11 AT&T ENTITY means any Person that is, at the relevant time, an
Affiliate of AT&T, except that, for periods beginning on and after the
Participation Commencement Date, the term "AT&T Entity" shall not include Lucent
or a Lucent Entity.
1.12 AT&T EXECUTIVE means an employee or former employee of AT&T, an AT&T
Entity, Lucent or a Lucent Entity, who immediately before the Close of the
Distribution Date is eligible to participate in or receive a benefit under any
AT&T Executive Benefit Plan.
1.13 AT&T GROUP PENSION TRUST is defined in Section 3.1.
1.14 AT&T LEAVE OF ABSENCE PROGRAMS means the Local Leave, Disability
Leave, Educational Leave of Absence, Accompanying AT&T Employed Spouse-Foreign
Assignment Leave, Personal Leave, Union Business Leave, Anticipated Disability
Leave, Care of Newborn/Newly Adopted Child Leave, Family Care Leave, Military
Leave, Transition Leave, Special Leave, Enhanced Leave, and ELOA Plus Leave
Programs offered from time to time under the personnel policies and practices of
AT&T.
1.15 AT&T LTD PLANS means the AT&T Long-Term Disability Plan for Management
Employees and the AT&T Long Term Disability Plan for Occupational Employees.
1.16 AT&T MANAGEMENT SAVINGS GROUP TRUST means the group trust under IRS
Rev. Rul. 81-100 established in connection with the AT&T LTSPME and the AT&T
RSPSP pursuant to a group trust agreement between AT&T and Fidelity Management
Trust Company.
1.17 AT&T MPP means the AT&T Management Pension Plan. Unless the context
indicates otherwise, AT&T MPP includes disability pensions payable from the AT&T
LTD VEBA and death benefits payable under the AT&T Special Accidental Death
Insurance Policy.
1.18 AT&T OCCUPATIONAL SAVINGS GROUP TRUST means the group trust under IRS
Rev. Rul. 81-100 established in connection with the AT&T LTSSP pursuant to a
group trust agreement between AT&T and Bankers Trust Company.
1.19 AT&T PP means the AT&T Pension Plan. Unless the context indicates
otherwise, AT&T PP includes disability pensions payable from the AT&T LTD VEBA
and death benefits payable under the AT&T Special Accidental Death Insurance
Policy.
1.20 AT&T SADBP means the AT&T Sickness and Accident Disability Benefit
Plan.
1.21 AT&T SPECIAL EXECUTIVE DEFERRAL ACCOUNT means an account established
on the financial books and records of any member of the AT&T Group to reflect a
liability to pay a special pension enhancement, hiring bonus or benefit to an
AT&T Executive pursuant to an Individual Agreement.
1.22 AT&T STOCK VALUE means the average of the daily high and low per-share
prices of the AT&T Common Stock as listed on the NYSE during each of the five
trading days immediately preceding the ex-dividend date for the Distribution.
1.23 AT&T TRANSFERRED EMPLOYEE means an individual who (a) on the
Participation Commencement Date, is either actively employed by or on leave of
absence from Lucent or a Lucent Entity (including for purposes of this
definition any division or business unit of AT&T on the Participation
Commencement Date that is part of the Lucent Business), if such individual is
part of a work group or organization that, at any time before the Close of the
Distribution Date, moves to the employ of AT&T or an AT&T Entity and that, after
such move, performs substantially the same
<PAGE>
functions as before such move; (b) on the Participation Commencement Date, is
either actively employed by or on leave of absence from a Subsidiary of AT&T
that becomes a Lucent Entity before the Close of the Distribution Date, if
such individual, at any time before the Close of the Distribution Date, moves
to the employ of AT&T or an AT&T Entity that does not become a Lucent Entity
before the Close of the Distribution Date; or (c) on the Participation
Commencement Date, is either actively employed by or on leave of absence from
Lucent or a Lucent Entity in a common support function, is at any time before
the Close of the Distribution Date designated by AT&T for transfer to AT&T or
an AT&T Entity and, at any time after the Participation Commencement Date and
before the Close of the Distribution Date, moves to the employ of AT&T or an
AT&T Entity. In addition, AT&T and Lucent may designate, by mutual agreement,
any other individual or group of individuals as AT&T Transferred Employees.
1.24 AT&T WCP means the AT&T Workers' Compensation Program, comprised of
the various arrangements established by AT&T or an AT&T Entity to comply with
the workers' compensation requirements of the states in which AT&T and its
Affiliates conduct business.
1.25 AUDITING PARTY is defined in Section 8.7(b)(i).
1.26 AWARD means an award under a Long Term Incentive Plan or a Short Term
Incentive Plan.
1.27 BDEC is defined in Section 5.16(a).
1.28 BDS is defined in Section 5.16(a).
1.29 CECRA, when immediately preceded by "AT&T," means the AT&T Child/Elder
Care Reimbursement Account Plan. When immediately preceded by "Lucent," CECRA
means the child/elder care reimbursement account plan to be established by
Lucent pursuant to Section 2.3.
1.30 CHANGE is defined in Section 5.8(b)(i).
1.31 CLOSE OF THE DISTRIBUTION DATE means 11:59:59 P.M., Eastern Standard
Time or Eastern Daylight Time (whichever shall then be in effect), on the
Distribution Date.
1.32 COBRA means the continuation coverage requirements for "group health
plans" under Title X of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, and as codified in Code Section 4980B and ERISA Sections 601
through 608.
1.33 CODE means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
1.34 COLLECTIVE BARGAINING AGREEMENT means the National AT&T/CWA/IBEW
Memorandum of Understanding, including all Attachments, National Items and
letters included as a part thereof, executed by AT&T and the CWA and IBEW as of
May 28, 1995, and such local collective bargaining agreements into which the
National AT&T/CWA/IBEW Memorandum of Understanding has been incorporated.
1.35 CORPORATE-OWNED LIFE INSURANCE means the life insurance policies owned
by AT&T insuring the lives of certain AT&T Executives and certain other highly
compensated employees of AT&T or an AT&T Entity that were purchased by AT&T
between the years 1985 and 1992.
1.36 COVERED AT&T AWARDS means any AT&T Options or non-vested AT&T
performance shares, stock units, restricted stock or restricted stock units held
as of the Close of the Distribution Date
<PAGE>
by Transferred Individuals who as of the Distribution Date are either active
employees of or on a leave of absence from Lucent or a Lucent Entity.
1.37 CWA means the Communication Workers of America, AFL-CIO.
1.38 DEFERRAL PLAN, when immediately preceded by "AT&T," means the AT&T
Senior Management Incentive Award Deferral Plan. When immediately preceded by
"Lucent," Deferral Plan means the senior management incentive award deferral
plan to be established by Lucent pursuant to Section 2.3.
1.39 DOL means the United States Department of Labor.
1.40 ERISA means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific provision of ERISA also includes any proposed,
temporary, or final regulation in force under that provision.
1.41 ESOP, when immediately preceded by "AT&T," means the AT&T Employee
Stock Ownership Plan. When immediately preceded by "Lucent," ESOP means the
employee stock ownership plan to be established by Lucent pursuant to Section
2.3.
1.42 ESOP TRUST, when immediately preceded by "AT&T," means the trust
established by AT&T forming part of the AT&T ESOP. When immediately preceded by
"Lucent," ESOP Trust has the meaning set forth in Section 4.3(a).
1.43 EXECUTIVE BENEFIT PLANS, when immediately preceded by "AT&T," means
the executive benefit and nonqualified plans, programs, and arrangements
established, maintained, agreed upon, or assumed by AT&T or an AT&T Entity for
the benefit of employees and former employees of AT&T or an AT&T Entity before
the Close of the Distribution Date, including the plans listed in Schedule 1,
but excluding the Senior Management Ground Transportation Program. When
immediately preceded by "Lucent," Executive Benefit Plans means the executive
benefit plans and programs to be established by Lucent pursuant to Section 2.3
that correspond to the respective AT&T Executive Benefit Plans.
1.44 EXISTING ACQUISITION LOAN is defined in Section 4.2(c)(ii).
1.45 FMLA means the Family and Medical Leave Act of 1993, as amended.
1.46 FOREIGN PLAN means a Plan maintained by AT&T, an AT&T Entity, Lucent,
or a Lucent Entity for the benefit of employees outside the U.S.
1.47 FUNDING POLICY AMOUNT is defined in Section 3.2(b)(i)(A).
1.48 GROSS VALUE OF THE ASSUMED STOCK AWARDS means the sum of (a) the
Lucent Stock Value multiplied by the number of shares of Lucent Common Stock
that Immediately after the Distribution Date would be issuable in respect of
then outstanding Covered AT&T Awards, assuming all then outstanding Covered AT&T
Awards were converted into replacement Awards as of such time in accordance with
the terms of Section 6.4(a), plus (b) the aggregate amount paid to AT&T by
Lucent on or after the Closing Date and prior to the Close of the Distribution
Date pursuant to Section 8.2(f)(i) and (iii), plus (c) the aggregate of the
exercise prices paid to AT&T on or after the Closing Date and prior to the Close
of the Distribution Date in respect of the exercise of all AT&T Options that
constitute Covered AT&T Awards and for which payments are made by Lucent to AT&T
pursuant to Section 8.2(f)(i) as a result of such exercise.
<PAGE>
1.49 GROUP INSURANCE POLICIES is defined in Section 5.7(b)(i).
1.50 GROUP LIFE PROGRAM, when immediately preceded by "AT&T," means the
AT&T Dependent Accidental Loss Insurance Plan, the AT&T Dependent Group Life
Insurance Plan, the AT&T Group Life Insurance Plan, the AT&T Supplementary
Accidental Loss Insurance Plan and the AT&T Supplementary Life Insurance Plan.
When immediately preceded by "Lucent," Group Life Program means the life
insurance plans and programs to be established by Lucent pursuant to Section 2.3
that correspond to the respective AT&T Group Life Programs.
1.51 HCFA means the Health Care Financing Administration.
1.52 HCRA PLAN, when immediately preceded by "AT&T," means the AT&T Health
Care Reimbursement Account Plan. When immediately preceded by "Lucent," HCRA
Plan means the Health Care Reimbursement Account Plan to be established by
Lucent pursuant to Section 2.3.
1.53 HEALTH AND WELFARE PLANS, when immediately preceded by "AT&T," means
the health and welfare plans listed on Schedule II established and maintained by
AT&T for the benefit of employees and retirees of AT&T and certain AT&T
Entities, and such other welfare plans or programs as may apply to such
employees and retirees as of the Distribution Date. When immediately preceded by
"Lucent," Health and Welfare Plans means the health and welfare plans to be
established by Lucent pursuant to Section 2.3 that correspond to the respective
AT&T Health and Welfare Plans.
1.54 HEALTH PLANS, when immediately preceded by "AT&T," means the AT&T
Dental Expense Plan for Active Employees, the AT&T Dental Expense Plan for
Retired Employees, the AT&T Medical Plans, the AT&T HCRA Plan and the AT&T
Vision Care Plan. When immediately preceded by "Lucent," Health Plans means the
health plans to be established by Lucent pursuant to Section 2.3 that correspond
to the respective AT&T Health Plans.
1.55 HEALTH PLANS BENEFIT TRUST, when immediately preceded by "AT&T," means
the American Telephone and Telegraph Company Health Plans Benefit Trust. When
immediately preceded by "Lucent," Health Plans Benefit Trust means the trust to
be established by Lucent pursuant to Section 5.1 that corresponds to the AT&T
Health Plans Benefit Trust.
1.56 HEALTH TRUSTS, when immediately preceded by "AT&T," means the AT&T
Health Plans Benefit Trust, the AT&T Management VEBA, and the AT&T Union VEBA.
When immediately preceded by "Lucent," Health Trusts means the trusts to be
established by Lucent pursuant to Section 5.1 that correspond to the respective
AT&T Health Trusts.
Medical Plans or the Lucent Medical Plans.
1.58 HMO AGREEMENTS is defined in Section 5.7(c)(i).
1.59 HPSS is defined in Section 5.21(c)(v).
1.60 HWLI COMMITTEE means the Health, Welfare and Life Insurance Committee
established pursuant to Section 5.9.
1.61 IBEW means the International Brotherhood of Electrical Workers.
1.62 IMMEDIATELY AFTER THE DISTRIBUTION DATE means 12:00 A.M., Eastern
Standard Time or Eastern Daylight Time (whichever shall then be in effect), on
the day after the Distribution Date.
<PAGE>
1.63 INITIAL ALLOCATION AMOUNT is defined in Section 3.2(b)(i)(A).
1.64 INDIVIDUAL AGREEMENT means an individual contract or agreement
(whether written or unwritten) entered into between AT&T, an AT&T Entity, Lucent
or a Lucent Entity and an AT&T Executive that establishes the right of such
individual to special executive compensation or benefits, including a
supplemental pension benefit, hiring bonus, loan, guaranteed payment, special
allowance, tax equalization or disability benefit, or share units granted (and
payable in the form of cash or otherwise) under individual phantom share
agreements, or that provides benefits similar to those identified in Schedule I.
1.65 IRS means the Internal Revenue Service.
1.66 LEGALLY PERMISSIBLE is defined in Section 5.15(a)(iv).
1.67 LEGALLY PERMITTED is defined in Section B.4 of Exhibit B.
1.68 LESOP, when immediately preceded by "AT&T," means the portion of the
AT&T LTSSP that is a leveraged employee stock ownership plan. When immediately
preceded by "Lucent," LESOP means the portion of the Lucent LTSSP that is a
leveraged employee stock ownership plan.
1.69 LESOP TRUST, when immediately preceded by "AT&T," means the trust
established by AT&T under Article 20 of the AT&T LTSSP. When immediately
preceded by "Lucent," LESOP Trust has the meaning set forth in Section
4.2(c)(i).
1.70 LONG TERM INCENTIVE PLAN, when immediately preceded by "AT&T," means
any of the AT&T 1984 Stock Option Plan, the AT&T 1987 Long Term Incentive
Program, and such other stock-based incentive plans assumed by AT&T by reason of
merger, acquisition, or otherwise, including incentive plans of NCR, Teradata
Corporation, AT&T Wireless Services, Inc. (formerly McCaw Cellular
Communications, Inc.), and Lin Broadcasting Corporation. When immediately
preceded by "Lucent," Long Term Incentive Plan means the long term incentive
plan to be established by Lucent pursuant to Section 2.3.
1.71 LTD VEBA, when immediately preceded by "AT&T," means the American
Telephone & Telegraph Company Long-Term Disability Plans Benefit Trust. When
immediately preceded by "Lucent," LTD VEBA means the welfare benefit fund to be
established by Lucent pursuant to Section 5.1 that corresponds to the AT&T LTD
VEBA.
1.72 LTSPME, when immediately preceded by "AT&T," means the AT&T Long Term
Savings Plan for Management Employees. When immediately preceded by "Lucent,"
LTSPME means the management savings plan to be established by Lucent pursuant to
Section 2.3 that corresponds to the AT&T LTSPME.
1.73 LTSSP, when immediately preceded by "AT&T," means the AT&T Long Term
Savings and Security Plan. When immediately preceded by "Lucent," LTSSP means
the occupational savings plan to be established by Lucent pursuant to Section
2.3 that corresponds to the AT&T LTSSP.
1.74 LUCENT ACQUISITION LOAN is defined in Section 4.2(c)(ii).
1.75 LUCENT ADMINISTRATIVE EMPLOYEES is defined in Section 8.1(c).
1.76 LUCENT ENTITY means any Person that is, at the relevant time, a
Subsidiary of Lucent or is otherwise controlled, directly or indirectly, by
Lucent.
<PAGE>
1.77 LUCENT INDIVIDUAL means any individual who (a) on the Participation
Commencement Date, is either actively employed by or on leave of absence from
Lucent or a Lucent Entity (including for purposes of this definition any
division or business unit of AT&T or an AT&T Entity on the Participation
Commencement Date that is part of the Lucent Business), other than any AT&T
Transferred Employee; (b) on the Participation Commencement Date, is either
actively employed by or on leave of absence from AT&T or an AT&T Entity as part
of a work group or organization that, at any time after the Participation
Commencement Date and before the Close of the Distribution Date, moves to the
employ of Lucent or a Lucent Entity from the employ of AT&T or an AT&T Entity
and that, after such move, performs substantially the same functions as before
such move; (c) on the Participation Commencement Date, is either actively
employed by or on leave of absence from AT&T or an AT&T Entity in a common
support function, is at any time before the Close of the Distribution Date
designated by AT&T for transfer to Lucent or a Lucent Entity and, at any time
after the Participation Commencement Date and before the Close of the
Distribution Date, moves to the employ of Lucent or a Lucent Entity from the
employ of AT&T or an AT&T Entity; (d) on the Participation Commencement Date, is
either actively employed by or on leave of absence from a Subsidiary of AT&T
that becomes a Lucent Entity before the Close of the Distribution Date, other
than any AT&T Transferred Employee; (e) at any time after the Participation
Commencement Date and before the Close of the Distribution Date both (i) is
declared to be surplus by AT&T or an AT&T Entity and (ii) applies for, obtains
and accepts employment with Lucent or a Lucent Entity; or (f) is a Lucent
Administrative Employee. In addition, AT&T and Lucent may designate, by mutual
agreement, any other individual or group of individuals as Lucent Individuals.
1.78 LUCENT STOCK VALUE means the average of the daily high and low
per-share prices of the Lucent Common Stock as listed on the NYSE during each of
the five trading days immediately preceding the ex-dividend date for the
Distribution.
1.79 LUCENT WCP CLAIMS is defined in Section 5.15(a)(i).
1.80 MANAGEMENT EMPLOYEE means any individual who is an "Employee" as
defined under the terms of the AT&T MPP or the Pension Plan to be established by
Lucent pursuant to Section 2.3 that corresponds to the AT&T MPP.
1.81 MANAGEMENT TRANSITION PERIOD means the period beginning Immediately
after the Distribution Date and ending on the earlier of December 31, 1997 and
the end of the third calendar month that ends after the Distribution Date.
1.82 MANAGEMENT VEBA, when immediately preceded by "AT&T," means The
American Telephone and Telegraph Company Management and Nonrepresented Employees
Postretirement Health Benefits Trust. When immediately preceded by "Lucent,"
Management VEBA means the welfare benefit fund to be established by Lucent
pursuant to Section 5.1 that corresponds to the AT&T Management VEBA.
1.83 MATERIAL FEATURE means any feature of a Plan that could reasonably be
expected to be of material importance to the sponsoring employer or the
participants and beneficiaries of the Plan, which could include, depending on
the type and purpose of the particular Plan, the class or classes of employees
eligible to participate in such Plan, the nature, type, form, source, and level
of benefits provided by the employer under such Plan and the amount or level of
contributions, if any, required to be made by participants (or their dependents
or beneficiaries) to such Plan.
1.84 MEDICAL PLANS, when immediately preceded by "AT&T," means the AT&T
Medical Expense Plan for Management Employees, the AT&T Medical Expense Plan for
Occupational Employees and the AT&T Medical Expense Plan for Retired Employees.
When immediately preceded
<PAGE>
by "Lucent," Medical Plans means the medical plans to be established by
Lucent pursuant to Section 2.3 that correspond to the respective AT&T Medical
Plans.
1.85 MPA means the Mandatory Portability Agreement established as of
January 1, 1985 among AT&T, American Information Technologies Corporation, Bell
Atlantic Corporation, Bell Communications Research, Inc., BellSouth Corporation,
Cincinnati Bell Telephone Company, NYNEX Corporation, Pacific Telesis Group,
Inc., The Southern New England Telephone Company, Southwestern Bell Corporation
and US WEST, Inc. that provides, in accordance with Section 559 of the Tax
Reform Act of 1984, for the mutual recognition of service credit and the
transfer of benefit obligations for specified employees who terminate employment
with one "Interchange Company" as defined under such agreement and subsequently
commence employment with another such Interchange Company.
1.86 NON-EMPLOYEE DIRECTOR, when immediately preceded by "AT&T," means a
member of AT&T's Board of Directors who is not an employee of AT&T, an AT&T
Entity, Lucent, or a Lucent Entity. When immediately preceded by "Lucent,"
Non-Employee Director means a member of Lucent's Board of Directors who is not
an employee of AT&T, an AT&T Entity, Lucent or a Lucent Entity.
1.87 NON-EMPLOYEE DIRECTOR PLANS, when immediately preceded by "AT&T,"
means the AT&T Deferred Compensation Plan for Non-Employee Directors, the AT&T
Directors' Individual Life Insurance Program and the AT&T Pension Plan for
Non-Employee Directors. When immediately preceded by "Lucent," Non-Employee
Director Plans means the plans and programs to be established by Lucent pursuant
to Section 2.3 that correspond to the AT&T Non-Employee Director Plans.
1.88 NON-PARTIES is defined in Section 8.7(b)(ii).
1.89 OCCUPATIONAL EMPLOYEE means any individual who is an "Employee" as
defined under the terms of the AT&T PP or the Pension Plan to be established by
Lucent pursuant to Section 2.3 that corresponds to the AT&T PP.
1.90 OCCUPATIONAL TRANSITION PERIOD means the period beginning Immediately
after the Distribution Date and ending on May 30, 1998, the scheduled expiration
date of the Collective Bargaining Agreement as in effect on the date hereof.
1.91 OPTION, when immediately preceded by "AT&T," means an option to
purchase AT&T Common Stock. When immediately preceded by "Lucent," Option means
an option to purchase Lucent Common Stock, in each case pursuant to a Long Term
Incentive Plan.
1.92 OUTSOURCE is defined in Sections 5.10(b) and 5.15(a)(iii) for purposes
of such respective sections.
1.93 PARTICIPATING COMPANY means (a) AT&T, (b) any Person that AT&T has
approved for participation in, and which is participating in, a Plan sponsored
by AT&T, and (c) any Person (other than an individual) which, by the terms of
such a Plan, participates in such Plan or any employees of which, by the terms
of such Plan, participate in or are covered by such Plan.
1.94 PARTICIPATION COMMENCEMENT DATE means February 1, 1996.
1.95 PBGC means the Pension Benefit Guaranty Corporation.
1.96 PENSION PLANS, when immediately preceded by "AT&T," means the AT&T MPP
and the AT&T PP. When immediately preceded by "Lucent," Pension Plans means the
respective management and occupational pension plans to be established by Lucent
pursuant to Section 2.3 that correspond to the AT&T Pension Plans.
<PAGE>
1.97 PLAN, when immediately preceded by "AT&T" or "Lucent," means any plan,
policy, program, payroll practice, on-going arrangement, contract, trust,
insurance policy or other agreement or funding vehicle providing benefits to
employees, former employees or Non-Employee Directors of AT&T or an AT&T Entity,
or Lucent or a Lucent Entity, as applicable.
1.98 QDRO means a domestic relations order which qualifies under Code
Section 414(p) and ERISA Section 206(d) and which creates or recognizes an
alternate payee's right to, or assigns to an alternate payee, all or a portion
of the benefits payable to a participant under any of the AT&T Pension Plans,
the AT&T Savings Plans, or the AT&T ESOP.
1.99 QMCSO means a medical child support order which qualifies under ERISA
Section 609(a) and which creates or recognizes the existence of an alternate
recipient's right to, or assigns to an alternate recipient the right to, receive
benefits for which a participant or beneficiary is eligible under an AT&T Health
Plan.
1.100 RABBI TRUST, when immediately preceded by "AT&T," means the American
Telephone and Telegraph Company Benefits Protection Trust. When immediately
preceded by "Lucent," Rabbi Trust means the grantor trust to be established by
Lucent pursuant to Section 6.8(a) that corresponds to the AT&T Rabbi Trust.
1.101 RABBI TRUST DETERMINATION DATE is defined in Section 6.8(b)(i).
1.102 RATIO means the amount obtained by dividing the AT&T Stock Value by
the Lucent Stock Value.
1.103 RFA means Retirement Funding Account.
1.104 RSPSP, when immediately preceded by "AT&T," means the AT&T Retirement
Savings and Profit Sharing Plan. When immediately preceded by "Lucent," RSPSP
means the savings plan to be established by Lucent pursuant to Section 2.3 that
corresponds to the AT&T RSPSP.
1.105 SAVINGS PLANS, when immediately preceded by "AT&T," means the AT&T
LTSPME, the AT&T LTSSP and the AT&T RSPSP. When immediately preceded by
"Lucent," Savings Plans means the Lucent LTSPME, the Lucent LTSSP and the Lucent
RSPSP.
1.106 SEPARATION AND DISTRIBUTION AGREEMENT is defined in the third
paragraph of the preamble of this Agreement.
1.107 SHORT TERM INCENTIVE PLAN, when immediately preceded by "AT&T," means
the AT&T Short Term Incentive Plan. When immediately preceded by "Lucent," Short
Term Incentive Plan means the AT&T Short Term Incentive Plan to be established
by Lucent pursuant to Section 2.3.
1.108 SPLIT DOLLAR LIFE INSURANCE means the life insurance policies
purchased by AT&T on behalf of certain AT&T Executives and AT&T Non-Employee
Directors under (a) the AT&T Senior Management Individual Life Insurance
Program, (b) the AT&T Senior Management Basic Life Insurance Program and (c) the
AT&T Directors' Individual Life Insurance Program, with respect to which such
AT&T Executives or AT&T Non-Employee Directors (or their assignees or
delegates), respectively, have executed collateral assignments for the benefit
of AT&T.
1.109 SPREAD is defined in Section 8.2(f).
1.110 STOCK PURCHASE PLAN, when immediately preceded by "AT&T," means the
AT&T
<PAGE>
1996 Employee Stock Purchase Plan. When immediately preceded by "Lucent,"
Stock Purchase Plan means the employee stock purchase plan to be established
by Lucent pursuant to Section 2.3.
1.111 TRANSFERRED INDIVIDUAL means any individual who, as of the Close of
the Distribution Date: (a) is either then actively employed by, or then on a
leave of absence from, Lucent or a Lucent Entity; or (b) is neither then
actively employed by, nor then on a leave of absence from, Lucent or a Lucent
Entity, but who (i) was a Lucent Individual, or (ii) whose most recent active
employment with AT&T or a past or present Affiliate of AT&T was with an entity
or a corporate division having a "Company Code," "Managed Entity Code" or "Legal
Entity Code" set forth in Schedule V, to the extent such information is
available, and who has not had an intervening period of employment covered by an
interchange agreement under which assets and liabilities with respect to the
individual were or are to be transferred from an AT&T Pension Plan, or (iii)
otherwise is identified pursuant to a methodology approved by the Lucent Senior
Vice President-Human Resources and the AT&T Senior Vice President-Benefits and
Compensation, which methodology shall be consistent with the intent of the
parties that former employees of AT&T or a past or present Affiliate of AT&T
will be aligned with the entity for which they most recently worked and based
upon the business of such entity. Transferred Individuals shall also include the
Lucent Administrative Employees and the individuals designated as such pursuant
to Section 9.2. An alternate payee under a QDRO, alternate recipient under a
QMCSO, beneficiary or covered dependent, in each case, of an employee or former
employee described in either of the preceding two sentences shall also be a
Transferred Individual with respect to that employee's or former employee's
benefit under the applicable Plans. Such an alternate payee, alternate
recipient, beneficiary, or covered dependent shall not otherwise be considered a
Transferred Individual with respect to his or her own benefits under any
applicable Plans unless he or she is a Transferred Individual by virtue of
either of the first two sentences of this definition. In addition, AT&T and
Lucent may designate, by mutual agreement, any other individuals, or group of
individuals, as Transferred Individuals. An individual may be a Transferred
Individual pursuant to this definition regardless of whether such individual is
or was a Lucent Individual and regardless of whether such individual is, as of
the Distribution Date, alive, actively employed, on a temporary leave of absence
from active employment, on layoff, terminated from employment, retired or on any
other type of employment or post-employment status relative to an AT&T Plan, and
regardless of whether, as of the Close of the Distribution Date, such individual
is then receiving any benefits from an AT&T Plan. Notwithstanding the foregoing,
if the Distribution does not occur on or before December 31, 1997, references in
this definition to the Close of the Distribution Date shall be deemed to refer
to the close of business on the earlier of the date AT&T publicly announces that
the Distribution will not occur and December 31, 1997.
1.112 TRANSITION INDIVIDUAL means any individual who:
(a) is a Transferred Individual who during the applicable Transition Period
becomes an employee of AT&T or an AT&T Entity without an intervening period of
employment covered by an interchange agreement under which assets and
liabilities with respect to the individual were or are to be transferred from
an AT&T Pension Plan; or
(b) is an employee or former employee of AT&T or an AT&T Entity as of the
Distribution Date (but is not a Transferred Individual) who during the
applicable Transition Period becomes an employee of Lucent or a Lucent Entity
without an intervening period of employment covered by an interchange
agreement under which assets and liabilities with respect to the individual
were or are to be transferred from an AT&T Pension Plan; or
(c) is an individual described in clause (a) or (b) of this definition whose
employer changes during the applicable Transition Period either (i) from AT&T
or an AT&T Entity to Lucent or a Lucent Entity, or (ii) from Lucent or a
Lucent Entity to AT&T or an AT&T Entity without an intervening period of
employment covered by an interchange agreement under which assets and
liabilities with
<PAGE>
respect to the individual were or are to be transferred from an AT&T
Pension Plan.
For these purposes, the applicable Transition Period is determined by the
positions (Management Employee or Occupational Employee) from which and into
which the individual is hired as more fully set forth in Sections 2.5(b) and
2.5(c). An alternate payee under a QDRO, alternate recipient under a QMCSO,
beneficiary or covered dependent, in each case, of an individual described in
clause (a), (b), or (c) of this definition shall also be a Transition
Individual with respect to that individual's benefit under the applicable
Plans. Such an alternate payee, alternate recipient, beneficiary, and covered
dependent shall not otherwise be considered a Transition Individual with
respect to his or her own benefits under any applicable Plans unless he or she
is a Transition Individual by virtue of clause (a), (b), or (c) of this
definition.
1.113 TRANSITION PERIOD means the Management Transition Period or the
Occupational Transition Period, as applicable.
1.114 TRUST-OWNED LIFE INSURANCE (VEBA) means the group life insurance
policies purchased from The Prudential Insurance Company of America by the
trustee of the AT&T Management VEBA.
1.115 UNFUNDED COST SHARING AGREEMENTS means the 1983 Force Adjustment Cost
Reimbursement and Indemnification Agreement established as of January 1, 1984
among AT&T, American Information Technologies Corporation, Bell Atlantic
Corporation, BellSouth Corporation, NYNEX Corporation, Pacific Telesis Group,
Inc., Southwestern Bell Corporation, and US WEST, Inc., which provides for
reimbursement by AT&T and certain AT&T Entities to the other parties of
certain expenses for medical and dental benefits and certain post-retirement
pension increases for employees designated for reassignment from the other
parties to AT&T on or about January 1, 1984, and the Unfunded Post-Retirement
Benefits Cost Sharing Agreement established as of January 1, 1984 among AT&T,
Advanced Mobile Phone Service, Inc., American Information Technologies
Corporation, Bell Atlantic Corporation, BellSouth Corporation, Central
Services Organization, NYNEX Corporation, Pacific Telesis Group, Inc.,
Southwestern Bell Corporation, and US WEST, Inc., which provides for the
allocation of expenses relating to post-retirement medical, dental, specified
disability and future contingent pension increases with respect to Bell System
employees who retired before January 1, 1984 or who otherwise left the service
of a Bell System Company before that date with eligibility to continue any
such benefits on or after January 1, 1984.
1.116 UNION VEBA, when immediately preceded by "AT&T," means the American
Telephone and Telegraph Company Represented Employees Post-Retirement Health
Benefits Trust. When immediately preceded by "Lucent," Union VEBA means the
welfare benefit fund to be established by Lucent pursuant to Section 5.1 that
corresponds to the AT&T Union VEBA.
1.117 U.S. means the 50 United States and the District of Columbia.
1.118 VALUE is defined in Section 8.2(f).
1.119 VEBA, when immediately preceded by "AT&T," means any voluntary
employees' beneficiary association trust sponsored by AT&T. When immediately
preceded by "Lucent," VEBA means any voluntary employees' beneficiary
association trust sponsored by Lucent.
1.120 VEBA PLANS is defined in Section 5.3.
ARTICLE II
GENERAL PRINCIPLES
<PAGE>
2.1 ASSUMPTION OF LIABILITIES.
(a) LUCENT LIABILITIES. Lucent hereby assumes and agrees to pay, perform,
fulfill and discharge, in accordance with their respective terms, all of the
following (regardless of when or where such Liabilities arose or arise or were
or are incurred): (i) all Liabilities to or relating to Lucent Individuals and
Transferred Individuals, and their respective dependents and beneficiaries, in
each case relating to, arising out of or resulting from employment by AT&T or
an AT&T Entity before becoming Lucent Individuals or Transferred Individuals,
respectively (including Liabilities under AT&T Plans and Lucent Plans); (ii)
all other Liabilities to or relating to Lucent Individuals, Transferred
Individuals and other employees or former employees of Lucent or a Lucent
Entity, and their dependents and beneficiaries, to the extent relating to,
arising out of or resulting from future, present or former employment with
Lucent or a Lucent Entity (including Liabilities under AT&T Plans and Lucent
Plans); (iii) all Liabilities relating to, arising out of or resulting from
any other actual or alleged employment relationship with Lucent or a Lucent
Entity; (iv) all Liabilities relating to, arising out of or resulting from the
imposition of withdrawal liability under Subtitle E of Title IV of ERISA as a
result of a complete or partial withdrawal of AT&T Network Construction
Services, Inc. from a "multiemployer plan" within the meaning of ERISA Section
4021, except to the extent that such withdrawal liability is imposed solely as
a result of the Separation, the IPO, or the Distribution; and (v) all other
Liabilities relating to, arising out of or resulting from obligations,
liabilities and responsibilities expressly assumed or retained by Lucent, a
Lucent Entity, or a Lucent Plan pursuant to this Agreement. Notwithstanding
the foregoing, Lucent shall not, by virtue of any provision of this Agreement
or the Separation and Distribution Agreement, be deemed to have assumed any
Excluded Liability or to have agreed to alter or amend any provision of
Article VI of the Separation and Distribution Agreement.
(b) EXCLUDED LIABILITIES. All Liabilities to or relating to AT&T Transferred
Employees and their respective dependents and beneficiaries relating to,
arising out of or resulting from employment by Lucent or a Lucent Entity
before becoming AT&T Transferred Employees or employment by AT&T or an AT&T
Entity (including Liabilities under AT&T Plans) shall be "Excluded
Liabilities" within the meaning of the Separation and Distribution Agreement.
2.2 LUCENT PARTICIPATION IN AT&T PLANS.
(a) PARTICIPATION IN AT&T PENSION, SAVINGS, HEALTH AND WELFARE AND
EXECUTIVE BENEFIT PLANS. Effective as of the Participation Commencement Date
and subject to the terms and conditions of this Agreement, Lucent shall become
a Participating Company in the AT&T Plans in effect as of the Participation
Commencement Date. Each Lucent Entity that is, as of the date of this
Agreement, a Participating Company in any of the AT&T Plans shall continue as
such. Effective as of any date on or after the Participation Commencement Date
and before the Distribution Date, a Lucent Entity not described in the
preceding sentence may, at its request and with the consent of AT&T (which
shall not be unreasonably withheld), become a Participating Company in any or
all of the AT&T Plans. Without Lucent consent, neither Lucent nor any Lucent
Entity shall become a Participating Company in an AT&T Plan established after
the Participation Commencement Date.
(b) PARTICIPATION IN AT&T STOCK PURCHASE PLAN. If the AT&T Stock Purchase
Plan is approved by the shareholders of AT&T at the 1996 annual meeting, then
(i) effective as of July 1, 1996, Lucent shall become a Participating Company
in the AT&T Stock Purchase Plan; and (ii) effective as of July 1, 1996, any
Lucent Entity may (at the discretion of AT&T in accordance with the terms of
the AT&T Stock Purchase Plan) become a Participating Company in the AT&T Stock
Purchase Plan.
(c) AT&T'S GENERAL OBLIGATIONS AS PLAN SPONSOR. AT&T shall continue through
the Close of the Distribution Date to administer, or cause to be administered,
in accordance with their terms and applicable law, the AT&T Plans, and shall
have the sole discretion and authority to interpret the AT&T Plans as set forth
therein. Before the Close of the Distribution Date, AT&T shall not, without
first consulting with Lucent (on behalf of itself and each Lucent Entity which
is a Participating Company), amend any Material Feature of any AT&T Plan in
which Lucent or a Lucent Entity is a Participating Company, except to the extent
such amendment would not affect any benefits of Lucent Individuals or
Transferred Individuals under such Plan or as may be necessary or appropriate to
comply with any collective bargaining agreement or applicable law.
(d) LUCENT'S GENERAL OBLIGATIONS AS PARTICIPATING COMPANY. Lucent
shall perform with respect to its participation in the AT&T Plans, and shall
cause each other Lucent Entity that is a Participating Company in any AT&T
Plan to perform, the duties of a Participating Company as set forth in such
Plans or any procedures adopted pursuant thereto, including: (i) assisting in
the administration of claims, to the extent requested by the claims
administrator of the applicable AT&T Plan; (ii) cooperating fully with AT&T
Plan auditors, benefit personnel and benefit vendors; (iii) preserving the
confidentiality of all financial arrangements AT&T has or may have with any
vendors, claims administrators, trustees or any other entity or individual
with whom AT&T has entered into an agreement relating to the AT&T Plans; and
(iv) preserving the confidentiality of participant health information
(including health information in relation to FMLA leaves).
(e) TERMINATION OF PARTICIPATING COMPANY STATUS. Effective as of the Close
of the Distribution Date, Lucent and each Lucent Entity shall cease to be a
Participating Company in the AT&T Plans, except that Lucent and each Lucent
Entity shall cease to be a Participating Company in the AT&T Rabbi Trust as of
the Rabbi Trust Determination Date.
2.3 ESTABLISHMENT OF LUCENT PLANS. Effective Immediately after the
Distribution Date, Lucent shall adopt, or cause to be adopted, the Lucent
Pension Plans, the Lucent Savings Plans, the Lucent ESOP, the Lucent Stock
Purchase Plan (if the AT&T Stock Purchase Plan is then in existence), the Lucent
Health and Welfare Plans, and the Lucent Executive Benefit Plans for the benefit
of the Transferred Individuals and other current, future, and former employees
of Lucent and the Lucent Entities. Except for the Lucent Long Term Incentive
Plan and the Lucent Stock Purchase Plan, the foregoing Lucent Plans as in effect
Immediately after the Distribution Date shall be substantially identical in all
Material Features to the corresponding AT&T Plans as in effect as of the Close
of the Distribution Date. The Lucent Long Term Incentive Plan and the Lucent
Stock Purchase Plan shall be adopted by Lucent and approved by AT&T as sole
shareholder of Lucent, before the Closing Date, to become effective Immediately
after the Distribution Date. Effective as of the Closing Date, Lucent shall
adopt, or cause to be adopted, the Lucent Non-Employee Director Plans, for the
benefit of Lucent Non-Employee Directors who were, immediately before the
Closing Date, AT&T Non-Employee Directors. The Lucent Non-Employee Director
Plans shall be substantially identical in all Material Features to the
corresponding AT&T Non-Employee Director Plans as in effect on the Closing Date,
except that they need not provide for the accrual of additional benefits after
the Closing Date. In addition, before the Closing Date, Lucent may adopt, and in
that event AT&T shall approve as sole shareholder of Lucent, a plan or other
arrangement for the payment of compensation of the Lucent Non-Employee Directors
in Lucent Common Stock, under which the number of shares permitted to be issued
before the Close of the Distribution Date shall not exceed 10,000 in the
aggregate.
2.4 TERMS OF PARTICIPATION BY TRANSFERRED INDIVIDUALS IN LUCENT PLANS
AND LUCENT NON-EMPLOYEE DIRECTORS IN LUCENT NON-EMPLOYEE DIRECTOR
PLANS.
(a) LUCENT PLANS. The Lucent Plans shall be, with respect to Transferred
Individuals, in all respects the successors in interest to, and shall not
provide benefits that duplicate benefits provided by, the corresponding AT&T
Plans. AT&T and Lucent shall agree on methods and procedures, including amending
the respective Plan documents, to prevent Transferred Individuals from receiving
duplicative benefits from the AT&T Plans and the Lucent Plans. Lucent shall not
permit any Lucent Plan to commence benefit payments to any Transferred
Individual until it receives notice from AT&T regarding the date on which
payments under the corresponding AT&T Plan shall cease. With respect to
Transferred Individuals, each Lucent Plan shall provide that all service, all
compensation and all other benefit-affecting determinations that, as of the
Close of the Distribution Date, were recognized under the corresponding AT&T
Plan shall, as of Immediately after the Distribution Date, receive full
recognition, credit, and validity and be taken into account under such Lucent
Plan to the same extent as if such items occurred under such Lucent Plan, except
to the extent that duplication of benefits would result. The provisions of this
Agreement for the transfer of assets from certain trusts relating to AT&T Plans
(including Foreign Plans) to the corresponding trusts relating to Lucent Plans
(including Foreign Plans) are based upon the understanding of the parties that
each such Lucent Plan will assume all Liabilities of the corresponding AT&T Plan
to or relating to Transferred Individuals, as provided for herein. If any such
Liabilities are not effectively assumed by the appropriate Lucent Plan, then the
amount of assets transferred to the trust relating to such Lucent Plan from the
trust relating to the corresponding AT&T Plan shall be recomputed, ab initio, as
set forth below but taking into account the retention of such Liabilities by
such AT&T Plan, and assets shall be transferred by the trust relating to such
Lucent Plan to the trust relating to such AT&T Plan so as to place each such
trust in the position it would have been in, had the initial asset transfer been
made in accordance with such recomputed amount of assets.
(b) LUCENT NON-EMPLOYEE DIRECTOR PLANS. The Lucent Non-Employee Director
Plans shall be, with respect to the Lucent Non-Employee Directors who
participated in the corresponding AT&T Non-Employee Director Plans, in all
respects the successors in interest to, and shall not provide benefits that
duplicate benefits provided by such AT&T Plans.
2.5 TRANSITION INDIVIDUALS. Portability of benefits (without duplication
thereof) for Transition Individuals shall be set forth in the separate
agreements provided for below.
(a) MANDATORY PORTABILITY AGREEMENT. Effective as of the Participation
Commencement Date, AT&T shall designate Lucent as, and Lucent shall become, an
Interchange Company under the MPA, with all the applicable rights and
obligations of such an Interchange Company. Each Lucent Entity that is an
Interchange Company as of the date of this Agreement shall continue as such.
Effective as of any date on or after the Participation Commencement Date, any
other Lucent Entity that becomes a Participating Company in the AT&T Pension
Plans pursuant to Section 2.2 may, at its request and with the consent of AT&T
(which shall not be unreasonably withheld), become an Interchange Company.
Effective Immediately after the Distribution Date, the Lucent Pension Plans
shall be "Interchange Company Pension Plans" under, and subject to the terms of,
the MPA. AT&T shall use its reasonable best efforts to seek an amendment of the
MPA to allow Lucent to become a "Tier II Signatory Company" under the MPA with
the same rights and obligations as have been granted to AirTouch International,
Inc. as a Tier II Signatory Company. Lucent shall take any and all action,
including any action reasonably requested by AT&T, to become a Tier II Signatory
Company under the MPA. During the applicable Transition Periods, neither AT&T
nor Lucent shall permit any Transition Individual covered by the Interchange
Agreements described above to waive portability under the MPA with respect to
movement as a Transition Individual.
(b) MANAGEMENT INTERCHANGE AGREEMENT. On or before the Closing Date, AT&T
and Lucent shall enter into an Interchange Agreement providing for (among other
things) the portability of benefits and mutual recognition of service during the
Management Transition Period with respect to Transition Individuals who
terminate employment with AT&T or an AT&T Entity and who become Management
Employees (or employees covered by an alternate benefit program) of Lucent or a
Lucent Entity and Transition Individuals who terminate employment with Lucent or
a Lucent Entity and who become Management Employees (or employees covered by an
alternate benefit program) of AT&T or an AT&T Entity after the Distribution
Date, as more fully described in Section 2.5(d).
<PAGE>
(c) OCCUPATIONAL INTERCHANGE AGREEMENT. On or before the Closing Date, AT&T
and Lucent shall enter into an Interchange Agreement providing for the
portability of benefits and mutual recognition of service during the
Occupational Transition Period with respect to Transition Individuals who cease
employment with AT&T or an AT&T Entity and who become Occupational Employees of
Lucent or a Lucent Entity and Transition Individuals who cease employment with
Lucent or a Lucent Entity and who become Occupational Employees of AT&T or an
AT&T Entity after the Distribution Date, as more fully described in Section
2.5(d).
(d) TERMS OF THE MANAGEMENT AND OCCUPATIONAL INTERCHANGE AGREEMENTS. The
Interchange Agreements described in Sections 2.5(b) and 2.5(c) shall provide in
a mutually agreeable manner for the following with respect to Transition
Individuals: (i) prohibition of the commencement of benefits under any
transferor AT&T or Lucent Pension Plan, and suspension of any benefits already
commenced, with respect to any individual for whom the liability for benefits is
transferred either from the AT&T Pension Plans to the Lucent Pension Plans or
from the Lucent Pension Plans to the AT&T Pension Plans; (ii) transfer of
service credit between the AT&T Plans and the Lucent Plans, where appropriate;
(iii) transfer of assets and liabilities between the AT&T Pension Plans and the
Lucent Pension Plans in the same manner and in accordance with the same methods
and assumptions as prescribed by the MPA, regardless of whether such employees
are covered by the MPA (but in no event shall a Transition Individual be
entitled to obtain overlapping benefits under both the MPA and the Interchange
Agreement); (iv) transfer of accounts between the AT&T Savings Plans and the
Lucent Savings Plans; (v) transfer of accounts between the AT&T ESOP and the
Lucent ESOP; (vi) transfer of accounts between the AT&T Stock Purchase Plan and
the Lucent Stock Purchase Plan; (vii) mutual maintenance and recognition by the
AT&T Health and Welfare Plans and the Lucent Health and Welfare Plans of the
coverage elections and all amounts applied to deductibles and out-of-pocket
maximums met under the other company's Health and Welfare Plans for plan years
in the applicable Transition Period; (viii) mutual maintenance and recognition
by the AT&T Health and Welfare Plans and the Lucent Health and Welfare Plans of
all lifetime maximum benefits reached under the other company's Health and
Welfare Plans; (ix) transfer of service credit, assets, and liabilities between
the AT&T Executive Benefit Plans and the Lucent Executive Benefit Plans and the
related trusts, insurance policies and other funding vehicles; (x) allocation
and transfer of RFA assets and liabilities between the applicable AT&T Health
and Welfare Plans and the applicable Lucent Health and Welfare Plans and the
related trusts, insurance policies and other funding vehicles; and (xi)
assumption of Individual Agreements. Each of the service crediting provisions
described above shall be subject to any applicable "service bridging" or "break
in service" rules under the AT&T Plans and the Lucent Plans.
(e) RESTRICTION ON PLAN AMENDMENTS. During the Management Transition
Period, neither AT&T nor Lucent shall adopt any amendment, or allow any
amendment to be adopted, to any of their respective Pension Plans, Savings Plans
or ESOPs that would violate Code Section 411(d)(6) or that would create an
optional form of benefit subject to Code Section 411(d)(6).
ARTICLE III
DEFINED BENEFIT PLANS
3.1 ESTABLISHMENT OF MIRROR PENSION TRUSTS. Before the Close of the
Distribution Date, AT&T shall cause the trust presently established under the
AT&T Pension Plans to be amended and restated as a group trust under IRS Rev.
Rul. 81-100 (the "AT&T Group Pension Trust") in a form reasonably satisfactory
to Lucent. AT&T shall establish, or cause to be established, a new master
pension trust under the AT&T Pension Plans, which shall be substantially
identical in all Material Features to the trust established under the AT&T
Pension Plans as in effect before such amendment and restatement and which shall
be a participating trust in the AT&T Group Pension Trust. Effective Immediately
after the Distribution Date, Lucent shall establish, or cause to be established,
a master pension trust qualified in accordance with Code Section 401(a), exempt
from taxation under Code
<PAGE>
Section 501(a)(1), and forming part of the Lucent Pension Plans, which
shall be a participating trust in the AT&T Group Pension Trust, subject to
ratification of such participation by the Board of Directors of Lucent or its
authorized delegate after the Close of the Distribution Date (and Lucent shall
seek such ratification within 60 days after the Close of the Distribution Date).
3.2 ASSUMPTION OF PENSION PLAN LIABILITIES AND ALLOCATION OF INTERESTS IN
THE AT&T MASTER PENSION TRUST.
(a) ASSUMPTION OF LIABILITIES BY LUCENT PENSION PLAN. Immediately after the
Distribution Date, all Liabilities to or relating to Transferred
Individuals under the AT&T MPP or AT&T PP, as applicable, shall cease to
be Liabilities of the AT&T MPP or AT&T PP, as applicable, and shall be
assumed by the corresponding Lucent Pension Plan.
(b) ASSET ALLOCATIONS AND TRANSFERS.
(i) CALCULATION OF ASSET ALLOCATION.
(A) As soon as practicable after the Close of the Distribution Date, AT&T
shall cause to be calculated, for the AT&T MPP and the corresponding Lucent
Pension Plan, as of Immediately after the Distribution Date, (1) the "Funding
Policy Amount," which shall be consistent with the minimum amount necessary to
satisfy AT&T's pension funding policy as set forth in Schedule VI, as applied to
the AT&T MPP and the corresponding Lucent Pension Plan; (2) the "414(l)(1)
Amount," which shall equal the minimum amount necessary to fully fund benefits
under the AT&T MPP and the corresponding Lucent Pension Plan on a "termination
basis" (as that term is defined in Treas. Reg. Section 1.414(l)-1(b)(5)); and
(3) the "Initial Allocation Amount," which shall equal the Funding Policy Amount
for that particular Pension Plan, plus one-half times the difference (positive
or negative) between (x) the amount of assets as of the Close of the
Distribution Date of the AT&T MPP and (y) the sum of the Funding Policy Amounts
for the AT&T MPP and the corresponding Lucent Pension Plan. The assumptions used
in determining the 414(l)(1) Amount for each Pension Plan shall be those used in
the determination of the minimum required contribution under ERISA for the Plan
year beginning January 1, 1996, except that the discount rates shall be the
rates issued by the PBGC for valuing annuities in terminating single-employer
pension plans during the month containing the Close of the Distribution Date.
(B) If the aggregate amount of the assets of the AT&T MPP as of the Close
of the Distribution Date is not less than the sum of the 414(l)(1) Amounts for
the AT&T MPP and the corresponding Lucent Pension Plan, then such assets shall
be allocated between the AT&T MPP and the corresponding Lucent Pension Plan in
accordance with the following: (1) if the Initial Allocation Amount is greater
than or equal to the 414(l)(1) Amount for the AT&T MPP, and the Initial
Allocation Amount is greater than or equal to the 414(l)(1) Amount for the
corresponding Lucent Pension Plan, then the amounts of assets allocated to the
AT&T MPP and the corresponding Lucent Pension Plan shall equal their respective
Initial Allocation Amounts; (2) if the Initial Allocation Amount is greater than
or equal to the 414(l)(1) Amount for the AT&T MPP, but the Initial Allocation
Amount is less than the 414(l)(1) Amount for the corresponding Lucent Pension
Plan, then the amount of assets allocated to the Lucent Pension Plan shall equal
the 414(l)(1) Amount for that Pension Plan, and the amount of assets allocated
to the AT&T MPP shall equal the excess of (x) the total amount of assets, as of
the Close of the Distribution Date, of the AT&T MPP over (y) the 414(l)(1)
Amount for the corresponding Lucent Pension Plan; and (3) if the Initial
Allocation Amount is less than the 414(l)(1) Amount for the AT&T MPP, but the
Initial Allocation Amount is greater than or equal to the 414(l)(1) Amount for
the corresponding Lucent Pension Plan, then the amount of assets allocated to
the AT&T MPP shall equal the 414(l)(1) Amount for the AT&T MPP, and the amount
of assets allocated to the corresponding Lucent Pension Plan shall equal the
excess of (x) the total amount of assets, as of the Close of the Distribution
Date, of the AT&T MPP over (y) the 414(l)(1) Amount for the AT&T MPP.
<PAGE>
(C) If the aggregate amount of the assets of the AT&T MPP as of the Close
of the Distribution Date is less than the sum of the 414(l)(1) Amounts for the
AT&T MPP and the corresponding Lucent Pension Plan, then such assets shall be
allocated between the AT&T MPP and the corresponding Lucent Pension Plan as
follows: (i) AT&T and Lucent shall obtain a quote from a mutually agreeable
insurance company for the provision of immediate and deferred annuities payable
under the AT&T MPP and the corresponding Lucent Pension Plan for all accrued
benefits under the AT&T MPP as of the Close of the Distribution Date; (ii) if
the amount of assets as of the Close of the Distribution Date is not less than
the amount of such quote, the amount of assets allocated to the AT&T MPP and the
corresponding Lucent Pension Plan shall equal the portion of the quote allocable
to each plan plus one-half of the excess, if any, over such quote; and (iii) if
the amount of assets as of the Close of the Distribution Date is less than the
amount of such quote, the amount of assets allocated to the AT&T MPP and the
corresponding Lucent Pension Plan shall be determined on a plan termination
basis in accordance with ERISA Section 4044 using the same assumptions as those
used in computing the 414(l)(1) Amounts.
(ii) CALCULATION OF THE AT&T PP'S ASSET ALLOCATION. The asset allocation of
the AT&T PP and the corresponding Lucent Pension Plan shall be determined by
applying Section 3.2(b)(i) but substituting "AT&T PP" for "AT&T MPP" wherever it
appears in that section.
(iii) SEGREGATION OF LUCENT PENSION PLANS' INTERESTS WITHIN THE AT&T GROUP
PENSION TRUST. The actual segregation of the interests of the Lucent Pension
Plans in the AT&T Group Pension Trust into separate trust accounts shall occur
as soon as practicable after the calculation of such interests pursuant to
Section 3.2(b)(i) and (ii), but in no event before AT&T determines that the
calculation and the data on which it is based are acceptably complete, accurate
and consistent. In addition, the interests so calculated shall be adjusted as of
the date of the actual segregation by AT&T to the extent necessary or
appropriate to reasonably and appropriately reflect additional pension
contributions, interest, investment gains and losses, and benefit payments and
data corrections, enhancements, and computational refinements from Immediately
after the Distribution Date through the date of the actual segregation of such
interests. If the master pension trust established by Lucent pursuant to the
last sentence of Section 3.1 is for any reason not then a participating trust in
the AT&T Group Pension Trust, such master pension trust shall be entitled to
receive its allocable share of the assets of the AT&T Group Pension Trust as
determined pursuant to the foregoing provisions of this Section 3.2(b) in
redemption of the interests therein of the Lucent Pension Plans as promptly as
prudently practicable. Such allocable share shall consist of Lucent's allocable
share of each class of assets in the AT&T Group Pension Trust, unless AT&T and
Lucent agree otherwise.
ARTICLE IV
DEFINED CONTRIBUTION PLANS
4.1 LTSPMEs AND RSPSPs.
(a) MANAGEMENT SAVINGS PLAN TRUSTS. Effective Immediately after the
Distribution Date, Lucent shall establish, or cause to be established,
separate trusts qualified under Code Section 401(a), exempt from taxation
under Code Section 501(a)(1), and forming part of the Lucent LTSPME and Lucent
RSPSP, which shall be participating trusts in the AT&T Management Savings
Group Trust.
(b) ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS. Effective Immediately
after the Distribution Date: (i) the Lucent LTSPME and the Lucent RSPSP shall
assume and be solely responsible for all Liabilities to or relating to
Transferred Individuals under the AT&T LTSPME and the AT&T RSPSP, respectively;
and (ii) AT&T shall cause the accounts of the Transferred Individuals under the
AT&T LTSPME and the AT&T RSPSP which are held by their related trusts as of the
Close of the Distribution Date to be transferred to the Lucent LTSPME and the
<PAGE>
Lucent RSPSP, respectively, and their related trusts, and Lucent shall
cause such transferred accounts to be accepted by such plans and trusts.
Effective no later than Immediately after the Distribution Date, Lucent shall
use its reasonable best efforts to enter into such agreements satisfactory to
Lucent to accomplish such assumptions and transfers, the maintenance of the
necessary participant records, the appointment of Fidelity Institutional Trust
Company as initial trustee under the Lucent LTSPME and the Lucent RSPSP, and the
engagement of Fidelity Records Management Company as initial recordkeeper under
such plans.
4.2 LTSSPS AND LESOPS.
(a) OCCUPATIONAL SAVINGS PLAN TRUSTS. Effective Immediately after the
Distribution Date, Lucent shall establish, or cause to be established, a
separate trust, qualified in accordance with Code Section 401(a), exempt from
taxation under Code Section 501(a)(1), and forming part of the Lucent LTSSP,
which shall be a participating trust in the AT&T Occupational Savings Group
Trust.
(b) ASSUMPTION OF LTSSP LIABILITIES. Effective Immediately after the
Distribution Date: (i) the Lucent LTSSP shall assume and be solely responsible
for all Liabilities to or relating to Transferred Individuals under the AT&T
LTSSP, other than Liabilities referred to in Section 4.2(c); and (ii) AT&T shall
cause the accounts of the Transferred Individuals under the AT&T LTSSP which are
held by its related trust as of the Close of the Distribution Date to be
transferred to the Lucent LTSSP and its related trust, and Lucent shall cause
such transferred accounts to be accepted by such plans and trusts. Effective no
later than Immediately after the Distribution Date, Lucent shall use its
reasonable best efforts to enter into agreements satisfactory to Lucent to
accomplish such assumption and transfer, the maintenance of the necessary
participant records, the appointment of the then-current trustee under the AT&T
LTSSP as initial trustee under the Lucent LTSSP, and the engagement of the
then-current recordkeeper of the AT&T LTSSP as initial recordkeeper under such
plans.
(c) LEVERAGED STOCK OWNERSHIP PLAN.
(i) Effective Immediately after the Distribution Date, Lucent shall
establish, or cause to be established, a separate trust (the "Lucent LESOP
Trust"), qualified in accordance with Code Section 401(a), exempt from taxation
under Code Section 501(a), and forming part of the Lucent LTSSP.
(ii) Before the Distribution Date, AT&T and Lucent shall use their
reasonable best efforts to renegotiate the note agreement between Bankers Trust
Company, as trustee of the AT&T LESOP, and various lenders dated March 9, 1990
(the "Existing Acquisition Loan") so that it is restructured into two note
agreements for two loans, the principal amount of one being attributable to the
accounts to be transferred to the Lucent LESOP Trust pursuant to Section
4.2(c)(iii) (the "Lucent Acquisition Loan") and the principal amount of the
other being attributable to the accounts remaining in the AT&T LESOP (the "AT&T
Acquisition Loan"). The principal amount of the Lucent Acquisition Loan shall be
determined by multiplying the principal amount of the Existing Acquisition Loan
as of the Distribution Date by the fraction described in Section 4.2(c)(iii).
AT&T and Lucent shall use their reasonable best efforts to cause the terms of
the AT&T Acquisition Loan and the Lucent Acquisition Loan to be as favorable to
Lucent and AT&T, respectively, as the terms of the Existing Acquisition Loan,
and, to the extent permitted by applicable law, including Code Section 133, the
terms of the Lucent Acquisition Loan to be no less favorable to Lucent and the
Lucent LESOP Trust than the terms of the AT&T Acquisition Loan are to AT&T and
the AT&T LESOP Trust.
(iii) Effective Immediately after the Distribution Date: (A) the Lucent
LTSSP shall assume and be solely responsible for all Liabilities to or relating
to Transferred Individuals under the AT&T LTSSP that relate to, arise out of or
result from the AT&T LESOP; (B) AT&T shall cause the
<PAGE>
accounts of the Transferred Individuals under the AT&T LTSSP which are held by
the AT&T LESOP Trust as of the Close of the Distribution Date to be
transferred to the Lucent LTSSP and the Lucent LESOP Trust; (C) if the
Existing Acquisition Loan has been restructured into, and subject to the terms
of, the AT&T Acquisition Loan and the Lucent Acquisition Loan, AT&T shall
cause the trustee of the AT&T LESOP Trust to transfer to the Lucent LESOP
Trust a portion of the assets held in the "Suspense Account" (as defined in
Article 20 of the AT&T LTSSP) attributable to the Transferred Individuals,
determined by multiplying the number of shares of AT&T Common Stock and the
fair market value of any other assets held in such suspense account as of the
Close of the Distribution Date by a fraction, the numerator of which is the
amount deemed to be employer matching contributions attributable to Lucent
Individuals and other employees of Lucent and the Lucent Entities for the
latest calendar month that ends on or before the Distribution Date, and the
denominator of which is the total amount deemed to be employer matching
contributions for all participants in the AT&T LTSSP for such calendar month;
and (D) Lucent shall cause all accounts transferred pursuant to clauses (B)
and (C) to be accepted by such plan and trust. Effective no later than
Immediately after the Distribution Date, Lucent shall use its reasonable best
efforts to enter into agreements acceptable to Lucent to accomplish such
assumption and transfers, the maintenance of the necessary participant and
suspense account records, the appointment of Bankers Trust Company as initial
trustee of the Lucent LESOP Trust, and the engagement of the then-current
recordkeeper of the AT&T LESOP as initial recordkeeper of the Lucent LESOP.
(iv) The parties intend that, as the result of the above-described
transactions, after the Close of the Distribution Date, each of them will be the
sponsor of an "employee stock ownership plan" as defined in Code Section
4975(e)(7), and that the AT&T Acquisition Loan and Lucent Acquisition Loan will
be exempt from the prohibited transaction rules of the Code and ERISA pursuant
to Code Section 4975(d)(3).
(v) The parties acknowledge that, as a result of the transfer of assets
described in Section 4.2(c)(iii) and the Distribution, both the AT&T LESOP and
the Lucent LESOP will, after the Close of the Distribution Date, hold shares of
both AT&T Common Stock and Lucent Common Stock. The parties further acknowledge
that applicable law generally prohibits such plans from holding securities that
are not "qualifying employer securities" within the meaning of Code Section 409
for more than a reasonable time after the Distribution Date unless the IRS
grants an extension of time. Accordingly, AT&T and Lucent shall each request the
IRS to grant an extension of such holding period as their financial advisors
shall deem prudent to allow the AT&T LESOP to dispose of the shares of Lucent
Common Stock received by it as a result of the Distribution and to allow the
Lucent LESOP to dispose of the shares of AT&T Common Stock it holds as a result
of the transfer of accounts pursuant to Section 4.2(c)(iii), and, in each case,
to reinvest in qualifying employer securities, in a manner consistent with the
best interests of the LESOP participants. In furtherance of such dispositions
and reinvestments, AT&T and Lucent shall take all actions necessary or
appropriate to permit the exchange of shares of Lucent Common Stock held by the
AT&T LESOP Trust for shares of AT&T Common Stock held by the Lucent LESOP Trust,
including the engagement of a fiduciary not affiliated with either AT&T or
Lucent to advise the parties regarding the time and manner (including the
exchange ratio) of such exchange. If the restructuring of the Existing
Acquisition Loan results in any prepayment or "make whole" penalty, or if the
interest rate payable pursuant to the Lucent Acquisition Loan exceeds the
interest rate payable pursuant to the AT&T Acquisition Loan or vice versa, then
Lucent and AT&T and their respective LESOPs shall bear the cost of such
penalties and the excess interest expense so incurred in proportion to the
relative initial principal amounts of the Lucent Acquisition Loan and the AT&T
Acquisition Loan, taking into account any tax benefits realized or tax
detriments suffered in connection therewith.
(vi) Notwithstanding the foregoing, if it is determined by AT&T or Lucent
before the Distribution Date that the restructuring of the Existing Acquisition
Loan is not practicable on commercially reasonable terms and conditions, then,
unless AT&T and Lucent agree otherwise, AT&T shall terminate the AT&T
LESOP and its related trust before the Distribution Date, and shall direct the
trustee of the AT&T LESOP trust to sell sufficient shares of AT&T Common Stock
held under the AT&T LESOP trust to repay the Existing Acquisition Loan. Any
remaining "Financed Shares" (as defined in the AT&T LESOP) that are released
after repayment of the loan and not the subject of any subsequent refinancing
shall be used by the Participating Companies to make matching contributions with
respect to periods before the Close of the Distribution Date to the AT&T LTSSP
in accordance with their obligations under the AT&T LTSSP.
4.3 ESOPS.
(a) ESOP TRUST. Effective Immediately after the Distribution Date, Lucent
shall establish, or cause to be established, a separate trust (the "Lucent
ESOP Trust"), qualified in accordance with Code Section 401(a), exempt from
taxation under Code Section 501(a), and forming part of the Lucent ESOP.
(b) ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS.
(i) Effective Immediately after the Distribution Date, the Lucent ESOP
shall assume and be solely responsible for all Liabilities to or relating to
Transferred Individuals under the AT&T ESOP, and AT&T shall cause the accounts
of the Transferred Individuals under the AT&T ESOP as of the Close of the
Distribution Date to be transferred to the Lucent ESOP and the Lucent ESOP
Trust, and Lucent shall cause such plan and trust to accept such assets.
Effective no later than Immediately after the Distribution Date, Lucent shall
use its reasonable best efforts to enter into agreements acceptable to Lucent to
accomplish such assumptions and transfers, the maintenance of the necessary
participant records, the appointment of Midlantic Bank as initial trustee of the
Lucent ESOP Trust and the engagement of American Transtech Inc. as initial
recordkeeper of the Lucent ESOP.
(ii) The parties acknowledge that, as a result of the transfer of assets
described in Section 4.3(b)(i) and the Distribution, both the AT&T ESOP and the
Lucent ESOP will, after the Distribution Date, hold shares of both AT&T Common
Stock and Lucent Common Stock and that, in order to continue to qualify as
employee stock ownership plans, each such plan will be required to dispose of
securities that are not qualifying employer securities and reinvest in
qualifying employer securities. The parties further acknowledge that applicable
law generally prohibits such plans from holding securities that are not
"qualifying employer securities" within the meaning of Code Section 409 for more
than a reasonable time after the Distribution Date unless the IRS grants an
extension of time. Accordingly, AT&T and Lucent shall each request the IRS to
grant an extension of such holding period as their financial advisors shall deem
prudent to allow the AT&T ESOP to dispose of the shares of Lucent Common Stock
received by it as a result of the Distribution and to allow the Lucent ESOP to
dispose of the shares of AT&T Common Stock it holds as a result of the transfer
of accounts pursuant to Section 4.3(b)(i), and, in each case, to reinvest in
qualifying employer securities, in a manner consistent with the best interests
of the ESOP participants. In furtherance of such dispositions and reinvestments,
AT&T and Lucent shall take all actions necessary or appropriate to permit the
exchange of shares of Lucent Common Stock held by the AT&T ESOP Trust for shares
of AT&T Common Stock held by the Lucent ESOP Trust, including the engagement of
a fiduciary not affiliated with either AT&T or Lucent to advise the parties
regarding the time and manner (including the exchange ratio) of such exchange.
ARTICLE V
HEALTH AND WELFARE PLANS
5.1 ESTABLISHMENT OF MIRROR HEALTH AND WELFARE PLAN TRUSTS. On or before
the Distribution Date, Lucent shall establish, or cause to be established: (a)
the Lucent Health Plans
<PAGE>
Benefit Trust, for the purpose of funding claims, other than for
post-retirement benefits, under the Lucent Health Plans; (b) the Lucent
Management VEBA, for the purpose of funding claims for post-retirement benefits
of employees not covered by any collective bargaining agreement under the Lucent
Health Plans; (c) the Lucent Union VEBA, for the purpose of funding claims for
post-retirement benefits under the Lucent Health Plans of employees covered by a
collective bargaining agreement; and (d) the Lucent LTD VEBA, for the purpose of
funding long-term disability and disability pension benefits under the Lucent
Health and Welfare Plans. Such trusts shall meet the requirements of Code
Sections 419, 419A, 501(a), and 501(c)(9). Lucent shall use its reasonable best
efforts to enter into agreements satisfactory to Lucent for the appointment as
initial trustee under each such trust of the trustee of the corresponding AT&T
trust.
5.2 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES.
(a) Immediately after the Distribution Date, all Liabilities to or relating
to Transferred Individuals under the AT&T Health and Welfare Plans shall cease
to be Liabilities of the AT&T Health and Welfare Plans and shall be assumed by
the corresponding Lucent Health and Welfare Plans.
(b) Notwithstanding Section 5.2(a), all treatments which have been
pre-certified for or are being provided to a Transferred Individual as of the
Close of the Distribution Date shall be provided without interruption under the
appropriate AT&T Health and Welfare Plan until such treatment is concluded or
discontinued pursuant to applicable plan rules and limitations, but Lucent shall
continue to be responsible for all Liabilities relating to, arising out of or
resulting from such on-going treatments as of the Close of the Distribution
Date.
(c) Lucent shall assume, effective Immediately after the Distribution Date,
all Liabilities relating to, arising out of or resulting from special
commitments made by AT&T before the Close of the Distribution Date to provide
benefits to or with respect to Transferred Individuals for custodial care or
other services not covered by any AT&T Health and Welfare Plans (but only if
such special commitments were made with the prior written consent of the Lucent
Senior Vice President, Human Resources or his delegate, to the extent such
commitments are made after the Participation Commencement Date). Before the
Close of the Distribution Date, AT&T shall transfer to Lucent copies of all
documentation, and a complete written description, of the terms of all such
special commitments to Transferred Individuals.
5.3 VEBA ASSET TRANSFERS. This Section 5.3 shall govern the transfer of
assets from the AT&T Health Trusts (other than the AT&T Health Plans Benefit
Trust) to the corresponding Lucent Health Trusts and from the AT&T LTD VEBA to
the Lucent LTD VEBA, except to the extent that Section 5.5 is applicable. As
soon as practicable after the Close of the Distribution Date, AT&T shall
determine the aggregate present value, as of the Close of the Distribution Date,
of the future benefit obligations of each AT&T Plan funded by a VEBA ("VEBA
Plans"), with respect to Transferred Individuals who are eligible to receive
benefits under the applicable VEBA Plan as of the Close of the Distribution Date
(and, in the case of any post-retirement health benefits, who have terminated
employment as of the Close of the Distribution Date). As soon as practicable
after such determination is made, there shall be transferred from each AT&T VEBA
to the corresponding Lucent VEBA an amount of assets having a fair market value
on the date of transfer equal to the amount determined by dividing such
aggregate present value of future benefit obligations for the applicable VEBA
Plans of Lucent by the aggregate of all such present values of all the
applicable VEBA Plans of AT&T and all the applicable VEBA Plans of Lucent,
multiplied by the fair market value of the assets of the AT&T VEBA on the date
of transfer, adjusted to take into account the extent to which AT&T and/or
Lucent has opted to forego reimbursement from the applicable VEBA of any benefit
obligation that was paid by AT&T or Lucent, as applicable, on or after the
Participation Commencement Date and before the Close of the Distribution Date.
<PAGE>
5.4 TRANSFER OF RETIREMENT FUNDING ACCOUNT ASSETS. This Section 5.4 shall
apply to AT&T Health and Welfare Plans with group term life insurance policies
that have RFAs maintained for the purpose of accumulating, through employer
contributions in advance of employee retirements, a fund to be used to pay all
or a portion of the costs for continuing life insurance protection for employees
after their retirement. As soon as practicable after the Close of the
Distribution Date, there shall be transferred to the corresponding RFA of Lucent
an amount of assets (determined by AT&T subject to audit by Coopers & Lybrand)
having a fair market value as of the Close of the Distribution Date equal to the
product of (a) the present value, as of the Close of the Distribution Date, of
the future benefit obligation with respect to Transferred Individuals to be
discharged from the RFA, divided by the present value of the future benefit
obligations with respect to all individuals whose benefits are to be discharged
from the RFA assets as of the Close of the Distribution Date times (b) the fair
market value of all RFA assets as of the Close of the Distribution Date. AT&T
and Lucent shall adopt, and shall use their reasonable best efforts to cause
their insurers to adopt, procedures to implement such asset transfers in a
reasonable and expeditious manner that is consistent with the underlying group
life insurance contracts and applicable legal requirements. Nothing in this
Agreement shall be interpreted to provide that any assets so transferred have
reverted to AT&T or Lucent.
5.5 VEBAs FUNDED WITH TRUST-OWNED LIFE INSURANCE. This Section 5.5 shall
govern transfers of assets of AT&T VEBAs that are funded, in whole or in part,
with trust-owned life insurance policies.
(a) GENERAL PROVISIONS. As soon as practicable after the Close of the
Distribution Date, AT&T shall cause each such AT&T VEBA to transfer to the
corresponding Lucent VEBA such assets as are attributable to Transferred
Individuals who are eligible to receive post-retirement health benefits under
the AT&T Health Plans with respect to such AT&T VEBA; provided, that AT&T shall
not be required to cause such transfer to occur before AT&T has obtained
appropriate rulings from regulatory agencies indicating that the transfers do
not contravene any statute, regulation, or technical pronouncement.
(b) AT&T MANAGEMENT VEBA: TRUST-OWNED LIFE INSURANCE (VEBA). To
accomplish the transfers required by Section 5.5(a), all or a portion of the
Trust-Owned Life Insurance (VEBA) policies and any residual assets in the AT&T
Management VEBA shall be allocated between the trustee of the AT&T Management
VEBA, and the trustee of the Lucent Management VEBA, in accordance with the
following procedures.
(i) AT&T shall determine the extent to which the assets of the AT&T
Management VEBA are sufficient to satisfy all Liabilities to or relating to
Transferred Individuals who have terminated employment and are eligible to
receive post-retirement health benefits under the AT&T Health Plans with respect
to the AT&T Management VEBA as of the Close of the Distribution Date.
(ii) AT&T shall instruct the trustee of the AT&T Management VEBA to
transfer one of the Trust-Owned Life Insurance (VEBA) policies to the Lucent
Management VEBA. AT&T shall determine which policy shall be transferred based on
the present values of relative post-retirement health liabilities (benefit
obligations) retained by AT&T and assumed by Lucent pursuant to this Agreement,
without regard to which entity employs the insured individuals, provided, that
before such transfer, AT&T shall instruct the trustee of the AT&T Management
VEBA to adjust and/or allocate the cash values under the Trust-Owned Life
Insurance (VEBA) policies such that the policy to be transferred to the Lucent
Management VEBA shall have a proportionate cash value consistent with the
proportion of post-retirement health liabilities (benefit obligations) to be
assumed by Lucent. Upon such assignment, the trustee of the Lucent Management
VEBA shall assume and be solely responsible for all Liabilities relating to,
arising out of or resulting from such policy, including the payment of any
premiums and any loan repayments required, and shall be entitled to all
benefits, under the policy.
<PAGE>
(c) OTHER ASSET TRANSFERS. To accomplish the transfers required by Section
5.5(a), a portion of the assets of the AT&T Management VEBA (other than
Trust-Owned Life Insurance (VEBA) policies) shall be transferred to the Lucent
Management VEBA to the extent necessary so that immediately after such
transfer and the transfer pursuant to Section 5.5(b), the ratio of the assets
of each such VEBA trust to the liabilities payable therefrom as described in
Section 5.5(b)(i), is equal.
(d) ADMINISTRATION. Lucent and AT&T shall share all information necessary
to determine when and whether any individuals insured by the Trust-Owned Life
Insurance (VEBA) policies owned by the trustees of the AT&T Management VEBA and
Lucent Management VEBA, respectively, are deceased, and as otherwise necessary
to administer their respective Management VEBAs.
5.6 CONTRIBUTIONS TO, INVESTMENTS OF AND DISTRIBUTIONS FROM VEBAS. Before
the Close of the Distribution Date, AT&T shall have sole authority to direct the
trustee of the AT&T Health Trusts and AT&T LTD VEBA as to the timing and manner
of any contributions to the AT&T Health Trusts and AT&T LTD VEBA, the investment
of any trust assets, and the distributions and/or transfers of trust assets to
AT&T, Lucent, any Participating Company in the trusts, any paying agent, any
successor trustee, or any other Person.
5.7 VENDOR CONTRACTS.
(a) THIRD-PARTY ASO CONTRACTS.
(i) AT&T shall use its reasonable best efforts to amend each administrative
services only contract with a third-party administrator that relates to any of
the AT&T Health and Welfare Plans (an "ASO Contract") in existence as of the
date of this Agreement to permit Lucent to participate in the terms and
conditions of such ASO Contract from Immediately after the Distribution Date
until the expiration of the financial fee guarantees in effect under such ASO
Contract as of the Close of the Distribution Date. AT&T shall use its reasonable
best efforts to cause all ASO Contracts into which AT&T enters after the date of
this Agreement but before the Close of the Distribution Date (including
contracts with a subrogation vendor, a COBRA administration vendor and a
Disability 2000 vendor) to allow Lucent to participate in the terms and
conditions thereof effective Immediately after the Distribution Date on the same
basis as AT&T.
(ii) AT&T shall have the right to determine, and shall promptly notify
Lucent of, the manner in which Lucent's participation in the terms and
conditions of ASO Contracts as set forth above shall be effectuated. The
permissible ways in which Lucent's participation may be effectuated include
automatically making Lucent a party to the ASO Contracts or obligating the third
party to enter into a separate ASO Contract with Lucent providing for the same
terms and conditions as are contained in the ASO Contracts to which AT&T is a
party. Such terms and conditions shall include the financial and termination
provisions, performance standards, methodology, auditing policies, quality
measures, reporting requirements and target claims. Lucent hereby authorizes
AT&T to act on its behalf to extend to Lucent the terms and conditions of the
ASO Contracts. Lucent shall fully cooperate with AT&T in such efforts, and
Lucent shall not perform any act, including discussing any alternative
arrangements with any third party, that would prejudice AT&T's efforts.
(iii) If AT&T determines that it will not be successful in negotiating
contract language that will permit compliance with Sections 5.7(a)(i) and
5.7(a)(ii), AT&T shall so notify Lucent promptly, but in no event later than
July 20,1996, and after such notification, Lucent shall be released from the
restriction contained in the last sentence of Section 5.7(a)(ii). In such case,
AT&T shall offer a contingency plan for the administration of the portion of the
Lucent Health and Welfare Plans affected by the unavailability of such ASO
Contract, including, if possible, an offer by the third-party administrator
under the relevant ASO Contract of its services under a separate contract with
Lucent,
<PAGE>
with terms and conditions as similar as practicable to those of the ASO
Contract with AT&T. Lucent shall, effective Immediately after the Distribution
Date, either adopt its own contingency plan or the contingency plan
established by AT&T for such arrangement.
(b) GROUP INSURANCE POLICIES.
(i) This Section 5.7(b) applies to group insurance policies not subject to
allocation or transfer pursuant to the foregoing provisions of this Article V
("Group Insurance Policies").
(ii) AT&T shall use its reasonable best efforts to amend each Group
Insurance Policy in existence as of the date of this Agreement for the provision
or administration of benefits under the AT&T Health and Welfare Plans to permit
Lucent to participate in the terms and conditions of such policy from
Immediately after the Distribution Date until the expiration of the financial
fee and rate guarantees in effect under such Group Insurance Policy as of the
Close of the Distribution Date. AT&T shall use its reasonable best efforts to
cause all Group Insurance Policies into which AT&T enters or which AT&T renews
after the date of this Agreement but before the Close of the Distribution Date
to allow Lucent to participate in the terms and conditions thereof effective
Immediately after the Distribution Date on the same basis as AT&T.
(iii) Lucent's participation in the terms and conditions of each such Group
Insurance Policy shall be effectuated by obligating the insurance company that
issued such insurance policy to AT&T to issue one or more separate policies to
Lucent. Such terms and conditions shall include the financial and termination
provisions, performance standards and target claims. Lucent hereby authorizes
AT&T to act on its behalf to extend to Lucent the terms and conditions of such
Group Insurance Policies. Lucent shall fully cooperate with AT&T in such
efforts, and Lucent shall not perform any act, including discussing any
alternative arrangements with third parties, that would prejudice AT&T's
efforts.
(iv) If AT&T determines that it will not be successful in negotiating
policy provisions that will permit compliance with Sections 5.7(b)(ii) and
5.7(b)(iii), AT&T shall so notify Lucent promptly, but in no event later than
July 20, 1996, and after such notification, Lucent shall be released from the
restriction contained in the last sentence of Section 5.7(b)(iii). In such case,
AT&T shall use its reasonable best efforts to either continue to cover Lucent
under its Group Insurance Policies or procure a separate policy for Lucent until
Lucent has procured such separate insurance policy or made other arrangements
for replacement coverage, and Lucent shall bear all costs incurred by AT&T to
continue such coverage.
(c) HMO AGREEMENTS.
(i) Before the Distribution Date, AT&T shall use its reasonable best
efforts to amend all letter agreements with HMOs that provide medical services
under the AT&T Medical Plans for 1996 ("HMO Agreements") in existence as of the
date of this Agreement to permit Lucent to participate in the terms and
conditions of such HMO Agreements, in each case, from Immediately after the
Distribution Date until December 31, 1996. AT&T shall use its reasonable best
efforts to cause all HMO Agreements into which AT&T enters after the date of
this Agreement but before the Close of the Distribution Date to allow Lucent to
participate in the terms and conditions of such HMO Agreements from Immediately
after the Distribution Date until December 31, 1996 on the same basis as AT&T.
(ii) AT&T shall have the right to determine, and shall promptly notify
Lucent of, the manner in which Lucent's participation in the terms and
conditions of all HMO Agreements as set forth above shall be effectuated. The
permissible ways in which Lucent's participation may be effectuated include
automatically making Lucent a party to the HMO Agreements or obligating the HMOs
to enter into letter agreements with Lucent which are identical to the HMO
Agreements. Such terms and conditions shall include the financial and
termination provisions of the HMO Agreements. Lucent hereby authorizes
<PAGE>
AT&T to act on its behalf to extend to Lucent the terms and conditions of
the HMO Agreements. Lucent shall fully cooperate with AT&T in such efforts, and
Lucent shall not perform any act, including discussing any alternative
arrangements with any third-party, that would prejudice AT&T's efforts.
(iii) If AT&T determines that it will not be successful in negotiating
arrangements that will permit compliance with Sections 5.7(c)(i) and 5.7(c)(ii),
AT&T shall so notify Lucent promptly, but no event later than July 20, 1996, and
after such notification, Lucent shall be released from the restriction contained
in the last sentence of Section 5.7(c)(ii). In such case, Lucent shall enter
into letter agreements with one or more HMOs to provide benefits under the
Lucent Medical Plans, at least through December 31, 1996, in the geographic area
serviced by the HMOs covered by AT&T's notice. AT&T shall, if requested by
Lucent and permitted by the HMOs, arrange for the continued provision under its
HMO Agreements of medical services to Lucent Medical Plan participants from
Immediately after the Distribution Date through December 31, 1996, and Lucent
shall bear all costs incurred by AT&T to continue such services.
(iv) Notwithstanding anything in this Article V to the contrary, Lucent
shall have the sole discretion to determine which HMOs to offer to the
participants in the Lucent Medical Plans for 1997 and subsequent years, and all
HMO Agreements in which Lucent participates pursuant to this Section 5.7(c)
shall provide Lucent with the right to discontinue its participation effective
January 1, 1997.
(d) EFFECT OF CHANGE IN RATES. AT&T and Lucent shall use their reasonable
best efforts to cause each of the insurance companies, HMOs, point-of-service
vendors and third-party administrators providing services and benefits under the
AT&T Health and Welfare Plans and the Lucent Health and Welfare Plans to
maintain the premium and/or administrative rates based on the aggregate number
of participants in both the AT&T Health and Welfare Plans and the Lucent Health
and Welfare Plans through the expiration of the financial fee or rate guarantees
in effect as of the Close of the Distribution Date under the respective ASO
Contracts, Group Insurance Policies, and HMO Agreements. To the extent they are
not successful in such efforts, AT&T and Lucent shall each bear the revised
premium or administrative rates attributable to the individuals covered by their
respective Health and Welfare Plans.
5.8 PROCEDURES FOR AMENDMENTS TO PLANS, PLAN DESIGNS, ADMINISTRATIVE
PRACTICES, AND VENDOR CONTRACTS.
(a) AMENDMENTS TO PLAN DOCUMENTS. From Immediately after the Distribution
Date through December 31, 1998, no amendment to any AT&T Health and Welfare Plan
or Lucent Health and Welfare Plan shall be effective unless the party intending
to amend its Health and Welfare Plan has: (i) given the other party written
notice of the intention to amend, accompanied by a copy of the proposed
amendment, at least 30 days in advance of the earlier of (A) the proposed
amendment effective date, or (B) the proposed amendment adoption date; (ii)
agreed to bear all of the costs of implementing the amendment incurred by
third-party administrators, insurance companies and other vendors and passed
through to one or both of the parties; and (iii) certified to the other party,
and provided to the other party the written concurrence of all third-party
administrators, insurance companies and other vendors providing services in
connection with such Plan, that (after taking into account the effect of clause
(ii)) the proposed amendment to the Health and Welfare Plan will have no
material adverse impact (financial, administrative or otherwise) on the
corresponding Health and Welfare Plan sponsored by the other party.
(b) CHANGES IN VENDOR CONTRACTS, GROUP INSURANCE POLICIES, PLAN
DESIGN, AND ADMINISTRATION PRACTICES AND PROCEDURES.
(i) From Immediately after the Distribution Date through the earlier of the
expiration of the financial fee or rate guarantees in effect as of the Close
of the Distribution Date under the applicable ASO Contract, Group Insurance
Policy or HMO Agreement, and December 31, 1998, neither AT&T nor
<PAGE>
Lucent shall materially modify, or take other action which would have a
material effect on, any of the following (each such modification, a "Change")
without complying with Section 5.8(b)(ii): (A) the termination date,
administration, or operation of (1) an ASO contract between AT&T or Lucent and a
third-party administrator, (2) a Group Insurance Policy issued to AT&T or
Lucent, or (3) an HMO Agreement with AT&T or Lucent, in each case, the material
terms and conditions of which contracts and policies are extended to Lucent or
to which Lucent becomes a party pursuant to Section 5.7; (B) the design of
either an AT&T Health and Welfare Plan or a Lucent Health and Welfare Plan; or
(C) the financing, operation, administration or delivery of benefits under
either an AT&T Health and Welfare Plan or a Lucent Health and Welfare Plan.
(ii) Neither AT&T nor Lucent shall make any Change unless the party
intending to make the Change has: (A) given the other party written notice of
the intention to make the Change, accompanied by a written description of the
Change, at least 180 days in advance of the proposed effective date of the
Change; (B) agreed to bear all of the costs of implementing the Change which are
incurred by all third-party administrators, insurance companies, HMOs and other
vendors and passed through to one or both of the parties; and (C) certified to
the other party, and provided to the other party the written concurrence of each
third-party administrator, insurance company, HMO or other vendor associated
with or performing services in connection with the Health and Welfare Plan
affected by the Change, that (after taking into account the effect of clause
(B)) the proposed Change will have no material adverse impact (financial,
administrative or otherwise) on the corresponding Health and Welfare Plan
sponsored by the other party.
(iii) SUBMISSION TO HEALTH, WELFARE AND LIFE INSURANCE COMMITTEE. If AT&T
or Lucent desires to make a Change that requires compliance with, but cannot
satisfy all of the conditions of, Section 5.8(b)(ii), the party desiring to make
the Change may submit a written request for approval of the Change, accompanied
by a written description of the Change, to the HWLI Committee. If such a request
is made, the desired Change may be implemented only after the Change is approved
in writing by the HWLI Committee.
(c) EMPLOYEE CONTRIBUTIONS. Notwithstanding the provisions of Sections
5.8(a) and 5.8(b), as of the first January 1 after the Distribution Date, AT&T
and Lucent shall each have the independent right, in its sole discretion and
without compliance with Sections 5.8(a) and 5.8(b), to increase or decrease the
amount of employee contributions under their respective Health and Welfare
Plans.
5.9 HEALTH, WELFARE AND LIFE INSURANCE COMMITTEE. From the date of this
Agreement through December 31, 1998, the management of the ASO Contracts, Group
Insurance Policies, and HMO Agreements and other vendor contracts that are
subject to Section 5.8 and the administration of the AT&T Health and Welfare
Plans and the Lucent Health and Welfare Plans associated therewith shall be
conducted under the supervision of the HWLI Committee. The HWLI Committee shall
be comprised of an equal number of representatives from AT&T and Lucent at the
District Manager or equivalent level, and shall provide strategic oversight and
direction of the cohesive administration of the AT&T Health and Welfare Plans
and the Lucent Health and Welfare Plans. Issues that cannot be resolved by the
HWLI Committee shall be decided, at the request of either party, by the
Executive Oversight Committee comprised of the Lucent Senior Vice
President-Human Resources and the AT&T Senior Vice President-Benefits and
Compensation.
5.10 AT&T SICKNESS AND ACCIDENT DISABILITY, LONG TERM DISABILITY AND
PENSION DISABILITY BENEFITS.
(a) ADMINISTRATION OF AT&T SADBP CLAIMS. AT&T shall administer claims
incurred under the AT&T SADBP by Transferred Individuals, Lucent Individuals and
other employees and former employees of Lucent and the Lucent Entities on or
after the Participation Commencement Date
<PAGE>
but before the Close of the Distribution Date, to the extent such claims are
not administered by Lucent pursuant to the terms of the AT&T SADBP as in
effect on the date of this Agreement. Any determination made or settlements
entered into by AT&T with respect to such claims shall be final and binding.
If claims incurred before the Close of the Distribution Date under the AT&T
SADBP by Transferred Individuals, Lucent Individuals and other employees and
former employees of Lucent and the Lucent Entities were administered by Lucent
before the Close of the Distribution Date, such claims shall continue to be
administered by Lucent after the Close of the Distribution Date, unless
outsourced pursuant to Section 5.10(b). AT&T shall transfer to Lucent,
effective Immediately after the Distribution Date, responsibility for
administering all claims incurred by Transferred Individuals, Lucent
Individuals and other employees and former employees of Lucent and the Lucent
Entities before the Close of the Distribution Date that are administered by
AT&T as of the Close of the Distribution Date. Lucent shall administer such
claims in the same manner, and using the same methods and procedures, as AT&T
used in administering such claims. Lucent shall have sole discretionary
authority to make any necessary determinations with respect to such claims,
including entering into settlements with respect to such claims.
(b) OUTSOURCING OF CLAIMS. AT&T, pursuant to its Disability 2000 project or
otherwise, shall have the right to engage a third-party administrator or
insurance company to administer ("outsource") claims incurred under the AT&T
SADBP that are being administered by AT&T pursuant to Section 5.10(a), claims
incurred under the AT&T LTD Plans, and claims incurred under the pension
disability provisions of the AT&T Pension Plans, including claims incurred by
Transferred Individuals, Lucent Individuals and other employees and former
employees of Lucent and the Lucent Entities before the Close of the Distribution
Date. AT&T may determine the manner and extent of such outsourcing, including
the selection of one or more third-party administrators or insurance companies
and the ability to transfer the liability for such claims to one or more
independent insurance companies. AT&T shall promptly notify Lucent of its intent
to outsource such claims, and the material terms and condition of the
outsourcing, before the effective date thereof. Lucent shall have the right to
notify AT&T, within a reasonable period of time after Lucent receives AT&T's
notice of intent to outsource, of Lucent's desire to participate in the proposed
outsourcing. If Lucent gives such notice, all claims incurred by Transferred
Individuals, Lucent Individuals and other employees and former employees of
Lucent and the Lucent Entities before the Close of the Distribution Date that
are administered by Lucent pursuant to Section 5.10(a) shall be included in the
proposed outsourcing. In the event Lucent elects to participate in such
outsourcing, Lucent shall be bound by the terms and conditions thereof
(including all consequences of any transfer of liability) and to any
determinations and settlements entered into by the third-party administrator
pursuant thereto.
5.11 POST-RETIREMENT HEALTH AND LIFE INSURANCE BENEFITS.
(a) As soon as practicable after the Distribution Date, AT&T shall provide
Lucent with a list of all Transferred Individuals who are, to the best knowledge
of AT&T, eligible to receive retiree medical or dental coverage under the AT&T
Health Plans as of the Distribution Date and/or post-retirement life insurance
coverage under the AT&T Group Life Program, and the type of retiree medical or
dental coverage and the level of life insurance coverage for which they are
eligible, as applicable.
(b) Effective Immediately after the Distribution Date, Lucent shall (i)
assume and continue through December 31, 1998 the company-sponsored retiree care
accounts provided under the AT&T Medical Expense Plan for Retired Employees
pursuant to collective bargaining agreements for all Transferred Individuals
under the Lucent Medical Expense Plan for Retired Employees and (ii) honor and
maintain all other-covered-charges buy-up lifetime maximum elections made by
Transferred Individuals under the AT&T Medical Expense Plan for Retired
Employees.
5.12 GROUP LIFE PROGRAMS. Effective as of the Close of the Distribution
Date, AT&T shall cause the insurance carrier that provides basic active life
insurance coverage, supplemental life insurance
<PAGE>
coverage, dependent life insurance coverage, accidental life insurance
coverage and the portion of the post-retirement life insurance benefit which
exceeds $50,000 per participant under the AT&T Group Life Program to: (a)
perform an experience rating; (b) allocate the applicable premium
stabilization reserves between AT&T and Lucent on an actuarial basis; (c)
allocate pending claim reserves based on actual claims data; and (d) allocate
unreported claim reserves based on expected claims by coverage.
5.13 COBRA AND DIRECT PAY. Through the Close of the Distribution Date, AT&T
shall be responsible for administering compliance with the health care
continuation coverage requirements of COBRA and the AT&T Health and Welfare
Plans with respect to Transferred Individuals, Lucent Individuals and other
employees and former employees of Lucent and the Lucent Entities and
beneficiaries and dependents thereof and Lucent and the Lucent Entities shall be
responsible for filing all necessary employee change notices with respect to
their respective employees in accordance with applicable AT&T policies and
procedures. Effective Immediately after the Distribution Date, Lucent shall
solely be responsible for administering compliance with the health care
continuation coverage requirements of COBRA and the Lucent Health and Welfare
plans, and, with respect to Transferred Individuals, the AT&T Health and Welfare
Plans.
5.14 LEAVE OF ABSENCE PROGRAMS AND FMLA.
(a) Through the Close of the Distribution Date, AT&T shall be responsible
for administering compliance with the AT&T Leave of Absence Programs and FMLA
with respect to Lucent Individuals and all other employees of Lucent and the
Lucent Entities. Lucent and the Lucent Entities shall be responsible for
determining whether their respective employees are eligible for leave under the
AT&T Leave of Absence Programs and FMLA in accordance with such programs and
FMLA, respectively.
(b) Effective Immediately after the Distribution Date: (i) Lucent shall
adopt, and shall cause each Lucent Entity to adopt, leave of absence programs
which are substantially identical in all Material Features to the AT&T Leave of
Absence Programs as in effect on the Distribution Date; (ii) Lucent shall honor,
and shall cause each Lucent Entity to honor, all terms and conditions of leaves
of absence which have been granted to any Transferred Individual under an AT&T
Leave of Absence Program or FMLA before the Close of the Distribution Date by
AT&T, Lucent, or a Lucent Entity, including such leaves that are to commence
after the Distribution Date; (iii) Lucent and each Lucent Entity shall be solely
responsible for administering leaves of absence and compliance with FMLA with
respect to their employees; and (iv) Lucent and each Lucent Entity shall
recognize all periods of service of Transferred Individuals with AT&T or an AT&T
Entity, as applicable, to the extent such service is recognized by AT&T for the
purpose of eligibility for leave entitlement under the AT&T Leave of Absence
Programs and FMLA; provided, that no duplication of benefits shall be required
by the foregoing.
(c) As soon as administratively possible after the Close of the
Distribution Date, AT&T shall provide to Lucent copies of all records pertaining
to the AT&T Leave of Absence Programs and FMLA with respect to all Transferred
Individuals to the extent such records have not been provided previously to
Lucent or a Lucent Entity.
5.15 AT&T WORKERS' COMPENSATION PROGRAM.
(a) ADMINISTRATION OF CLAIMS.
(i) Through the Close of the Distribution Date or such earlier date as may
be agreed by AT&T and Lucent, (A) AT&T shall continue to be responsible for the
administration of all claims that (1) are, or have been, incurred under the AT&T
WCP before the Close of the Distribution Date by Transferred Individuals, Lucent
Individuals and other employees and former employees of Lucent and the Lucent
Entities through the Close of the Distribution Date ("Lucent WCP Claims") and
(2) have been historically administered by AT&T or its insurance company, and
(B) Lucent shall continue to be
<PAGE>
responsible for the administration of all Lucent WCP Claims that have been
historically administered by the Lucent Business.
(ii) Effective immediately after the Distribution Date or such earlier date
as may be agreed by AT&T and Lucent, (A) Lucent shall, to the extent Legally
Permissible (as defined below), be responsible for the administration of all
Lucent WCP Claims, whether those claims were previously administered by AT&T or
Lucent, and (B) AT&T shall be responsible for the administration of all Lucent
WCP Claims not administered by Lucent pursuant to clause (A), whether previously
administered by AT&T or Lucent and whether under the self-insured or insured
portion of the AT&T WCP. Any determination made, or settlement entered into, by
either party or its insurance company with respect to Lucent WCP Claims for
which it is administratively responsible shall be final and binding upon the
other party.
(iii) Each party shall fully cooperate with the other with respect to the
administration and reporting of Lucent WCP Claims, the payment of Lucent WCP
Claims determined to be payable, and the transfer of the administration of any
Lucent WCP Claims to the other party as determined under Section 5.15(a)(ii).
Either party shall have the right to "outsource" (i.e., transfer the
administration of claims to a third party administrator or cause claims to be
paid through insurance) any and all Lucent WCP Claims for which it is
administratively responsible.
(iv) For purposes of this Section 5.15(a), "Legally Permissible" shall be
determined on a state-by-state basis, and shall mean that administration of
Lucent WCP Claims by Lucent both (A) is permissible under the applicable state's
workers' compensation laws (taking into account all relevant facts, including
that Lucent may have a self-insurance certificate in that state) and (B) would
not have a material adverse effect on AT&T's self-insurance certificate within
that state. If it is determined that, in a particular state, it is Legally
Permissible for Lucent to administer Lucent WCP Claims, then Lucent shall be
responsible for the administration of all Lucent WCP Claims incurred in that
state, whether previously administered by AT&T, Lucent, or an insurance company.
If it is determined that, in a particular state, it is not Legally Permissible
for Lucent to administer Lucent WCP Claims, then AT&T shall be responsible for
the administration of all Lucent WCP Claims incurred in that state, whether
previously administered by AT&T, Lucent, or an insurance company.
(b) SELF-INSURANCE STATUS.
(i) AT&T shall amend its certificates of self-insurance with respect to
workers' compensation and any applicable group insurance policies to include
Lucent until the Close of the Distribution Date, and Lucent shall fully
cooperate with AT&T in obtaining such amendments. All costs incurred by AT&T in
amending such certificates or group insurance policies, including filing fees,
adjustments of security and excess loss policies and amendment of safety
programs, shall be shared equally by AT&T and Lucent. AT&T shall use its
reasonable best efforts to obtain self-insurance status for workers'
compensation for Lucent effective Immediately after the Distribution Date in
each jurisdiction in which Lucent conducts business and in which AT&T is
self-insured, if AT&T determines that such status is beneficial to Lucent.
Lucent hereby authorizes AT&T to take all actions necessary and appropriate on
its behalf in order to obtain such self-insurance status.
(ii) AT&T shall also arrange a contingent insured or other arrangement for
payment of workers' compensation claims, into which Lucent shall enter if and to
the extent that AT&T fails to obtain self-insured status for Lucent as provided
in Section 5.15(b)(i), unless Lucent obtains another such arrangement that is
effective Immediately after the Distribution Date, in which event Lucent shall
reimburse AT&T for any expenses incurred by AT&T in procuring such contingent
arrangement.
(c) INSURANCE POLICY.
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(i) In the event the workers' compensation insurance policy that AT&T
maintains under the AT&T WCP expires before the Distribution Date, AT&T shall
use its reasonable best efforts to renew such policy and to cause the issuing
insurance company to issue a separate policy to Lucent. If AT&T is not able to
cause such insurance company to issue such separate insurance policy, Lucent
shall use its reasonable best efforts to procure a separate policy from another
insurance company or to obtain self-insurance status, and AT&T shall use its
reasonable best efforts to continue to cover Lucent under its renewed policy
until the earlier of (A) the date on which Lucent's application for such
self-insurance status is approved or (B) the date on which a separate insurance
policy is procured. Lucent shall compensate AT&T for all costs incurred by AT&T
to continue such coverage. Any claims incurred by Transferred Individuals after
the Close of the Distribution Date that will be covered under and during any
such continuation of coverage shall be treated as being incurred before the
Close of the Distribution Date for purposes of determining the party responsible
for the administration of benefits.
(ii) AT&T shall use its best effort to maintain the premium rates for all
workers' compensation insurance policies for both AT&T and Lucent in effect for
periods through the Close of the Distribution Date to be based on the aggregate
number of employees covered under the workers' compensation insurance policies
of both AT&T and Lucent. Any premiums due under the separate workers'
compensation insurance issued to Lucent shall be payable by Lucent.
5.16 AMERICAN TRANSTECH INC. AND BENEFIT DIRECTIONS ENROLLMENT CENTER. AT&T
shall cause American Transtech Inc. to enter into an agreement with Lucent for
the provision of data and enrollment services and customer service for
enrollment and eligibility matters through the 1996 fall open enrollment period
using the Benefit Directions Enrollment Center (the "BDEC") and the Benefit
Direction System (the "BDS") database. Such services shall be provided by
American Transtech Inc. to Lucent on terms and conditions and at prices
comparable to those on which American Transtech Inc. provides similar services
to AT&T.
5.17 AT&T EMPLOYEE ASSISTANCE PROGRAM. Effective Immediately after the
Distribution Date, Lucent shall either (a) provide a centralized Lucent Employee
Assistance Program staff to provide case management services for chemical
dependency/substance abuse treatments to Transferred Individuals or (b) contract
with the mental health network vendor used by AT&T to provide such services. As
of the Close of the Distribution Date, the AT&T Employee Assistance Program
shall cease to have any responsibility to provide case management services for
any Transferred Individuals' chemical dependency/substance abuse treatments.
5.18 AT&T WORK AND FAMILY PROGRAM. Before the Close of the Distribution
Date, AT&T and Lucent shall use their reasonable best efforts to agree on the
manner in which the Work and Family Program, including the Family Care
Development Fund, will be jointly funded, operated and administered. Until an
agreement is reached, AT&T will have sole responsibility for determining the
1996 grant payments to be made under the occupational and management Family Care
Development Fund. After an agreement is reached, but no later than the Close of
the Distribution Date, Lucent will have sole discretion to determine whether and
at what rate to make payments for the Lucent Fund for Management Employees. In
addition, Lucent will have sole discretion for administering the Lucent Family
Development Fund Program, provided that it funds its proportionate share of the
grants required by the National AT&T/CWA/IBEW Memorandum of Understanding
executed by AT&T and the CWA and IBEW as of May 31, 1992 (the "1992 Collective
Bargaining Agreement") and the Collective Bargaining Agreement. The share will
be determined in accordance with a methodology agreed upon by AT&T and Lucent,
and if they fail to agree upon a methodology, Lucent's allocable share shall be
that portion of the total of such grants that bears the same relationship to
such total grants as the number of Lucent Individuals who are occupational
employees bears to total number of occupational employees of AT&T, the AT&T
Entities, Lucent and the Lucent Entities as of the Participation Commencement
Date. Until all of the foregoing obligations under the 1992 Collective
Bargaining Agreement and the Collective Bargaining Agreement have been
satisfied, Lucent will provide AT&T with quarterly reports
<PAGE>
of occupational grants funded. Before the Close of the Distribution Date, AT&T
shall use its reasonable best efforts to cause its agreement with its Work and
Family vendors to permit Lucent to participate in the terms and conditions of
such agreements until the expiration of the agreements. These efforts shall
substantially conform to the guidelines set forth in Section 5.7(a) as if such
agreements were ASO Contracts.
5.19 WORLD WIDE WEB. Before the Close of the Distribution Date, AT&T and
Lucent shall jointly continue to explore (including by participation in a
testing program) the feasibility of offering participants in their Plans on-line
computer access to the point-of-service provider directories, fee schedules,
enrollment and other benefit communication materials through the AT&T customized
Internet World Wide Web developed by AT&T Bell Laboratories and a third-party
vendor. Lucent shall have the right to offer Lucent Plan participants these
on-line computer services after the Distribution Date, provided that Lucent
exercises this right by giving written notice of its intent to do so to AT&T on
or before the Distribution Date. If the portion of AT&T Bell Laboratories
responsible for developing and maintaining the AT&T customized Internet World
Wide Web is transferred to Lucent pursuant to the Separation and Distribution
Agreement, AT&T shall have the right to use, and Lucent agrees to maintain, this
service pursuant to a contract entered into between AT&T and Lucent as soon as
practicable after the Close of the Distribution Date. If the portion of AT&T
Bell Laboratories responsible for developing and maintaining the AT&T customized
Internet World Wide Web remains with AT&T pursuant to the Separation and
Distribution Agreement, Lucent shall have the right to use, and AT&T agrees to
maintain, this service pursuant to a contract entered into between AT&T and
Lucent as soon as practicable after the Close of the Distribution Date.
5.20 UNEMPLOYMENT INSURANCE TAX MANAGEMENT PROGRAM.
(a) AT&T shall cause Lucent to be covered under the AT&T Unemployment
Insurance Tax Management Program from the Participation Commencement Date
through the Close of the Distribution Date. Lucent shall reimburse AT&T for its
allocable share of fees paid by AT&T to its unemployment insurance tax
management vendor for services rendered during such period. Lucent shall
cooperate with the unemployment insurance tax management vendor by providing
information in its possession that is necessary for administration of the AT&T
Unemployment Insurance Tax Management Program.
(b) Before the Distribution Date, AT&T shall use its reasonable best
efforts to cause its agreement with its unemployment insurance tax management
vendor and any successor thereto to permit Lucent to participate in the terms
and conditions of such agreements from Immediately after the Distribution Date
through June 30, 1997. These efforts shall substantially conform to the
guidelines set forth in Section 5.7(a) as if such agreements were ASO Contracts.
AT&T shall use its reasonable best efforts to cause such agreements to provide
that Lucent's participation shall include administration of all unemployment
compensation claims of Transferred Individuals, Lucent Individuals and other
employees and former employees of Lucent and the Lucent Entities, regardless of
whether such claims were filed before, on, or after the Distribution Date.
5.21 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS.
(a) CONTINUANCE OF ELECTIONS, CO-PAYMENTS AND MAXIMUM BENEFITS.
(i) Lucent shall cause the Lucent Health and Welfare Plans to recognize and
maintain all coverage and contribution elections made by Transferred Individuals
under the AT&T Health and Welfare Plans and apply such elections under the
Lucent Health and Welfare Plans for the remainder of the period or periods for
which such elections are by their terms applicable. The transfer or other
movement of employment from AT&T to Lucent at any time before the Close of the
Distribution Date shall neither constitute nor be treated as a "status change"
under the AT&T Health and Welfare Plans or the Lucent Health and Welfare Plans.
(ii) Lucent shall cause the Lucent Health and Welfare Plans to recognize
and give credit for (A) all amounts applied to deductibles, out-of-pocket
maximums, and other applicable benefit coverage limits with respect to which
such expenses have been incurred by Transferred Individuals under the AT&T
Health and Welfare Plans for the remainder of the year in which the Distribution
occurs, and (B) all benefits paid to Transferred Individuals under the AT&T
Health and Welfare Plans for purposes of determining when such persons have
reached their lifetime maximum benefits under the Lucent Health and Welfare
Plans.
(iii) Lucent shall recognize and maintain through December 31, 1998 all
eligible populations covered by the AT&T Health and Welfare Plans (as defined in
the applicable AT&T Health and Welfare Plan documents), including Class I and
Class II dependents, term and temporary employees, alternate benefit plan
employees, and all categories of part-time employees (which are fully and
non-fully eligible for company contributions).
(iv) Lucent shall (A) provide coverage to Transferred Individuals under the
Lucent Group Life Program without the need to undergo a physical examination or
otherwise provide evidence of insurability, and (B) recognize and maintain all
irrevocable assignments and accelerated benefit option elections made by
Transferred Individuals under the AT&T Group Life Program.
(b) ADMINISTRATION.
(i) COORDINATION OF BENEFITS FOR SPOUSES AND DEPENDENTS. Effective as of
the first January 1 that occurs on or after the Distribution Date, Lucent shall
cause the Lucent Health and Welfare Plans to permit eligible Transferred
Individuals to cover their lawful spouses as dependents if such lawful spouses
are active or retired AT&T employees. As of the first January 1 that occurs on
or after the Distribution Date, AT&T shall cause the AT&T Health and Welfare
Plans to permit eligible AT&T and AT&T Entity employees to cover their lawful
spouses as dependents if such lawful spouses are active or retired Lucent
employees. All benefits provided under either the Lucent Health and Welfare
Plans or the AT&T Health and Welfare Plans to a lawful spouse dependent of the
other company's plans shall be coordinated pursuant to the terms and conditions
of the applicable Health and Welfare Plans. Effective as of January 1, 1997,
eligible dependents of AT&T and Lucent lawful spouse employees or lawful spouse
retirees may be covered under both the Lucent Health and Welfare Plans and the
AT&T Health and Welfare Plans, and the benefits provided under both plans shall
be coordinated pursuant to the applicable terms and conditions of the respective
Health and Welfare Plans in effect as of such date and thereafter as amended
from time to time.
(ii) HCFA DATA MATCH. Immediately after the Distribution Date, Lucent shall
assume all Liabilities relating to, arising out of or resulting from claims
verified by AT&T or Lucent under the HCFA data match reports that relate to
Transferred Individuals. Lucent and AT&T shall share all information necessary
to verify HCFA data match reports regarding Transferred Individuals. Lucent
shall not change any employee identification numbers assigned by AT&T without
notifying AT&T of the change and the new Employee Identification Number. To the
extent that AT&T enters into any settlement negotiations between its health plan
carriers or claims administrators and HCFA before the end of the Occupational
Transition Period, Lucent shall have the right to participate in such
negotiations.
(c) OTHER POST-DISTRIBUTION TRANSITIONAL RULES.
(i) AT&T HCRA PLAN. To the extent any Transferred Individual contributed to
an account under the AT&T HCRA Plan during the calendar year that includes the
Distribution Date, effective as of the Close of the Distribution Date, AT&T
shall transfer to the Lucent HCRA Plan the account balances of Transferred
Individuals for such calendar year under the AT&T HCRA Plan, regardless of
whether the account balance is positive or negative.
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(ii) AT&T CHILD/ELDER CARE REIMBURSEMENT ACCOUNT PLAN. To the extent any
Transferred Individual contributed to the AT&T CECRA Plan during the calendar
year that includes the Distribution Date, AT&T shall transfer the account
balances of Transferred Individuals for such calendar year in the AT&T CECRA
Plan to the Lucent CECRA Plan.
(iii) POST-RETIREMENT MEDICAL PLAN. Pursuant to Code SectionSection 401(h)
and 420, Lucent shall comply with all cost maintenance period requirements and
benefit maintenance period requirements that are applicable to post-retirement
health benefits under the Lucent Health Plans for any pension asset transfers
pursuant to Code Section 420 by or on behalf of AT&T for qualified current
retiree health liabilities (as defined under Code Section 420). With respect to
any pension asset transfers pursuant to Code Section 420, Lucent shall obtain
AT&T's prior written approval before amending any Lucent Health Plan with
respect to the provision of post-retirement health benefits during the cost
maintenance or benefit maintenance periods to which the AT&T Health Plans are
subject pursuant to Code Section 420. No pension asset transfer pursuant to Code
Section 420 shall be made after the date hereof and before the Close of the
Distribution Date unless Lucent and AT&T so agree.
(iv) HEALTH AND WELFARE PLANS SUBROGATION RECOVERY. After the Close of the
Distribution Date, AT&T shall pay to Lucent or the Lucent Health Trusts (as
appropriate) any amounts AT&T recovers from time to time through subrogation or
otherwise for claims incurred by or reimbursed to any Transferred Individual. If
Lucent recovers any amounts through subrogation or otherwise for claims incurred
by or reimbursed to employees and former employees of AT&T or an AT&T Entity and
their respective beneficiaries and dependents (other than Transferred
Individuals), Lucent shall pay such amounts to AT&T or the AT&T Health Trusts
(as appropriate).
(v) EXCHANGE OF HISTORICAL DATA. Both AT&T and Lucent shall have access to
claims data configured on the Medical Information Data Analysis System database
(or archived, if applicable) and to eligibility data configured on the
eligibility database (or archived, if applicable) and to disability, medical and
demographic data configured on the Health Planning Support System ("HPSS")
database (or archived, if applicable) for all historical periods beginning
January 1, 1989, up to and including eligibility, incurred claims and HPSS data
for the calendar year that includes the Distribution Date, for all vendors
administering the AT&T Medical Plans and Lucent Medical Plans. AT&T and Lucent
shall cooperate in the collection of claims, eligibility and HPSS data during
the period from the first January 1 that occurs after the Distribution Date
through December 31, 1998, and share all such data. Both AT&T and Lucent shall
have the right to access and use eligibility, incurred claims, and HPSS data for
periods through December 31, 1998 for such purposes as each determines.
5.22 APPLICATION OF ARTICLE V TO LUCENT ENTITIES. Any reference in this
Article V to "Lucent" shall include a reference to a Lucent Entity when and to
the extent Lucent has caused the Lucent Entity to (a) become a party to a vendor
contract, group insurance contract, or HMO letter agreement associated with a
Lucent Health and Welfare Plan, (b) become a self-insured entity for the
purposes of one or more Lucent Health and Welfare Plans, (c) assume all or a
portion of the liabilities or administrative responsibilities for benefits which
arose before the Close of the Distribution Date under an AT&T Health and Welfare
Plan and which were expressly assumed by Lucent pursuant to the terms of this
Agreement, or (d) take any other action, extend any coverage, assume any other
liability or fulfill any other responsibility that Lucent would otherwise be
required to take under the terms of this Article V, unless it is clear from the
context that the particular reference is not intended to include a Lucent
Entity. In all such instances in which a reference in this Article V to "Lucent"
includes a reference to a Lucent Entity, Lucent shall be responsible to AT&T for
ensuring that the Lucent Entity complies with the applicable terms of this
Agreement and the Transferred Individuals allocated to such Lucent Entity shall
have the same rights and entitlements to benefits under the applicable Lucent
Health and Welfare Plans that the Transferred Individual would have had if he or
she had instead been allocated to Lucent.
<PAGE>
ARTICLE VI
EXECUTIVE BENEFITS AND NON-EMPLOYEE DIRECTOR BENEFITS
6.1 ASSUMPTION OF OBLIGATIONS. Effective Immediately after the Distribution
Date, Lucent and the Lucent Entities shall assume and be solely responsible for
all Liabilities to or relating to Transferred Individuals under all AT&T
Executive Benefit Plans, other than any Liabilities to or relating to executives
or former executives of NCR pursuant to separate agreements with such executives
entered into in connection with AT&T's acquisition of NCR.
6.2 CONSENTS AND NOTIFICATIONS. AT&T and Lucent shall use their reasonable
best efforts to obtain, or cause to be obtained, to the extent necessary, the
written consent of each Transferred Individual who is a party to an Individual
Agreement and/or a participant in any AT&T Executive Benefit Plan, and of each
Lucent Non-Employee Director who is a participant in any AT&T Non-Employee
Director Plan, to the treatment of such Individual Agreement, Executive Benefit
Plan and/or AT&T Non-Employee Director Plan, as applicable, in accordance with
this Article VI, including the assumption by Lucent and the Lucent Entities, of
sole responsibility for, and the release of AT&T and the AT&T Entities from, all
Liabilities thereunder; provided, that no failure to seek or to obtain any such
consent shall have any effect upon the obligations of Lucent and the Lucent
Entities with respect to such Liabilities.
6.3 AT&T SHORT TERM INCENTIVE PLAN. Lucent shall be responsible for
determining, with respect to all Awards that would otherwise be payable under
the AT&T Short Term Incentive Plan to Transferred Individuals for the 1996
performance year, (a) the extent to which established performance criteria (as
interpreted by Lucent, in its sole discretion, after taking into account the
effects of the IPO and the Distribution) have been met and (b) the payment level
for each Transferred Individual.
6.4 AT&T LONG TERM INCENTIVE PLANS. AT&T and Lucent shall use their
reasonable best efforts to take all actions necessary or appropriate so that
each outstanding Award granted under any AT&T Long Term Incentive Plan held by
any Transferred Individual shall be replaced as set forth in this Section 6.4
with an Award under the Lucent Long Term Incentive Plan.
(a) TRANSFERRED INDIVIDUALS WHO ARE ACTIVE EMPLOYEES OF LUCENT.
(i) STOCK OPTIONS. Lucent shall cause each Award consisting of an AT&T
Option that is outstanding as of the Close of the Distribution Date (or, in the
case of a Lucent Administrative Employee, such later date as he or she becomes a
Transferred Individual) and is held by a Transferred Individual who, as of the
Distribution Date (or, in the case of a Lucent Administrative Employee, such
later date as he or she becomes a Transferred Individual), is an active employee
of or on leave of absence from Lucent or a Lucent Entity to be replaced,
effective Immediately after the Distribution Date, with a Lucent Option. Such
Lucent Option shall provide for the purchase of a number of shares of Lucent
Common Stock equal to the number of shares of AT&T Common Stock subject to such
AT&T Option as of the Close of the Distribution Date, multiplied by the Ratio,
and then rounded down to the nearest whole share. Lucent shall pay to the holder
of such replacement Award, at the time of such replacement, cash in lieu of any
fractional share equal to the product of (A) the fraction represented by such
fractional share times (B) (1) the excess of the Lucent Stock Value over (2) the
per-share exercise price of such AT&T Option as of the Close of the Distribution
Date divided by the Ratio. The per-share exercise price of such Lucent Option
shall equal the per-share exercise price of such AT&T Option as of the Close of
the Distribution Date divided by the Ratio. Each such Lucent Option shall
otherwise have the same terms and conditions as were applicable to the
corresponding AT&T Option as of the Close of the Distribution Date, except that
references to AT&T and its Affiliates shall be amended to refer to Lucent and
its Affiliates.
(ii) PERFORMANCE SHARES AND STOCK UNITS. Lucent shall cause each Award
<PAGE>
consisting of AT&T performance shares or AT&T stock units that is outstanding
as of the Close of the Distribution Date (or, in the case of a Lucent
Administrative Employee, such later date as he or she becomes a Transferred
Individual) and is held by a Transferred Individual who, as of the
Distribution Date (or, in the case of a Lucent Administrative Employee, such
later date as he or she becomes a Transferred Individual), is an active
employee of or on leave of absence from Lucent or a Lucent Entity to be
replaced, effective Immediately after the Distribution Date, with a new
performance share award or a new stock unit award, as the case may be,
consisting of a number of Lucent performance shares or Lucent stock units, as
the case may be, equal to the number of AT&T performance shares or AT&T stock
units, as the case may be, constituting such Award immediately before the
Distribution Date, multiplied by the Ratio, and then rounded down to the
nearest whole share. Lucent shall pay to the holder of such replacement Award,
at the time of such replacement, cash in lieu of any fractional share based on
the Lucent Stock Value. Each such replacement Award shall otherwise have the
same terms and conditions as were applicable to the corresponding AT&T Award
as of the Close of the Distribution Date, except that references to AT&T and
its Affiliates shall be amended to refer to Lucent and its Affiliates and
dividend equivalent payments, if any, shall be payable after the Close of the
Distribution Date with reference to dividends on Lucent Common Stock.
(iii) RESTRICTED STOCK AND RESTRICTED STOCK UNITS. Lucent shall cause each
Award that consists of non-vested restricted shares of AT&T Common Stock or
restricted stock units relating to shares of AT&T Common Stock that is
outstanding as of the Close of the Distribution Date (or, in the case of a
Lucent Administrative Employee, such later date as he or she becomes a
Transferred Individual) and is held by a Transferred Individual who, as of the
Close of the Distribution Date (or, in the case of a Lucent Administrative
Employee, such later date as he or she becomes a Transferred Individual), is an
active employee of or on leave of absence from Lucent or a Lucent Entity to be
replaced, effective Immediately after the Distribution Date, with a new Award
consisting of a number of non-vested restricted shares of Lucent Common Stock
and/or restricted stock units relating to shares of Lucent Common Stock equal to
the number of non-vested restricted shares or restricted stock units of AT&T
Common Stock constituting such Award as of the Close of the Distribution Date
multiplied by the Ratio, and then rounded down to the nearest whole share.
Lucent shall pay to the holder of such replacement Award, at the time of such
replacement, cash in lieu of any fractional share based on the Lucent Stock
Value. Each such replacement Award shall otherwise have the same terms and
conditions as were applicable to the corresponding AT&T Award as of the Close of
the Distribution Date, except that references to AT&T and its Affiliates shall
be amended to refer to Lucent and its Affiliates and dividend equivalent
payments, if any, shall be payable after the Distribution Date with reference to
dividends on Lucent Common Stock.
(iv) SPECIAL PAYMENT. On the thirtieth day following the Distribution Date,
AT&T shall pay to Lucent an amount in cash equal to the excess, if any, of (a)
the Gross Value of the Assumed Stock Awards over (b) seven percent (7%) of the
Aggregate Lucent Stock Value.
(b) TRANSFERRED INDIVIDUALS WHO ARE NOT ACTIVE EMPLOYEES OF LUCENT. Each
outstanding Award that is held by a Transferred Individual who, as of the Close
of the Distribution Date (or, in the case of a Lucent Administrative Employee,
such later date as he or she becomes a Transferred Individual), is not an active
employee of or on leave of absence from Lucent or a Lucent Entity shall remain
outstanding Immediately after the Distribution Date in accordance with its terms
as applicable as of the Close of the Distribution Date, subject to such
adjustments as may be applicable to outstanding Awards held by individuals who
remain active employees of or on leave of absence from AT&T or an AT&T Entity
after the Distribution Date.
6.5 AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN. Each Transferred
Individual who has a deferred AT&T share unit account under the AT&T Deferral
Plan shall be permitted an irrevocable election to have the share units in such
account converted to their cash value and transferred to the cash account under
the AT&T Deferral Plan, which election shall be made in
<PAGE>
accordance with procedures established by AT&T, in its sole discretion, before
and effective as of the Close of the Distribution Date. Immediately after the
Distribution Date, the balance of any Transferred Individual in either an AT&T
share unit account or a cash account under the AT&T Deferral Plan as of the
Close of the Distribution Date shall be transferred to a Lucent share unit
account or cash account, respectively, under the Lucent Deferral Plan, with a
number of Lucent share units equal to the number of AT&T share units under the
AT&T Deferral Plan as of the Close of the Distribution Date multiplied by the
Ratio.
6.6 NON-EMPLOYEE DIRECTOR BENEFITS.
(a) NON-EMPLOYEE DIRECTOR PLANS. As of the Closing Date, Lucent shall
assume and be solely responsible for all Liabilities under the AT&T Non-Employee
Director Plans to or relating to Lucent Non-Employee Directors.
(b) DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS. Each Lucent
Non-Employee Director who has a deferred AT&T share unit account under the AT&T
Deferred Compensation Plan for Non-Employee Directors shall be permitted an
irrevocable election to have the share units in such account converted to their
cash value and transferred to the cash account under the AT&T Deferred
Compensation Plan for Non-Employee Directors, which election shall be made in
accordance with procedures established by AT&T, in its sole discretion, before
and effective as of the Closing Date. As of the Closing Date, the balance of any
Lucent Non-Employee Director in either an AT&T share unit account or a cash
account under the AT&T Deferred Compensation Plan for Non-Employee Directors
shall be transferred to a Lucent share unit account or cash account,
respectively, under the Lucent Deferred Compensation Plan for Non-Employee
Directors, with a number of Lucent share units equal to the number of AT&T share
units under the AT&T Deferred Compensation Plan for Non-Employee Directors as of
the Closing Date multiplied by the amount obtained by dividing (A) the average
of the daily high and low per-share prices of the AT&T Common Stock as listed on
the NYSE during each of the five trading days Immediately after the Closing
Date, by (B) the average of the daily high and low per-share prices of the
Lucent Common Stock as listed on the NYSE during each of the five trading days
Immediately after the Closing Date.
6.7 NON-COMPETITION GUIDELINES.
(a) AT&T NON-COMPETITION GUIDELINE. Effective as of the Close of the
Distribution Date, AT&T shall cause the AT&T Non-Competition Guideline to be
amended to provide that until the end of the eighteenth calendar month that ends
after the Close of the Distribution Date, employment by Lucent or a Lucent
Entity shall not be a violation of the guideline.
(b) LUCENT NON-COMPETITION GUIDELINE. Effective Immediately after the
Distribution Date, Lucent shall adopt a non-competition guideline, applicable to
employees of Lucent and the Lucent Entities who are similarly situated to those
employees of AT&T and the AT&T Entities who are subject to the AT&T
Non-Competition Guideline, which guideline shall expressly provide that until
the end of the eighteenth calendar month that ends after the Close of the
Distribution Date, employment by AT&T shall not constitute a violation of the
guideline.
(c) CONFIDENTIALITY AND PROPRIETARY INFORMATION. No provision of the
Separation and Distribution Agreement shall be deemed to release any individual
for any violation of the AT&T Non-Competition Guideline or any agreement or
policy pertaining to confidential or proprietary information of AT&T or any of
its Affiliates, or otherwise relieve any individual of his or her obligations
under such Guideline or any such agreement or policy.
6.8 RABBI TRUST AND CORPORATE-OWNED LIFE INSURANCE.
<PAGE>
(a) ESTABLISHMENT OF MIRROR RABBI TRUST. Effective no later than
Immediately after the Distribution Date, Lucent shall establish, or cause to be
established, the Lucent Rabbi Trust as a grantor trust subject to Code
SectionSection 671 et seq., which shall be substantially identical in all
Material Features to the AT&T Rabbi Trust, other than the definitions of the
terms "potential change in control" and "change in control." Lucent shall
appoint as trustee under the Lucent Rabbi Trust the then-current trustee of the
AT&T Rabbi Trust.
(b) FUNDING OF LUCENT RABBI TRUST.
(i) As of the earlier of the Close of the Distribution Date and the date
when assets are first transferred or contributed to the Lucent Rabbi Trust (the
"Rabbi Trust Determination Date"), AT&T shall determine the amount of the
liabilities under the AT&T Executive Benefits Plans (other than the AT&T Senior
Management Incentive Award Deferral Plan) that are payable from the AT&T Rabbi
Trust. AT&T shall then cause the trustee of the AT&T Rabbi Trust to transfer to
the trustee of the Lucent Rabbi Trust (A) the most recently purchased
trust-owned life insurance policy held by the AT&T Rabbi Trust if more than one
such policy is then so held (regardless of which entity employs the insured
individuals), and (B) if AT&T, in its sole discretion, so determines, all cash
then held in the AT&T Rabbi Trust that is not invested in trust-owned life
insurance. If AT&T determines (or projects) that immediately after such transfer
the ratio of the value of the assets in the Lucent Rabbi Trust to the
liabilities under the Lucent Executive Benefit Plans (other than the Lucent
Senior Management Incentive Award Deferral Plan) that are payable from the
Lucent Rabbi Trust will be less than the ratio of the value of the assets in the
AT&T Rabbi Trust (before the allocation of assets to the Lucent Rabbi Trust) to
the liabilities under the AT&T Executive Benefit Plans (other than the AT&T
Senior Management Incentive Award Deferral Plan) (before the allocation of
liabilities to the Lucent Rabbi Trust), then Lucent shall make an additional
contribution to the Lucent Rabbi Trust from its general assets in cash,
simultaneously with the transfer of assets from the AT&T Rabbi Trust to the
Lucent Rabbi Trust, in an amount such that, immediately following the transfer
of assets from the AT&T Rabbi Trust to the Lucent Rabbi Trust, the ratio of the
value of the assets in the Lucent Rabbi Trust to the liabilities under the
Lucent Executive Benefit Plans (other than the Lucent Senior Management
Incentive Award Deferral Plan) will immediately thereafter be equal to the ratio
of assets to liabilities under the AT&T Rabbi Trust (other than liabilities
associated with the AT&T Senior Management Incentive Award Deferral Plan)
immediately before the allocation of assets and liabilities to the Lucent Rabbi
Trust. For purposes of this Section 6.8(b)(i), liabilities shall be determined
based upon the "Full Funding Amount" as defined in Section 2.5 of the AT&T Rabbi
Trust.
(ii) As of the Rabbi Trust Determination Date, Lucent and AT&T shall
identify the Transferred Individuals and other individuals insured by
trust-owned life insurance polices held by the trustee of the AT&T Rabbi Trust
and (after any transfers described in Section 6.8(b)(i)) the trustee of the
Lucent Rabbi Trust, and shall share (and shall cause the trustees of their
respective Rabbi Trusts to share) such information as may be necessary for each
to determine when and whether such individuals are deceased.
(c) CORPORATE-OWNED LIFE INSURANCE. Lucent and AT&T shall take all actions,
including creating any trust arrangements necessary to replicate the manner in
which AT&T has heretofore held such policies, and executing or accepting
delivery of any assignments reasonably requested by either party or any
insurance company insuring one or more lives under the Corporate-Owned Life
Insurance, as may be necessary or appropriate in order to assign those policies
insuring Transferred Individuals to Lucent, effective Immediately after the
Distribution Date. If a Corporate-Owned Life Insurance Policy is so assigned to
Lucent, Lucent shall assume and be solely responsible for all Liabilities, and
shall be entitled to all benefits, thereunder, effective as of the earlier of
(i) the Close of the Distribution Date and (ii) the date of such assignment.
AT&T and Lucent shall continue, liquidate and/or administer such Corporate-Owned
Life Insurance Policies on terms and conditions agreed to by AT&T and Lucent.
Lucent and AT&T shall share all information that may be necessary to identify
the
<PAGE>
individuals insured by the Corporate-Owned Life Insurance policies owned by
AT&T and Lucent and to determine when and whether such individuals are
deceased.
6.9 AT&T SPLIT DOLLAR LIFE INSURANCE. AT&T and Lucent shall take all
actions necessary or appropriate to assign to Lucent, AT&T's rights and
interests in the Split Dollar Life Insurance policies under the Senior
Management Individual Life Insurance Program and the Senior Management Basic
Life Insurance Program issued by Metropolitan Life Insurance Company, Hartford
Life Insurance Company, and Confederation Life Insurance Company (or their
successors in interest, including Pacific Mutual Life Insurance Company), and
any additional split dollar life insurance program that may be implemented by
AT&T before the Close of the Distribution Date, with respect to Transferred
Individuals, effective Immediately after the Distribution Date, and under the
AT&T Non-Employee Director Plans with respect to AT&T Non-Employee Directors who
become Lucent Non-Employee Directors, effective as of the Closing Date (such
policies, the "Assigned Split Dollar Policies"). Such actions shall include
Lucent's acceptance of any collateral assignments, policy endorsements or such
other documentation executed by or on behalf of Transferred Individuals and
Lucent Non-Employee Directors, or any trustee of any trust to which such
individual's policy rights or incidents of ownership under the Assigned Split
Dollar Policies have been assigned, and Lucent's entering into such agreements
as may be necessary to fulfill any obligations of AT&T to any insurance company
or insurance agent or broker under the Assigned Split Dollar Policies. From and
after the date of the assignment of any Assigned Split Dollar Policy to Lucent,
Lucent shall assume and be solely responsible for all Liabilities, and shall be
entitled to all benefits, of AT&T under such policy and under the Senior
Management Life Insurance Program, the Senior Management Basic Life Insurance
Program, the AT&T Non-Employee Director Plans and any additional split dollar
life insurance program that may be implemented by AT&T before the Close of the
Distribution Date, as the case may be, with respect to such policies, and any
related agreements entered into by Transferred Individuals or Lucent
Non-Employee Directors.
ARTICLE VII
MISCELLANEOUS BENEFITS
7.1 TRANSFER OF STOCK PURCHASE PLAN RECORDKEEPING ACCOUNTS. If the AT&T
Stock Purchase Plan is in effect as of the Close of the Distribution Date, AT&T
shall cause the recordkeeping accounts under the AT&T Stock Purchase Plan of all
Transferred Individuals to be transferred, as of the Close of the Distribution
Date or as soon as practicable thereafter, to, and Lucent shall cause the
accounts to be accepted by, the recordkeeper for the Lucent Stock Purchase Plan.
Lucent shall use its reasonable best efforts to enter into agreements
satisfactory to Lucent with the recordkeeper of the AT&T Stock Purchase Plan to
ensure the transfer and maintenance of the participant records. Through the end
of the Occupational Transition Period, Lucent shall use a recordkeeper and an
enrollment vendor under the Lucent Stock Purchase Plan compatible with the
recordkeeper and enrollment vendor under the AT&T Stock Purchase Plan.
7.2 CONCESSION TELEPHONE SERVICE. Effective Immediately after the
Distribution Date through June 30, 1998, Lucent shall continue to provide a
concession telephone service program for Transferred Individuals who are then
retired or who retire on or before June 30, 1998, which shall be substantially
identical in all Material Features to the corresponding AT&T concession
telephone service program (provided, that Lucent shall only reimburse or pay for
long-distance services provided by AT&T to such Transferred Individuals).
7.3 SERVICE ANNIVERSARY AND RETIREMENT AWARD PROGRAM.
(a) Before the Close of the Distribution Date, AT&T shall use its
reasonable best efforts to amend the service anniversary merchandise vendor
contract in existence as of the date of this Agreement and related to the AT&T
Service Anniversary and Retirement Award Program to permit Lucent and the Lucent
Entities to participate in the terms and conditions of such contract effective
Immediately after the
<PAGE>
Distribution Date. These efforts shall substantially conform with the
guidelines set forth in Section 5.7(a) as if the service anniversary
merchandise vendor contract were an ASO Contract.
(b) Lucent and the Lucent Entities may provide to their employees service
anniversary merchandise bearing the name and/or logo of AT&T ordered by AT&T
before the date of this Agreement and delivered under the Lucent Service
Anniversary and Retirement Award Program to Transferred Individuals, Lucent
Individuals and other employees and former employees of Lucent and the Lucent
Entities whose service anniversary occurs on or before December 31, 1996,
subject to the terms and conditions of any separate agreement between AT&T and
Lucent regarding the use of the corporate names, logos, service marks and
other intellectual property of AT&T and an AT&T Entity. No service anniversary
merchandise bearing the corporate name and/or logo of AT&T shall be delivered
to any Transferred Individuals, Lucent Individuals or other employees and
former employees of Lucent and the Lucent Entities with respect to a service
anniversary on or after January 1, 1997, without the express written consent
of AT&T.
7.4 SHARES FOR GROWTH PROGRAM. Effective Immediately after the Distribution
Date, Lucent shall assume and be solely responsible for all Liabilities relating
to, arising out of or resulting from awards to Transferred Individuals under the
Shares for Growth Program provided for in the Collective Bargaining Agreement.
Awards to Transferred Individuals payable after the Close of the Distribution
Date shall be made in shares of Lucent Common Stock rather than shares of AT&T
Common Stock, and in determining the number of shares of Lucent Common Stock
Transferred Individuals will receive for such awards, the August 1995 reference
price for a share of Lucent Common Stock shall be calculated by dividing the
August 1995 reference price for a share of AT&T Common Stock as set forth in the
Collective Bargaining Agreement by the Ratio.
7.5 THEODORE N. VAIL AWARD TRUST ASSETS. Lucent shall have the option to
continue to offer the Theodore N. Vail Memorial Fund Awards program to its
employees after the Close of the Distribution Date, provided that it exercises
this option by giving written notice of its intent to AT&T before the Close of
the Distribution Date. If Lucent elects to offer the Theodore N. Vail Awards
program, and it is determined by AT&T to be legally permissible to transfer
assets from the AT&T Theodore N. Vail Awards trust to a trust established by
Lucent for purposes of the Lucent Theodore N. Vail Awards program, AT&T shall
transfer from the AT&T Theodore N. Vail Awards trust to such trust established
by Lucent assets determined by AT&T to have a fair market value that bears the
same relationship to the fair market value of the total assets in such AT&T
trust as the number of Transferred Individuals bears to the total number of
employees and former employees of AT&T, the AT&T Entities, Lucent and the Lucent
Entities as of the Close of the Distribution Date. AT&T shall have the sole
discretion to determine whether such assets will be transferred to the Lucent
trust in the form of AT&T Stock or cash or a combination thereof.
7.6 1996 MANAGEMENT INCENTIVE COMPENSATION PAYMENTS. Effective Immediately
after the Distribution Date, Lucent shall be responsible for determining, with
respect to company performance awards, unit performance awards, and merit awards
that would otherwise be payable under AT&T's management compensation program to
Transferred Individuals for the 1996 performance year, (a) the extent to which
established performance criteria (as interpreted by Lucent, in its sole
discretion, after taking into account the effects of the IPO and the
Distribution) have been met and (b) the payment level for each Transferred
Individual.
ARTICLE VIII
GENERAL AND ADMINISTRATIVE
8.1 PAYMENT OF 1996 ADMINISTRATIVE COSTS AND EXPENSES.
(a) SHARED COSTS. The estimated budget for 1996 for AT&T's Benefits and
Compensation
<PAGE>
organization is set forth on Schedule VII. AT&T and Lucent shall each be
responsible for their allocable share of such budgeted costs as set forth on
Schedule VII. Lucent shall pay to AT&T one-twelfth of its allocable share of
such budgeted costs each month during 1996. AT&T shall provide, as soon as
practicable after the date of this Agreement, such information as may reasonably
be requested by Lucent concerning the determination of such budgeted costs.
(b) ADDITIONAL UNANTICIPATED EXPENSES. If there are additional expenses not
anticipated in the 1996 budget for AT&T's Benefits and Compensation
organization, then Lucent shall pay to AT&T one-half of such unanticipated
expenses, but only to the extent that the additional expenses are (i) reasonable
and necessary and (ii) incurred as a direct result of, and solely for the
purpose of, the normal administration (as currently projected for 1996) of the
AT&T Plans and the Lucent Plans during 1996. If any unanticipated expenses are
incurred at the request of Lucent or a Lucent Entity, they shall be the sole
responsibility of Lucent. Any other unanticipated expenses shall be the sole
responsibility of AT&T.
(c) ADMINISTRATIVE PERSONNEL. A schedule of the individuals employed in
AT&T's Benefits and Compensation organization who have been designated to become
employees of Lucent or a Lucent Entity (the "Lucent Administrative Employees")
has been agreed to by Lucent and AT&T. The Lucent Administrative Employees shall
remain on AT&T's payroll until December 31, 1996 unless AT&T and Lucent agree to
a different date. If AT&T and Lucent elect that the Lucent Administrative
Employees be placed on the Lucent payroll before January 1, 1997, then Lucent's
direct cost with respect to the Lucent Administrative Employees (including
salary and loading for benefit related charges) for each month after they leave
AT&T's payroll shall be subtracted from the monthly amount payable by Lucent in
accordance with Section 8.1(a). Such individuals shall become Transferred
Individuals when they are placed on the payroll of Lucent or a Lucent Entity if
such date is after the Close of the Distribution Date. Regardless of whether the
Lucent Administrative Employees are on the payroll of AT&T or Lucent or a Lucent
Entity, they shall be subject to the supervision of AT&T's Senior Vice
President, Benefits and Compensation, or his delegates, through December 31,
1996.
(d) POST-DISTRIBUTION ADMINISTRATION IN 1996. From the Distribution Date
through December 31, 1996, AT&T's Senior Vice President, Benefits and
Compensation, and his staff (including the Lucent Administrative Employees)
shall have full authority and responsibility to administer the Lucent Plans to
the same extent as if AT&T's Senior Vice President, Benefits and Compensation,
and his staff were employees of Lucent or a Lucent Entity. Notwithstanding the
foregoing, Lucent shall retain all fiduciary responsibility for the
administration of the Lucent Plans and, subject to the need to conform the
administration of the AT&T Plans and the Lucent Plans during 1996, Lucent shall
have the right to direct AT&T's Senior Vice President, Benefits and
Compensation, in the manner in which it intends the Lucent Plans to be
administered.
8.2 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.
(a) ACTUARIAL AND ACCOUNTING METHODOLOGIES AND ASSUMPTIONS. For purposes of
this Agreement, unless specifically indicated otherwise: (i) all actuarial
methodologies and assumptions used for a particular Plan shall (except to the
extent otherwise determined by AT&T and Lucent to be reasonable or necessary) be
substantially the same as those used in the actuarial valuation of that Plan
used to determine minimum funding requirements under ERISA Section 302 and Code
Section 412 for 1996, or, if such Plan is not subject to such minimum funding
requirements, used to determine AT&T's deductible contributions under Code
Section 419A or, if such Plan is not subject to Code Section 419A, the
assumptions used to prepare AT&T's audited financial statements for 1996, as the
case may be; and (ii) the value of plan assets shall be the value established
for purposes of audited financial statements of the relevant plan or trust for
the period ending on the date as of which the valuation is to be made. Lucent
Liabilities relating to, arising out of or resulting from the status of Lucent
and the Lucent Entities as Participating Companies in AT&T Plans, as provided
for in Section
<PAGE>
2.2 and all accruals relating thereto shall be determined by AT&T using
actuarial assumptions and methodologies (including with respect to demographics,
medical trends and other relevant factors) determined by AT&T in a manner
consistent with AT&T's practice as in effect on the Participation Commencement
Date and in conformance with the generally accepted actuarial principles
promulgated by the American Academy of Actuaries, the Code, ERISA, and/or
generally accepted accounting principles, as applicable, in each case as
interpreted by AT&T consistent with past practice. Except as otherwise
contemplated by this Agreement or as required by law, all determinations as to
the amount or valuation of any assets of or relating to any AT&T Plan (whether
or not such assets are being transferred to a Lucent Plan) shall be made
pursuant to procedures to be established by the parties before the Closing Date.
(b) PAYMENT OF LIABILITIES; DETERMINATION OF EMPLOYEE STATUS. Lucent shall
pay directly, or reimburse AT&T promptly for, all Liabilities assumed by it
pursuant to this Agreement, including all compensation payable to Lucent
Individuals and Transferred Individuals for services rendered while in the
employ of AT&T or an AT&T Entity before becoming a Lucent Individual or
Transferred Individual, respectively (to the extent not charged for pursuant to
Section 8.1 or another Ancillary Agreement). To the extent the amount of such
Liabilities is not yet determinable because the status of individuals as Lucent
Individuals or Transferred Individuals is not yet determined, except as
otherwise specified herein or in another Ancillary Agreement with respect to
particular Liabilities, Lucent shall make such payments or reimbursements based
upon AT&T's reasonable estimates of the amounts thereof, and when such status is
determined, Lucent shall make additional reimbursements or payments, or AT&T
shall reimburse Lucent, to the extent necessary to reflect the actual amount of
such Liabilities. In determining the number of individuals in any particular
group of employees described in this Agreement (such as "Transferred Individuals
and Lucent Individuals"), no individual shall be counted twice (even if, for
example, he or she is both a Lucent Individual and a Transferred Individual).
Determinations of what entity employs or employed a particular individual shall
be made by reference to the applicable legal entity and/or other appropriate
accounting code, to the extent possible.
(c) CONTRIBUTIONS TO TRUSTS. Lucent shall pay its share of any
contributions made to any trust maintained in connection with an AT&T Plan with
respect to any period while Lucent or a Lucent Entity is a Participating Company
in that AT&T Plan; provided, however, that Lucent shall not be required to
contribute to the AT&T Rabbi Trust after the date of this Agreement. Lucent's
share of any contributions to the AT&T Health Benefits Trust shall be determined
based on AT&T's reasonable estimate of the claims under the AT&T Plans funded
through such trust that are paid to or for the benefit of Lucent Individuals and
other employees and former employees of Lucent and the Lucent Entities,
Transferred Individuals and beneficiaries and dependents thereof, until a cash
benefit payment procedure for daily check presentments separately to Lucent and
the Lucent Entities for such claims is implemented, after which Lucent's share
of such contributions shall be determined based upon such procedure. Lucent's
share of any contributions to any other such trust shall be determined by AT&T
by computing separate contribution amounts for AT&T and Lucent, as if Lucent and
the Lucent Entities were not Affiliates of AT&T and the AT&T Entities, but
followed the same funding policy and used the same funding assumptions as AT&T
and the AT&T Entities with respect to such trust; provided, that if the sum of
the amounts so determined is less than or exceeds the total contribution to be
made to such trust in accordance with such funding policy as applied to AT&T,
the AT&T Entities, Lucent and the Lucent Entities as a group, then Lucent's
share of such contribution shall be determined by increasing or reducing both
such amounts, as applicable, proportionately so as to eliminate such difference.
(d) PARTICIPANT CONTRIBUTIONS; SETTLEMENTS, REFUNDS, AND SIMILAR PAYMENTS.
Until such time as a cash benefit payment procedure is implemented pursuant to
which the participant contributions made under any AT&T Health and Welfare Plan
made by Lucent Individuals, Transferred Individuals and other employees and
former employees of Lucent and the Lucent Entities and beneficiaries and
dependents thereof can be specifically identified as such, for purposes of
determining the Lucent Liabilities associated with such Plan, such individuals
shall be
<PAGE>
deemed to have made such contributions in an amount that bears the same
relationship to the total contributions by all participants to such Plan as the
number of such individuals who are participants in such Plan bears to the total
number of participants in such Plan. If AT&T or an AT&T Entity receives any
amount that represents an offset to or reduction of any Liability relating to,
arising out of or resulting from any AT&T Plan (including any amount received in
settlement of a dispute regarding the amount of benefits payable under such Plan
and any refund of premiums paid to an insurer of benefits under such Plan) with
respect to a period before the Close of the Distribution Date, then except to
the extent Section 5.21(c)(iv) is applicable, AT&T shall pay to Lucent a portion
of such amount that bears the same relationship to the total of such amount as
the number of Lucent Individuals, Transferred Individuals and other employees
and former employees of Lucent and the Lucent Entities who were participants in
such Plan during the period to which such amount relates bears to the total
number of participants in such Plan.
(e) ADMINISTRATIVE EXPENSES NOT CHARGEABLE TO A TRUST. To the extent not
charged for pursuant to Section 8.1 or another Ancillary Agreement or the ASA
Agreement and to the extent not chargeable to a trust established in connection
with an AT&T Plan, Lucent shall be responsible, through either direct payment
from its own cash or reimbursement of AT&T from its own cash, for the following
expenses in the administration of the AT&T Plans while Lucent or a Lucent Entity
is a Participating Company in such Plans (and except as expressly provided
below, Lucent's allocable share of the following administrative expenses shall
be that portion of the total such expenses that bears the same relationship to
such total expenses as the number of Lucent Individuals, Transferred Individuals
and other employees and former employees of Lucent and the Lucent Entities who
are participants in the applicable Plan bears to total number of participants in
such Plan): (i) the costs incurred in the administration of the AT&T Pension
Plans and other Plans providing benefits to retired individuals, including the
cost of managing any trust assets and performing actuarial calculations (which
shall be shared equally between Lucent and AT&T); (ii) the recordkeeping costs
(including expenses in development and operation of the daily valuation
recordkeeping system for the AT&T LTSSP) and other costs incurred in the
administration of the AT&T Savings Plans (including expenses in employee
communications materials for the AT&T Savings Plans and consultant and other
out-of-pocket fees and expenses generally related to the design or
administration of the AT&T Savings Plans); (iii) the fees paid to benefit
delivery vendors under AT&T Health and Welfare Plans; (iv) COBRA administrative
costs (of which Lucent's allocable share shall be that portion of the total such
costs that bears the same relationship to such total costs as the number of
Lucent Individuals, Transferred Individuals and other employees and former
employees of Lucent and the Lucent Entities and beneficiaries and dependents
thereof who are participants in the applicable Plan bears to total number of
participants in such Plan); (v) the cost of administrative services for the
Family Care Development Fund and other Work and Family programs; (vi) the costs
incurred in the administration of the AT&T Executive Benefits Plans, including
payments made to insurance agents and brokers (such as the agents and brokers
who administer corporate-owned life insurance and trust-owned life insurance
programs), and payments made to vendors (such as the vendor(s) who administer
the AT&T Senior Management Financial Counseling Program); (vii) the expenses
incurred in establishing the AT&T Stock Purchase Plan and its recordkeeping
system; (viii) the consultant and other out-of-pocket fees and expenses
(including accounting, actuarial, consulting, and legal fees, and photocopying,
printing, and similar expenses) generally related to the design or
administration of the AT&T Plans (which shall be shared equally between Lucent
and AT&T); (ix) the payments for administration of the AT&T Rabbi Trust and for
actuarial and legal work in connection with the AT&T Rabbi Trust (which shall be
shared equally between Lucent and AT&T); and (x) the payments for the management
of the assets of the AT&T Rabbi Trust (which shall be prorated between Lucent
and AT&T based on relative value of Lucent's and AT&T's share of the liabilities
funded by AT&T Rabbi Trust assets with respect to AT&T and Lucent Executives as
reflected in the IPO Registration Statement).
(f) STOCK AWARD CHARGEBACKS. Lucent shall pay AT&T the following amounts:
(i) with respect to each AT&T Option that is exercised by a Lucent Individual or
another employee of Lucent or
<PAGE>
a Lucent Entity at any time after the Closing Date, the Spread on such
Option; (ii) with respect to each purchase of AT&T Common Stock pursuant to the
AT&T Stock Purchase Plan by a Lucent Individual or another employee of Lucent or
a Lucent Entity at any time after the Closing Date, the Spread with respect to
such purchase; (iii) with respect to the vesting or delivery at any time after
the Closing Date of shares of AT&T Common Stock pursuant to an Award (other than
an AT&T Option) held by a Lucent Individual or another employee of Lucent or a
Lucent Entity, the Value of such AT&T Common Stock on the date of such vesting
or delivery. AT&T shall bill Lucent for such amounts from time to time (but only
after the exercise, purchase, vesting or delivery that gives rise to the
obligation to make any such payment), and Lucent shall pay such amounts promptly
after receipt of such bills. The "Spread" on an Option or with respect to a
purchase pursuant to the AT&T Stock Purchase Plan means the excess, if any, of
the Value of the purchased shares on the date of exercise of such Option or the
date of such purchase, as applicable, over the price paid for such shares. The
"Value" of a share of AT&T Common Stock on a given date means the average of the
high and the low per-share prices of the AT&T Common Stock as listed on the NYSE
on such date, or if there is no trading on the NYSE on such date, on the most
recent previous date on which such trading takes place.
8.3 1984 AT&T UNFUNDED DIVESTITURE REIMBURSEMENT AGREEMENTS. In order to
permit AT&T to continue to honor any obligations it may have for on-going
reimbursement costs payable periodically to the seven Regional Bell Holding
Companies and Bell Communications Research, Inc. in accordance with the
provisions of the Unfunded Cost Sharing Agreements, Lucent shall provide, on an
annual basis and in accordance with the schedule provided to Lucent by AT&T, at
no cost to AT&T, any information in its possession required to enable AT&T to
determine, validate, and reconcile the AT&T offset amounts specified in the
Unfunded Cost Sharing Agreements. Lucent shall also provide AT&T with
information in its possession to the extent requested by a party to an Unfunded
Cost Sharing Agreement pursuant to its rights thereunder to audit information
provided by Lucent to AT&T. If Lucent or any Lucent Entity grants an "ad hoc
pension increase" as defined in either of the Unfunded Cost Sharing Agreements,
as a result of which AT&T or any AT&T Entity is required to pay pursuant to
either or both of the Unfunded Cost Sharing Agreements any amounts in excess of
the amounts it would have been required to pay absent such ad hoc pension
increase, then Lucent shall reimburse AT&T for the amount of such excess, as and
when it is paid by AT&T or such AT&T Entity. The parties agree that any such ad
hoc increase made by Lucent or any Lucent Entity to the extent not in excess of
a prior ad hoc increase by AT&T or any AT&T Entity made after the date hereof
will not give rise to any reimbursement obligation pursuant to the foregoing
sentence, but an ad hoc increase made by Lucent or any Lucent Entity prior to
any ad hoc increase made by AT&T or any AT&T Entity will give rise to such
reimbursement obligation (with no reduction in such reimbursement obligation due
to the subsequent ad hoc increase by AT&T or any AT&T Entity). Except as
specifically provided in the preceding two sentences, the foregoing shall not be
deemed to give rise to any liability of Lucent under the Unfunded Cost Sharing
Agreements.
8.4 SHARING OF PARTICIPANT INFORMATION. AT&T and Lucent shall share, AT&T
shall cause each applicable AT&T Entity to share, and Lucent shall cause each
applicable Lucent Entity to share, with each other and their respective agents
and vendors (without obtaining releases) all participant information necessary
for the efficient and accurate administration of each of the AT&T Plans and the
Lucent Plans during the respective Transition Periods applicable to such Plans,
and with respect to each of the AT&T Health and Welfare Plans and Lucent Health
and Welfare Plans, any additional periods during which such Plan is subject to
the restrictions of Section 5.8. AT&T and Lucent and their respective authorized
agents shall, subject to applicable laws on confidentiality, be given reasonable
and timely access to, and may make copies of, all information relating to the
subjects of this Agreement in the custody of the other party, to the extent
necessary for such administration. Until the Close of the Distribution Date, all
participant information shall be provided in the manner and medium applicable to
Participating Companies in the AT&T Plans generally, and thereafter until
December 31, 1998, all participant information shall be provided in a manner and
medium that is compatible with the data processing systems of AT&T as in effect
of the Close of the Distribution Date, unless otherwise agreed
<PAGE>
to by AT&T and Lucent.
8.5 REPORTING AND DISCLOSURE AND COMMUNICATIONS TO PARTICIPANTS. While
Lucent is a Participating Company in the AT&T Plans, Lucent shall take, and
shall cause each other applicable Lucent Entity to take, all actions necessary
or appropriate to facilitate the distribution of all AT&T Plan-related
communications and materials to employees, participants and beneficiaries,
including summary plan descriptions and related summaries of material
modification, summary annual reports, investment information, prospectuses,
notices and enrollment material for the Lucent Plans. Lucent shall pay AT&T the
cost relating to the copies of all such documents provided to Lucent, except to
the extent such costs are charged pursuant to Section 8.1 or pursuant to an
Ancillary Agreement or the ASA Agreement. Lucent shall assist, and Lucent shall
cause each other applicable Lucent Entity to assist, AT&T in complying with all
reporting and disclosure requirements of ERISA, including the preparation of
Form 5500 annual reports for the AT&T Plans, where applicable.
8.6 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No
provision of this Agreement or the Separation and Distribution Agreement shall
be construed to create any right, or accelerate entitlement, to any compensation
or benefit whatsoever on the part of any Lucent Individual, Transferred
Individual or other future, present or former employee of AT&T, an AT&T Entity,
Lucent, or a Lucent Entity under any AT&T Plan or Lucent Plan or otherwise.
Without limiting the generality of the foregoing: (i) neither the Distribution
nor the termination of the Participating Company status of Lucent or a Lucent
Entity shall cause any employee to be deemed to have incurred a termination of
employment which entitles such individual to the commencement of benefits under
any of the AT&T Plans, any of the Lucent Plans, or any of the Individual
Agreements; and (ii) except as expressly provided in this Agreement, nothing in
this Agreement shall preclude Lucent, at any time after the Close of the
Distribution Date, from amending, merging, modifying, terminating, eliminating,
reducing, or otherwise altering in any respect any Lucent Plan, any benefit
under any Plan or any trust, insurance policy or funding vehicle related to any
Lucent Plan.
8.7 PLAN AUDITS.
(a) AUDIT RIGHTS WITH RESPECT TO THE ALLOCATION OR TRANSFER OF PLAN ASSETS.
The allocation of Pension Plan assets and liabilities pursuant to Section 3.2,
the transfer of assets from AT&T VEBAs pursuant to Sections 5.3 and 5.5, the
transfer of RFA assets pursuant to Section 5.4 and the transfer of assets from
the AT&T Rabbi Trust pursuant to Section 6.8 shall be audited on behalf of both
AT&T and Lucent by the consulting firm of Milliman & Robertson. The scope of
such audit shall be limited to the accuracy of the data and the accuracy of the
computation and adherence to the methodology specified in this Agreement and
except as set forth in the last sentence of this Section 8.7(a), such audit
shall not be binding on the parties. Milliman & Robertson shall provide its
report to both AT&T and Lucent. No other audit shall be conducted with respect
to the transfer or allocation of Plan assets. The costs of such audit shall be
shared equally by AT&T and Lucent, or, at each company's discretion and to the
extent allocable thereto, by their respective Pension Plans. To the extent such
audit recommends a change to the value of assets allocated to a Lucent Plan of
less than 0.25%, the original determination shall be binding on the parties and
shall not be subject to the dispute resolution process provided under the
Separation and Distribution Agreement. To the extent such audit recommends such
a change of 0.25% or more, any unresolved dispute between the parties as to
whether and how to make any change in response to such recommendation shall be
subject to the dispute resolution process provided under the Separation and
Distribution Agreement.
(b) AUDIT RIGHTS WITH RESPECT TO INFORMATION PROVIDED.
(i) Each of AT&T and Lucent, and their duly authorized representatives,
shall have the right to conduct audits with respect to all information provided
to it by the other party. The party conducting the audit (the "Auditing Party")
shall have the sole discretion to determine the procedures and guidelines
<PAGE>
for conducting audits and the selection of audit representatives under this
Section 8.7(b); provided, that audits with respect to the allocation or transfer
of Plan assets and liabilities shall be subject only to Section 8.7(a). The
Auditing Party shall have the right to make copies of any records at its
expense, subject to the confidentiality provisions set forth in the Separation
and Distribution Agreement, which are incorporated by reference herein. The
party being audited shall provide the Auditing Party's representatives with
reasonable access during normal business hours to its operations, computer
systems and paper and electronic files, and provide workspace to its
representatives. After any audit is completed, the party being audited shall
have the right to review a draft of the audit findings and to comment on those
findings in writing within five business days after receiving such draft.
(ii) The Auditing Party's audit rights under this Section 8.7(b) shall
include the right to audit, or participate in an audit facilitated by the party
being audited, of any Subsidiaries and Affiliates of the party being audited and
of any benefit providers and third parties with whom the party being audited has
a relationship, or agents of such party, to the extent any such persons are
affected by or addressed in this Agreement (collectively, the "Non-parties").
The party being audited shall, upon written request from the Auditing Party,
provide an individual (at the Auditing Party's expense) to supervise any audit
of a Non-party. The Auditing Party shall be responsible for supplying, at the
Auditing Party's expense, additional personnel sufficient to complete the audit
in a reasonably timely manner. The responsibility of the party being audited
shall be limited to providing, at the Auditing Party's expense, a single
individual at each audited site for purposes of facilitating the audit.
(c) AUDITS REGARDING VENDOR CONTRACTS. From Immediately after the
Distribution Date through December 31, 1998, AT&T and Lucent and their duly
authorized representatives shall have the right to conduct joint audits with
respect to any vendor contracts that relate to both the AT&T Health and Welfare
Plans and the Lucent Health and Welfare Plans. The scope of such audits shall
encompass the review of all correspondence, account records, claim forms,
canceled drafts (unless retained by the bank), provider bills, medical records
submitted with claims, billing corrections, vendor's internal corrections of
previous errors and any other documents or instruments relating to the services
performed by the vendor under the applicable vendor contracts. AT&T and Lucent
shall agree on the performance standards, audit methodology, auditing policy and
quality measures and reporting requirements relating to the audits described in
this Section 8.7 and the manner in which costs incurred in connection with such
audits will be shared.
8.8 BENEFICIARY DESIGNATIONS. All beneficiary designations made by
Transferred Individuals for AT&T Plans shall be transferred to and be in full
force and effect under the corresponding Lucent Plans until such beneficiary
designations are replaced or revoked by the Transferred Individual who made the
beneficiary designation.
8.9 REQUESTS FOR IRS RULINGS AND DOL OPINIONS.
(a) COOPERATION. Lucent shall cooperate fully with AT&T on any issue
relating to the transactions contemplated by this Agreement for which AT&T
elects to seek a determination letter or private letter ruling from the IRS or
an advisory opinion from the DOL. AT&T shall cooperate fully with Lucent with
respect to any request for a determination letter or private letter ruling from
the IRS or advisory opinion from the DOL with respect to any of the Lucent Plans
relating to the transactions contemplated by this Agreement.
(b) APPLICATIONS. AT&T and Lucent shall make such applications to
regulatory agencies, including the IRS and DOL, as may be necessary to ensure
that any transfers of assets from the AT&T Health Trusts to the Lucent Health
Trusts and from the AT&T LTD VEBA to the Lucent LTD VEBA will neither (i) result
in any adverse tax, legal or fiduciary consequences to AT&T and Lucent, the AT&T
Health Trusts and the AT&T LTD VEBA, the Lucent Health Trusts and the Lucent LTD
VEBA, any participant therein or beneficiaries thereof, or any of AT&T Health
Trusts and the AT&T LTD
<PAGE>
VEBA, any successor welfare benefit funds established by or on behalf of
Lucent, or the trustees of such trusts, nor (ii) contravene any statute,
regulation or technical pronouncement issued by any regulatory agency. Before
the Close of the Distribution Date, Lucent shall prepare all forms required to
obtain favorable tax-exempt determination letters from the IRS for the Lucent
Health Trusts and the Lucent LTD VEBA, and, if applicable, the Lucent Union
VEBA. Lucent and AT&T agree to cooperate with each other to fulfill any filing
and/or regulatory reporting obligations with respect to such transfers.
(c) LIFE INSURANCE. To the extent the transfer or allocation of all or a
portion of any life insurance policies results in any adverse tax or legal
consequences, including (i) any finding that such transfer results in the
creation of a modified endowment contract within the meaning of Code Section
7702A, a transfer for value within the meaning of Code Section 101(a), or a lack
of insurable interest for either AT&T or Lucent (or their respective trusts, if
any), or (ii) multiple claims for insurance proceeds, AT&T and Lucent shall take
such steps as may be necessary to contest any such finding and, to the extent of
any final determination that such adverse tax or legal consequences will result,
AT&T and Lucent shall make such further adjustments so as to place both parties
in the proportionate financial position that they each would have been in
relative to the other but for such adverse tax or legal consequences.
8.10 FIDUCIARY MATTERS.
(a) FIDUCIARY STATUS. AT&T and Lucent each acknowledges that actions
required to be taken pursuant to this Agreement may be subject to fiduciary
duties or standards of conduct under ERISA or other applicable law, and no party
shall be deemed to be in violation of this Agreement if it fails to comply with
any provisions hereof based upon its good faith determination that to do so
would violate such a fiduciary duty or standard.
(b) INDEPENDENT FIDUCIARY. Lucent shall retain a fiduciary independent of
AT&T to review and approve the types and value of the assets to be transferred
to the Lucent Plans from the AT&T Plans as described in Articles III and IV of
this Agreement to the extent that such Plans are subject to Part 4 of Title I of
ERISA. The foregoing shall not prevent Lucent from engaging any fiduciaries for
any other purposes.
8.11 AGREEMENT WITH ACTUARIAL SCIENCES ASSOCIATES, INC. Lucent shall enter
into an agreement with Actuarial Sciences Associates, Inc. ("ASA"), in a form
substantially similar to Exhibit A. Within 60 days after the Distribution Date,
such agreement shall be presented for ratification by Lucent's Board of
Directors or its authorized delegate.
8.12 COLLECTIVE BARGAINING. To the extent any provision of this Agreement
is contrary to the provisions of the Collective Bargaining Agreement or any
other collective bargaining agreement to which AT&T or any Affiliate of AT&T is
a party, the terms of such collective bargaining agreement shall prevail. Should
any provisions of this Agreement be deemed to relate to a topic determined by an
appropriate authority to be a mandatory subject of collective bargaining, AT&T
or Lucent may be obligated to bargain with the union representing affected
employees concerning those subjects. Neither party will agree to a modification
of the Collective Bargaining Agreement without the consent of the other. In the
event a force surplus affecting members of a bargaining unit in both AT&T or any
AT&T Entity (on the one hand) and Lucent or any Lucent Entity (on the other
hand) directly results, due to the provisions of the Collective Bargaining
Agreement, in an employee involuntarily leaving the payroll of the party not
declaring the surplus, then the party declaring the surplus shall bear the cost
of any severance payable to such employee.
8.13 CONSENT OF THIRD PARTIES. If any provision of this Agreement is
dependent on the consent of any third party (such as a vendor or a union) and
such consent is withheld, AT&T and Lucent shall use their reasonable best
efforts to implement the applicable provisions of this Agreement
<PAGE>
to the full extent practicable. If any provision of this Agreement cannot be
implemented due to the failure of such third party to consent, AT&T and Lucent
shall negotiate in good faith to implement the provision in a mutually
satisfactory manner. The phrase "reasonable best efforts" as used herein shall
not be construed to require the incurrence of any non-routine or unreasonable
expense or liability or the waiver of any right.
8.14 POST-DISTRIBUTION BENEFIT DELIVERY/ADMINISTRATION. Lucent shall
continue to use the P2000 benefit administration system and a compatible pension
payment system, to administer the Lucent Pension Plans through the end of the
Management Transition Period.
8.15 QUIET PERIODS. Lucent shall take such action as is necessary to ensure
that participants in the Lucent LTSSP, the Lucent LTSPME, and the Lucent RSPSP
are notified that a quiet period will occur beginning on or about October 1,
1996, during which changes in investment direction with respect to participants'
accounts generally will not be permitted.
ARTICLE IX
MISCELLANEOUS
9.1 FOREIGN PLANS. As soon as practicable after the date of this Agreement,
AT&T and Lucent shall enter into an agreement regarding the treatment of Foreign
Plans consistent with the principles set forth in Exhibit B hereto.
9.2 RESOURCE LINK EMPLOYEES. The following individuals who are employees of
AT&T or an AT&T Entity as of the Close of the Distribution Date shall become
employees of Lucent or a Lucent Entity Immediately after the Distribution Date,
and shall be Transferred Individuals: (a) a maximum of 208 such individuals who,
as of the Close of the Distribution Date, are on Resource Link assignments to
Lucent or a Lucent Entity as of that time, or whose most recent Resource Link
assignment before the Close of the Distribution Date was with Lucent or a Lucent
Entity; (b) a maximum of 48 additional individuals who are, as of the Close of
the Distribution Date, on Resource Link assignment to common support functions
or whose most recent Resource Link assignment before the Close of the
Distribution Date was to common support functions; and (c) term employees who
are, as of the Close of the Distribution Date, on Resource Link assignments with
Lucent or a Lucent Entity.
9.3 EFFECT IF DISTRIBUTION DOES NOT OCCUR. If the Distribution does not
occur, then all actions and events that are, under this Agreement, to be taken
or occur effective as of the Close of the Distribution Date, Immediately after
the Distribution Date, or otherwise in connection with the Distribution, shall
not be taken or occur except to the extent specifically agreed by Lucent and
AT&T.
9.4 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties other
than the relationship set forth herein.
9.5 AFFILIATES. Each of AT&T and Lucent shall cause to be performed, and
hereby guarantees the performance of, all actions, agreements and obligations
set forth in this Agreement to be performed by an AT&T Entity or a Lucent
Entity, respectively.
9.6 INCORPORATION OF SEPARATION AND DISTRIBUTION AGREEMENT PROVISIONS. The
following provisions of the Separation and Distribution Agreement are hereby
incorporated herein by reference, and unless otherwise expressly specified
herein, such provisions shall apply as if fully set forth herein (references in
this Section 9.6 to an "Article" or "Section" shall mean Articles or Sections of
the Separation and Distribution Agreement, and, except as expressly set forth
below, references in the
<PAGE>
material incorporated herein by reference shall be references to the
Separation and Distribution Agreement): Article V (relating to Mutual Releases
and Indemnification); Article VIII (relating to Exchange of Information and
Confidentiality); Article IX (relating to Arbitration and Dispute Resolution);
Article X (relating to Further Assurances and Additional Covenants); Article
XI (relating to Termination); and Article XII (relating to Miscellaneous)
other than Section 12.2 (relating to Governing Law).
9.7 GOVERNING LAW. To the extent not preempted by applicable federal law,
this Agreement shall be governed by, construed and interpreted in accordance
with the laws of the State of New York, irrespective of the choice of laws
principles of the State of New York, as to all matters, including matters of
validity, construction, effect, performance and remedies.
IN WITNESS WHEREOF, the parties have caused this Employee Benefits
Agreement to be duly executed as of the day and year first above written.
AT&T CORP.
By: /s/
Name:
Title:
LUCENT TECHNOLOGIES INC.
By: /s/
Name:
Title:
<PAGE> 1
Exhibit 12
Form 10-Q
For the Three
Months Ended
March 31, 1996
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31, 1996
Income from Continuing Operations
Before Income Taxes ............................ $2,353
Less Interest Capitalized during
the Period...................................... 49
Less Undistributed Earnings of Less than 50%
Owned Affiliates................................ 54
Add Fixed Charges................................. 351
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges............................... $2,601
Fixed Charges
Total Interest Expense Including Capitalized Interest.$ 306
Interest Portion of Rental Expense.................... 45
Total Fixed Charges...............................$ 351
Ratio of Earnings to Fixed Charges.................... 7.4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of AT&T at March 31, 1996 and the unaudited consolidated
statement of income for the three-month period ended March 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 205
<SECURITIES> 0
<RECEIVABLES> 9,242
<ALLOWANCES> 1,284
<INVENTORY> 0
<CURRENT-ASSETS> 21,818
<PP&E> 34,342
<DEPRECIATION> 18,021
<TOTAL-ASSETS> 60,391
<CURRENT-LIABILITIES> 21,610
<BONDS> 8,486
0
0
<COMMON> 1,606
<OTHER-SE> 17,051
<TOTAL-LIABILITY-AND-EQUITY> 60,391
<SALES> 0
<TOTAL-REVENUES> 12,956
<CGS> 0
<TOTAL-COSTS> 10,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 532
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 2,353
<INCOME-TAX> 910
<INCOME-CONTINUING> 1,443
<DISCONTINUED> (81)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,362
<EPS-PRIMARY> $0.85
<EPS-DILUTED> 0
</TABLE>
