From: tfsmail@tycoint.com [SMTP:tfsmail@tycoint.com]
Sent: Tuesday, September 17, 2002 10:26 AM
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Subject: TFSMailNews: TYCO FILES REPORT ON IMPROPER CONDUCT OF FORMER MANAGEMENT
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=== TFSMail - NEWS ===
=== 17 September 2002 ===
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Subject : TYCO FILES FORM 8-K REPORT ON IMPROPER CONDUCT
Technology : -
Geographic : USA
Keywords : Tyco Press Release, Form 8-K Report
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TYCO FILES FORM 8-K REPORT ON IMPROPER CONDUCT OF FORMER MANAGEMENT
Pembroke, Bermuda - September 17, 2002 - Tyco International Ltd. (NYSE -
TYC, BSX - TYC, LSE - TYI) today filed a Form 8-K report with the
Securities and Exchange Commission on its investigation, review and
analysis of transactions between and among the Company and its
subsidiaries and the Company's officers and directors, including the
improper conduct of its former Chief Executive Officer, former Chief
Financial Officer and former Chief Corporate Counsel.
The Company said the improper conduct and the related misuse of Company
funds by its former management does not require material adjustments to
Tyco's prior financial statements because the expenditure of these
funds, while unauthorized, has already been expensed in its financial
statements.
The Company also said the improper conduct of its former management has
damaged Tyco. The amount of money improperly diverted by Tyco's former
senior executives from the Company to themselves is very small in
comparison with Tyco's total revenues and profits, but it is very large
by any other relevant comparison; and the extent of the former
executives' misconduct has harmed Tyco's reputation and credibility with
investors, lenders and others. In the interest of restoring confidence
in the Company, the Company's disclosures in the 8-K filing go beyond
what the law requires, or what would ordinarily be disclosed in such a
filing.
The Company said that this pattern of improper and illegal activity
occurred for at least five years prior to June 3, 2002, when former CEO
L. Dennis Kozlowski resigned, and that this activity was concealed from
the Board and its relevant committees. The nature of such conduct, to
the extent it is now known by Tyco, is described in the filing. The
areas covered in this filing include:
- Relocation Programs, under which certain executive officers, including
Mr. Kozlowski, former CFO Mark Swartz and former Chief Corporate Counsel
Mark Belnick used the Company's relocation program to take
non-qualifying interest-free loans and unauthorized benefits that were
not generally available to all salaried employees affected by
relocations. Under the program, Mr. Kozlowski improperly borrowed
approximately $61,690,628 in non-qualifying relocation loans to purchase
real estate and other properties, Mr. Swartz borrowed approximately
$33,097,925 and Mr. Belnick borrowed approximately $14,635,597.
- The "TyCom Bonus" Misappropriation, in which Mr. Kozlowski caused Tyco
to pay a special, unapproved bonus to 51 employees who had relocation
loans with the Company. The bonus was calculated to forgive the
relocation loans of 51 executives and employees, totaling $56,415,037,
and to pay compensation sufficient to discharge all of the tax liability
due as a result of the forgiveness of those loans. This action was
purportedly related to the successful completion of the TyCom Initial
Public Offering. The total gross wages paid by the Company in this
mortgage forgiveness program were $95,962,000, of which amount Mr.
Kozlowski received $32,976,000 and Mr. Swartz received $16,611,000.
These benefits were not approved by, or disclosed to, the Compensation
Committee or the Board of Directors. However, the employees who received
these bonuses were led by Mr. Kozlowski to believe that they were part
of a Board-approved program.
- The "ADT Automotive Bonus" Misappropriations, in which Mr. Kozlowski
authorized Tyco to pay cash, award restricted shares of Tyco common
stock and purportedly forgive additional loans and make related tax
payments to approximately 17 Tyco officers and employees - even though
the relocation loans of each of these 17 persons had already been paid
in full. Mr. Kozlowski and Mr. Swartz received cash bonuses, restricted
shares and "relocation" benefits valued approximately $25,566,610 and
$12,844,632 respectively. These benefits were not approved by or
disclosed to the Compensation Committee or the Board of Directors. As
with the TyCom unauthorized bonus, other senior executives were misled
by Mr. Kozlowski to believe that the ADT Automotive award of restricted
shares was a Board-approved program.
- The Key Employee Loan (KEL) Program, in which certain executive
officers borrowed money for purposes other than the payment of taxes due
upon the vesting of restricted shares, or borrowed in excess of the
maximum amount they were permitted under the program. Mr. Kozlowski was,
by a large margin, the greatest abuser of this program. By the end of
2001, Mr. Kozlowski had taken over 200 KEL loans - some for millions of
dollars and some as small as $100 - and his total borrowings over that
time exceeded $250 million. Approximately 90% of Mr. Kozlowski's KEL
loans were non-program loans, which he used to fund his personal
lifestyle, including speculating in real estate, acquisition of antiques
and furnishings for his properties (including properties purchased with
unauthorized "relocation loans") and the purchase and maintenance of his
yacht. Mr. Swartz also borrowed millions in non-program loans. Like Mr.
Kozlowski, Mr. Swartz used those unauthorized loans to purchase, develop
and speculate in real estate; to fund investments in various business
ventures and partnerships; and for miscellaneous personal uses having
nothing to do with the ownership of Tyco stock. Tyco is currently
evaluating the KEL program in light of recent enactment of a prohibition
upon loans by public companies to directors and executive officers.
- Attempted Unauthorized Credits to Key Employee Loan Accounts, in which
Mr. Kozlowki and Mr. Swartz attempted to erase an outstanding $25
million KEL indebtedness to Mr. Kozlowski and $12.5 million in KEL
indebtedness to Mr. Swartz without the knowledge or approval of the
Compensation Committee. Mr. Kozlowski, through his attorneys, has
acknowledged to Tyco that he sought no approvals for these credits and
that, if they were entered as a credit to his KEL account, it was done
so improperly, and that he is therefore obligated to repay these amounts
to Tyco. Mr. Swartz has also agreed to repay his forgiven indebtedness
with interest and has repaid most of the amounts. Tyco has reversed
these entries and a related unauthorized entry, thereby increasing the
outstanding balances for the key employee loan accounts of each
individual involved.
- Executive Compensation, including authorized and unauthorized
compensation to Mr. Belnick, which totaled $34,331,679 for the years
1999-2001. Belnick's compensation resulted from a secret agreement that
tied Mr. Belnick's compensation to Mr. Kozlowski's compensation, thereby
giving Mr. Belnick an undisclosed incentive to aid and facilitate Mr.
Kozlowski's improper diversion of Company funds to Mr. Kozlowski's
personal benefit. The undisclosed terms of Messrs. Kozlowski's and
Belnick's agreement were incorporated in a letter dated August 19, 1998
and signed by Mr. Kozlowski. Mr. Kozlowski and Mr. Belnick agreed that
the letter would not be disclosed to the Tyco Board, the Board's
Compensation Committee or the Tyco Human Resources department. Mr.
Belnick did, however, keep a copy of the undisclosed agreement in his
personal office.
- Perquisites in excess of $50,000 per year for Mr. Kozlowski and Mr.
Swartz. These perquisites were required to be reported in a proxy to the
extent they exceeded $50,000. However, these amounts were not reported
in the proxy because Mr. Kozlowski and Mr. Swartz represented that they
would reimburse the Company for amounts in excess of $50,000. However,
in most cases Messrs. Kozlowski and Swartz failed to reimburse the
Company for all perquisites in excess of $50,000. Mr. Kozlowski also
caused Tyco to make available to him various properties that the Company
owned for his purported business use. Tyco has now discovered that Mr.
Kozlowski periodically made personal use of properties in North Hampton,
NH, Boca Raton, FL, New York City and New Castle, NH.
- Self-Dealing Transactions and Other Misuses of Corporate Trust,
including Tyco properties purchased by or from Mr. Kozlowski without
disclosure to or authorization by the Compensation Committee. For
example, Mr. Kozlowski and others caused a Tyco subsidiary to purchase
property in Rye, New Hampshire from Mr. Kozlowski on July 6, 2000 for
$4,500,000. After an appraisal in March 2002 valued the property at
$1,500,000, Tyco wrote down the carrying value of the property to the
appraised value and charged Mr. Kozlowski's $3,049,576 overpayment to
expense. Mr. Kozlowski also used millions of dollars of Company funds to
pay for his other personal interests and activities, including a
$700,000 investment in the film "Endurance"; more than $1 million for an
extravagant birthday party celebration for his wife in Sardinia; over $1
million in undocumented business expenses, including a private venture;
jewelry, clothing, flowers, club membership dues and wine; and an
undocumented $110,000 charge for the purported corporate use of Mr.
Kozlowski's personal yacht, "Endeavour." Mr. Kozlowski also tampered
with evidence under subpoena, purchased a New York City apartment at its
depreciated rather than its market value, and took personal credit for
at least $43 million in donations from Tyco to charitable organizations.
- Information Concerning Other Transactions Between Tyco and its
Directors, which includes detail about transactions between the Company
and certain directors.
Actions Taken by the Company
The 8-K filed today also includes previous announcements of actions
taken by Tyco to address the issues the Company has been facing. These
include:
- A lawsuit against Mr. Kozlowski for breach of fiduciary duties, fraud
and other wrongful conduct. This suit seeks to recover actual and
consequential damages, including misappropriated or otherwise
unauthorized payments fraudulently made at Mr. Kozlowski's direction to
himself, a former director and other senior executives and key managers;
repayment of outstanding loans made to Mr. Kozlowski by a Company
subsidiary; disgorgement of all compensation paid to Mr. Kozlowski from
1997 through 2002; forfeiture of all benefits awarded to Mr. Kozlowski
from 1997 through 2002; and compensatory, consequential, special and
punitive damages suffered by Tyco as a result of Mr. Kozlowski's
wrongful conduct, including his breaches of fiduciary duties and
misappropriations of Tyco funds and assets.
- A lawsuit against Mr. Belnick for a broad pattern of misconduct,
including using Company funds for personal gain.
- A lawsuit against former director Frank Walsh for breaching his
fiduciary responsibilities by taking a $20 million "finders fee" in
connection with the CIT acquisition, without the knowledge or approval
of the Board.
- The appointment of John A. Krol, former Chairman and CEO of E.I
DuPont, to the Board of Directors.
- The appointment of Eric Pillmore as Senior Vice President for
Corporate Governance, a newly-created position.
- The appointment of David FitzPatrick, the former Chief Financial
Officer of United Technologies, as Tyco's new CFO.
- The appointment of William Lytton, the former General Counsel of
International Paper, as Tyco's new General Counsel.
- The nomination of five leading figures in the business community to
fill expected vacancies on the Board before the Company's next annual
meeting.
- The Board's vote not to nominate or support for re-election at the
Company's 2003 annual meeting any of the nine current members of the
Board who were members of the Board prior to July 2002.
As disclosed in its 10-Q report filed on August 14, 2002, Tyco's new
Chief Executive Officer Ed Breen believes that one of his immediate
priorities is to restore the credibility of Tyco with investors and
regulators. For that reason, Mr. Breen has directed Boies, Schiller &
Flexner LLP and the forensic accounting firm of Urbach Kahn & Werlin
Advisors, in conjunction with the Company's auditor,
PricewaterhouseCoopers LLP, to perform an in-depth review of Tyco's
accounting beginning with fiscal year 1999 and extending into the fourth
quarter of the current fiscal year. This review will include, but is not
limited to, reviewing Tyco's revenues, profits, cash flow and internal
auditing procedures as well as past and present accounting for
acquisitions and reserves.
Management notes that Tyco currently has no reason to believe that there
are any material adjustments necessary to the Company's financial
results. However, Mr. Breen believes that, in view of recent events at
the Company, this in-depth review of accounting practices is important
if the Company is to provide further assurance to shareholders and
regulators that accounting decisions made at Tyco have been appropriate
and consistent with Generally Accepted Accounting Principles. If this
internal review were to reveal any material adjustments necessary to the
Company's financial results, the Company of course would promptly
disclose such adjustments.
ABOUT TYCO INTERNATIONAL LTD.
Tyco International Ltd. is a diversified manufacturing and service
Company. Tyco is the world's largest manufacturer and servicer of
electrical and electronic components; the world's largest designer,
manufacturer, installer and servicer of undersea telecommunications
systems; the world's largest manufacturer, installer and provider of
fire protection systems and electronic security services and the world's
largest manufacturer of specialty valves. Tyco also holds strong
leadership positions in medical device products, and plastics and
adhesives. Tyco operates in more than 100 countries and had fiscal 2001
revenues from continuing operations of approximately $34 billion.
FORWARD LOOKING STATEMENTS
This release may contain certain "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations
and are subject to risks, uncertainty and changes in circumstances,
which may cause actual results, performance or achievements to differ
materially from anticipated results, performance or achievements. All
statements contained herein that are not clearly historical in nature
are forward looking and the words "anticipate," "believe," "expect,"
"estimate," "plan," and similar expressions are generally intended to
identify forward-looking statements. The forward-looking statements in
this release include statements addressing the following subjects:
future financial condition and operating results. Economic, business,
competitive and/or regulatory factors affecting Tyco's businesses are
examples of factors, among others, that could cause actual results to
differ materially from those described in the forward-looking
statements.
More detailed information about these and other factors is set forth in
Tyco's Annual Report on Form 10-K for the fiscal year ended September
30, 2001, and in Tyco's Quarterly Report on Form 10-Q, for the quarter
ended June 30, 2002. Tyco is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of new information, future events or
otherwise.
Contact:
Gary Holmes (Media)
212-424-1314
Kathy Manning (Investors)
603-778-9700 |
