Kozlowski is out and Tyco stock takes a hit

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Monday, July 1, 2002

NEW YORK-Tyco International took another tumble in early June when its President and Chief Executive Officer L. Dennis Kozlowski resigned for "personal reasons" only to be indicted and arraigned for sales tax evasion.

News of the Manhattan district attorney's investigation into millions of dollars of artwork that Kozlowski bought for his Fifth Avenue apartment and shipped to New Hampshire to avoid paying about a $1 million in state sales tax sent Tyco's stock on a downward spiral. Since the announcement of the investigation, the company's stock has gone as low as $8.25 per share, but rebounded to $14.09 as of press time.

The investigation by the district attorney's office also raised questions in the investment community about how much of an impact Kozlowski's personal matters would affect the company he once ran.

"The best barometer is the meltdown of the stock," said Jack Mallon, a security industry analyst with Mallon & Associates. "Nothing changed as far as the corporation, what changed is the disclosure of the alleged illegal behavoir on the part of the CEO."

Shortly after Kozlowski's resignation, company officials initially said they did not anticipate Kozlowski's own woes will reek havoc on Tyco. "Any allegations against Dennis are personal matters for Dennis and are certainly not related to his role as chief executive officer or the rest of the management team," said Brad McGee, executive vice president of Tyco.

Now, that does not seem to be the case.

Since then, Tyco has opened up an internal investigation into whether corporate funds were used to buy homes for executives, including Kozlowski. And, the company's former general counsel, Mark Belnick, who was recently fired has been sued by Tyco for misconduct that included using the company's funds for personal gains.

The financial implications on Tyco's fire and security related companies appear to be broad (See related story on page 1). Not only are there questions about whether Tyco will be able to hold onto its security and fire related companies, but company wide about 7,100 people will be laid off to trim costs and 24 locations closed. That announcement was made after Tyco officials dropped plans to break the company into four units after its stock took its first nose dive, losing about $85 billion, or three-quarters, of its value.

"The future direction of this company is unclear," said Steven Altman, an analyst with Commerzbank in New York. "Is it going to be a streamlined company? Conglomerates are a lot more rarer these days."

Kozlowski's resignation as head of one of the fastest growing conglomerates came after a series of weekend conference calls with Tyco's board of directors to talk about the district attorney's investigation. Some published reports said Kozlowski was asked to resign.

Since then, John Fort, who has been associated with Tyco for the past 28 years, has taken over as interim chief executive officer. Fort was chairman and chief executive officer of Tyco for 10 years, from 1982 to 1992. Since then, he's been an active member of the board.

Under Fort's leadership, Tyco recently announced plans to trim $125 million by reducing corporate staff positions by 115 people, consolidating offices and selling assets, such as the company's aircraft.

McGee expects the search for a permanent replacement for Kozlowski will take a while.

"The board is initiating a search for a permanent replacement," said McGee. "There's not a specific timeframe, but we are talking in terms of months rather than weeks."

Meanwhile, Kozlowski pled not guilty to the charges against him and was released on $3 million bail. He had to surrender his passport and must inform the district attorney's office of any travel plans.

According to district attorney spokesperson Sherry Hunter, the 11 charges against Kozlowski are punishable by up to four years in prison.