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A Very Forgiving Company

Tyco says Kozlowski and Swartz borrowed millions, then didn't pay money back; some went to cover $22,000 monthly rent on an apartment in Manhattan. Both men say they can't make bail. Plus: bonds booming, and Kukura's kidnappers want $6 million.
Stephen Taub, CFO.com | US
September 18, 2002

You thought zero percent financing was a pretty good rate?

According to papers filed with the SEC on Tuesday, it appears that Tyco International was the king of the zero percent repayment program.

In the conglomerate's long-awaited 8-K filing, the company's new management revealed that the company's old management loaned at least 51 employees more than $56 million. The loans, part of the company's generous worker relocation program, were apparently forgiven.

In addition, former CEO Dennis Kozlowski received nearly $33 million in loans, while former CFO Mark Swartz received nearly $17 million. Apparently, those loans were also never repaid.

Last week, Kozlowski and Swartz were indicted for stealing from the company while Mark A. Belnick, its former executive vice president and chief corporate counsel, was charged with falsifying business records to conceal $14 million in loans to himself.

"The amount of money improperly diverted by Tyco's former 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," the company's management stated in the filing.

The hefty perquisites were awarded as part of a broad relocation program that involved executives and other employees who moved from the company's Exeter, N.H. headquarters to New York City. Tyco's management said this sweeping general plan, adopted by the company's compensation committee and reported to its board of directors, did not need to be disclosed in SEC filings.

Indeed, Charles Stillman, a lawyer for ex-Tyco CFO Swartz, said in a statement that his client is innocent, noting: "Mark Swartz never received a penny from Tyco that was not fully authorized."

But Tyco's previous management team also seems to have implemented another relocation program tailored to five or six executives. According to Tyco's current management, that program "had not been authorized by the compensation committee of the board."

The company also allegedly implemented an unauthorized relocation plan for Florida-based executives in 1997. In both the New Hampshire and Florida programs, two versions of the program were apparently crafted. "One [was] for general application, administered through the human resources department," Tyco's management noted in its filing. "A second, more generous plan, [was] maintained in the files of the then-Treasurer, for use by certain executives only."

According to the 8-K, Kozlowski improperly borrowed nearly $30 million in non-qualifying relocation loans to purchase land and construct a home in Boca Raton, Fla., from 1997 to 2000. The filing also indicates that Kozlowski improperly borrowed about $7 million in non-qualifying relocation loans to purchase a cooperative apartment in New York City in 2000.

In addition, Kozlowski rented an apartment in New York City whose $264,000 in annual rent was allegedly paid by Tyco. Kozlowski also is said to have purchased, using interest-free relocation loans, a $7 million Tyco-owned apartment on Park Avenue in New York City. The 8-K indicates Kozlowski then turned around and deeded the apartment to his ex-wife a few months later.

The most memorable paragraph of the more than 100-page document released by Tyco, however, detailed expenditures the company reimbursed to Kozlowski in the New York City apartment that he was given by the company. They included a shower curtain for $6,000; a dog umbrella stand for $15,000; a sewing basket for $6,300; a traveling toilette box for $17,100; a gilt metal wastebasket for $2,200; coat hangers for $2,900; two sets of sheets for $5,960; a notebook for $1,650; and a pincushion for $445.

All told, Tyco management says Kozlowski enjoyed the following benefits:

Of Kozlowski's total $61,690,628 of alleged unauthorized interest free relocation loans: $21,697,303 were actually repaid by him, but without interest. Nearly $20 million was "repaid" through unauthorized forgiveness that he apparently bestowed upon himself. Another $20 million or so was reclassified to other Kozlowski loan accounts that he maintained with the company.

Swartz received:

Of Swartz's total $33,097,925 of unauthorized interest free relocation loans, $10,786,977 was repaid by him, but without interest. Around $10 million was repaid through forgiveness that Kozlowski was not authorized to bestow. Another $12.5 million was reclassified to other Swartz loan accounts that he maintained with the company.


Tyco Twosome Can't Make Bail
Kozlowski's $17,000 traveling toilette kit may come in handy, after all.

The onetime Tyco CEO, along with Swartz, could wind up behind bars as early as Thursday. The two former Tyco executives told a judge late Tuesday that they are unable to come up with bail money, according to published reports.

Lawyers reportedly told Manhattan Supreme Court Judge Michael Obus at what was described as a hastily called hearing that Kozlowski is broke and cannot access bank accounts because they are frozen. "He can't even go to an ATM machine because all of his assets are blocked," said Kozlowski's lawyer, Stephen Kaufman, according to wire service accounts. "He has many friends on the outside but not the kind of friends who have this kind of money."

Kozlowski was freed last week on a $100 million personal recognizance bond that was to be secured by $10 million in personal assets.

Swartz was released on a $50 million bond, secured by $5 million in personal funds. Lawyers for Swartz also reportedly said he couldn't make bail.

If they can't come up with the cash by Thursday, both men will be handcuffed and sent to Riker's Island, one of the nation's toughest jails.

Interestingly, Kozlowski's ex-wife offered to post her $10 million home in Greenwich, Conn. to help the former Tyco CEO make bail. The lead prosecutor objected, however, on the grounds that the house could have been received as a result of Kozlowski's alleged criminal conduct.

Belnick, the former chief corporate counsel, was released last week on an unsecured personal recognizance bond of $1 million.

Bond Bonanza
This is shaping up as one of the biggest weeks ever for bond underwriters.

Already, $5.5 billion in new issues have come to market, and another $6 billion is expected by the end of the week, according to published reports.

A "window of opportunity" opened for issuers, Peter Palfrey, vice president and portfolio manager, for Loomis, Sayles told Reuters.

Among the new issues: Wells Fargo & Co. offered $2 billion of two-year global floating rate notes priced at six basis points over three-month Libor. It was rated Aa2 by Moody's and single-A-plus by Standard & Poor's. The bank initially planned to raise $1.25 billion.

Cox Communications, Inc. also issued debt this week, offering $1 billion of 10-year notes, priced at 337.5 basis points over comparable Treasurys. The paper was rated Baa2/BBB.

In addition, Wal-Mart Stores, Inc. reopened its a bond offer maturing in 2007 for an additional $500 million. The Wal-Mart debt was priced at 52 basis points over Treasurys and rated Aa2/AA. The total issue size is now $1.5 billion.

Other issuers include: Branch Bank & Trust, $500 million of 10-year global subordinated notes; Anadarko Petroleum Corp., $300 million of 10-year notes at a spread of 123 basis points over Treasurys; Ocean Energy, Inc., $400 million of five-year notes at a spread of 150 basis points over Treasurys; and Centex Corp., $225 million of seven-year notes at a spread of 235 basis points over Treasurys.

Meanwhile, later this week General Electric Capital Corp. plans to price a $4 billion two-part global offering that will include a two-year floating rate maturity and a seven-year fixed rate bullet.

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