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Shareholder blasts Tyco
Executives try to reassure investors but Omega's Cooperman demands changes on the board.
June 14, 2002: 12:56 PM EDT

NEW YORK (CNN/Money) - Tyco International executives told investors Friday that the SEC's latest probe was limited to former CEO Dennis Kozlowski and did not focus on accounting, but one big investor called for changes on the board of the beleaguered conglomerate.

"This board of directors has been totally asleep," Leon Cooperman, president of investment firm Omega Advisors, told Tyco executives during a morning conference call. He added that "common sense would dictate" that the composition of the board has to be changed.

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As of March 31, Omega owned 5.5 million shares of Tyco, or about 0.3 percent of the company's outstanding shares, according to FactSet research.

John Fort, Tyco's lead director and interim CEO, said the company is weighing making changes to the board as well as searching for a permanent replacement to Kozlowski, who was indicted last week on charges of tax evasion. Fort said the company's internal investigation of Kozlowski is expected to end in six to eight weeks.

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But Fort has recently come under scrutiny as well, according to a law enforcement official working on the case. The official said the probe of Fort focused on the "question of independence, especially since he's a member of the Tyco board governance committee."

Fort was both an adviser and a paid investor in a buyout fund that bought Tyco's flow-control products division for about $810 million in 1999, according to Friday's Wall Street Journal, which first reported the scrutiny of Fort.

In addition, Fort also sold his house in New Hampshire to Kozlowski in 1996, a sale that is under investigation for possible use of Tyco funds, according to the newspaper. The company did not comment on the report during Friday's call.

Tyco's (TYC: up $0.15 to $13.95, Research, Estimates) shares rose in midday trading after jumping Thursday on hopes the company is making progress in spinning off its CIT Group finance unit in an initial public offering -- a move that will raise much needed cash to pay down debt.

Fort said that a roadshow for CIT is underway and that the IPO should take place in early July. Tyco hopes to raise $5 billion to $5.8 billion from the offering.

Tyco is struggling to shore up its finances after two leading credit-rating agencies cut the company's bonds to "junk" in the last week.

During Friday's call, Tyco Chief Financial Officer Mark Swartz called the downgrades by Moody's Investor Service and Fitch "irrational" and said Tyco is committed to restoring its former investment grade status.

"We do deserve, and should be at, a higher rating than we currently are," Swartz said. Standard & Poor's the other major credit-rating agency, has Tyco's bonds rated as triple B minus, one notch above junk status.

Lower credit ratings make it more expensive to borrow. In order to boost its ratings, Swartz said Tyco plans to use its $4 billion in cash on hand, cash generated by its businesses, as well as funds from the CIT offering, to slash debt to $17 billion, from $27 billion, in the next six months.

But concerns about the balance sheet are not the only reason why Tyco's stock has lost more than 75 percent of its value this year. The company has been hit hard by softness in its electronics business and that has led to a steady decline in earnings estimates.

Omega's Cooperman noted that when Tyco announced a break up plan in January, the company expected to earn $3.70 a share in fiscal 2002. Now estimates are for earnings of just $2.57 a share. The company abandoned the breakup plan last spring.

Fort said Tyco was not changing its guidance for its fiscal fourth quarter, which ends in September, but that it was reviewing its outlook. Analysts currently expect Tyco to earn 61 cents a share on $10.6 billion in revenue. That compares to earnings of 86 cents a share and sales of $10 billion a year earlier.  Top of page