KLA-Tencor Takes $400M Options Charge; Levy Exits

By Colleen Taylor -- Electronic News, 10/17/2006

KLA-Tencor Corp. late Monday announced the conclusion of its internal investigation of the company's stock option granting practices and said it will pay $400 million for the errors it has discovered. In a separate announcement today, the company said that its founder Kenneth Levy has announced his retirement as a board member and employee at KLA.

The Securities and Exchange Commission began investigating KLA in May, prompting the company to launch its own inquiry into its history of stock options granting. The company previously confirmed that its board of directors had indeed concluded that backdating occurred principally during the period from July 1, 1997 through June 30, 2002, but at that time did not provide any details regarding the total amount of the errors.

Now, KLA says it will restate its financial statements to correct the accounting for retroactively priced stock options, and anticipates that the total additional non-cash charges for stock-based compensation expenses will not exceed $400 million.

The fall out from the investigation has prompted KLA to wash its hands of those involved with the stock options scandal. In a statement released yesterday, KLA said it "has terminated all aspects of its employment relationship with Kenneth L. Schroeder, effective immediately." Schroeder was president and COO of the company from 1991 to 1999, and CEO and a member of the board of directors from 1999 through 2005.

The company also announced that its general counsel, Stuart J. Nichols, has resigned, effective immediately. Nichols had been VP and general counsel of the company since 2000. KLA said it expects to name an interim general counsel soon.

Additionally, KLA further announced its intention to cancel all outstanding backdated stock options held by Schroeder and to re-price all outstanding retroactively priced stock options held by Nichols. The exercise price of each re-priced option will be increased to the fair market value on the corrected measurement date, KLA said.

In a separate announcement made today, the company said that Kenneth Levy, founder and chairman of the board, has informed it that he is retiring as a director and employee, effective immediately. Levy was a member of the board since 1975, chairman of the board since 1999, and CEO from 1975 to 1997 and from mid 1998 to mid 1999. Edward W. Barnholt, the former president and CEO of Agilent Technologies and a KLA board member since 1995, will succeed Levy.

Meanwhile, KLA did have some good news from the investigation. The company said that it has concluded that there was no involvement in the improper stock option practices by any current members of company management, including Richard P. Wallace, John H. Kispert and Jeffrey L. Hall, who became CEO, COO and CFO, respectively, in early 2006. However, although the board concluded that Kispert was not involved in the improper stock option practices, his outstanding retroactively priced options will be re-priced because he served as CFO during part of the period in question.

KLA has a long, number-filled road ahead. The company said the restatement process is well under way and that it will continue to "work diligently" to determine the exact amount of additional non-cash charges for stock-based compensation expenses, the resulting accounting and tax impact, and the specific prior periods requiring restatement, and to file its delayed annual report on Form 10-K for the fiscal year ended June 30, as well as other required reports, "as soon as practicable."

For more on the industry’s ongoing stock options backdating scandal, click here.