SafeNet to restate results

Improper accounting of options affects earnings in 4Q of 2002

July 27, 2006|By STACEY HIRSH | STACEY HIRSH,SUN REPORTER

SafeNet Inc. said yesterday that an internal investigation had found improprieties in its accounting of stock options awards that would force it to restate earnings in at least one quarter.

The Harford County company, which makes network security products, has come under scrutiny in recent months by federal regulators. It disclosed in May that it received a federal subpoena and an informal inquiry from the Securities and Exchange Commission over stock-option grants to company officers and directors.

"We take these matters very seriously," SafeNet Chairman and Chief Executive Officer Anthony A. Caputo said in a conference call with analysts yesterday.

SafeNet is one of dozens of publicly traded companies that have come under investigation by regulators and prosecutors for possibly backdating option awards.

Backdating is the term for making options effective at a time that coincides with a dip in the stock price, not the actual award date when the share price is likely to be higher.

Yesterday, SafeNet said in a statement that as a result of its internal investigation it "believes that certain option grants ... were or likely were accounted for using incorrect measurement dates under applicable accounting rules in effect at the time.

"With respect to one of these grants, made to officers and employees of the company, including the chief executive officer, in the fourth quarter of 2002, the company has concluded that material non-cash, stock-based compensation expenses related to this option grant will have to be recorded. Therefore, the company expects that financial statements for the fourth quarter of 2002 will have to be restated."

A committee named by SafeNet's board to investigate the awards has retained counsel and hired forensic accountants to help with the probe. Last month, SafeNet named former SEC Commissioner J. Carter Beese Jr. to its board and appointed him to the committee.

Company officials declined to comment further on the options grants during yesterday's conference call.

SEC documents show that Caputo was issued immediately exercisable grants of stock options at or near the bottom of short-term dips in the stock price or at yearly lows. In October 2002, for instance, SafeNet granted Caputo 100,000 options when the stock was $13.75. Within two months it was $29.

On Feb. 27, 2003, Caputo received 100,000 options when the stock was $16.47, according to SEC documents. That was the lowest price of any trading day that year. By October, the stock had reached almost $43.

SafeNet has said Caputo exercised only about a quarter of the options on more than 700,000 shares of company stock he's been granted in his 19 years with SafeNet.

The company said yesterday that as part of a new policy, SafeNet's options will be granted on fixed dates throughout the year.

SafeNet said it did not know if results of other quarters would need to be restated because of options accounting. The company said it would delay filing its second-quarter report with the SEC until the accounting review was finished.

Preliminary second-quarter results released yesterday showed the Belcamp company's loss narrowed and its revenue increased in the three months that ended June 30.

SafeNet reported a net loss of $800,000, or 4 cents per share, compared with a loss of $4.9 million, or 20 cents per share, for the second quarter of 2005. Revenue was $69.5 million, compared with $63.1 million.

The results were released after the market closed. SafeNet shares gained 30 cents to $15.61.

Analysts have said SafeNet lost some credibility on Wall Street because of disappointing numbers and having to restate earnings in the past.

stacey.hirsh@baltsun.com

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