SafeNet upbeat, despite probes

July 29, 2006|By TRICIA BISHOP | TRICIA BISHOP,SUN REPORTER

At its annual shareholders' meeting in Belcamp yesterday, SafeNet Inc. focused on the good news, reporting it was on track for record revenue, was ahead of schedule on military orders for data encryptors and had recently landed an unnamed big banking customer - which a trade publication has identified as SWIFT, the huge financial network.

But before Chairman and Chief Executive Officer Anthony A. Caputo could get to all that, he had to deal with the bad.

"I'd like to spend a few minutes talking about corporate governance, because this has become a very important issue at SafeNet," said Caputo, as he began his status-of-the-company report. "Recently we have experienced some challenges in this area, which we are attempting to quickly and swiftly put behind us."

The 22-year-old company - which makes network security products used to protect some of the country's top secret information - is one of more than 80 being probed in connection with options awards.

SafeNet has received a subpoena from a federal grand jury for the Southern District of New York and is informally being investigated by the Securities and Exchange Commission.

Four shareholders also are suing SafeNet over "alleged abuses in connection with the granting of stock options," according to a filing on the company's behalf in Harford County Circuit Court.

The federal probes seek to find out if businesses are illegally backdating stock options for top executives. The practice involves dating option awards earlier than the day they're granted, to take advantage of lows in the stock price and reap maximum profits. It's OK to backdate options if they are properly taxed, accounted for and disclosed, but illegal if not.

The Internal Revenue Service also has announced it is investigating backdating at certain companies.

"The IRS will examine relevant cases to determine that both the companies and executives involved satisfied their tax obligations," said a statement by Mark W. Everson, the agency's chief. "I've directed our corporate audit group to consult closely with the SEC to determine which companies merit scrutiny."

This week, SafeNet said it had found options granted to employees and officers, including Caputo, that had "incorrect measurement dates" and would likely force it to restate its earnings for the fourth quarter of 2002. An internal investigation of stock options granted over the past decade is under way.

The stock-option probes didn't appear to concern the several dozen people at the annual meeting yesterday - mostly SafeNet board members, employees, affiliates and a handful of shareholders.

People chatted in small groups, picked over the buffet spread and called friendly greetings to one another across the conference room. By 10 a.m., when the meeting was set to begin, the only one who appeared ready for business was Caputo. He stood at the front of the room flipping through pages and jotting notes while others worked the room.

Soon, the group took their seats and the meeting began. The nine directors were re-elected to their positions and Ernst & Young LLP was approved as the company's independent auditor for 2006.

Caputo said the company expects revenue of $283 million for 2006 - a 7.6 percent increase over 2005, and talked about a "large financial institution" that had recently signed on to use SafeNet's products to secure its networks.

He declined to name the institution, though a May edition of trade publication Baseline identified it as SWIFT, the Belgian cooperative that coordinates communications among 7,800 financial institutions worldwide. In the article, a former SWIFT executive says its larger customers will receive computers containing SafeNet technology.

(The New York Times reported in June that SWIFT had allowed the U.S. government to secretly track money transfers on its network since 2001. The company, formerly called the Society for Worldwide Interbank Financial Telecommunication, tracks trillions of banking transactions in a year.)

SafeNet officials said yesterday that they were confident about the company's course despite the options probes.

"We're proud as hell of the quarter and what the company does," said SafeNet board member Arthur L. Money. But he acknowledged that it's also "an awkward time."

Said SafeNet spokesman Ian Dix: "Bad things happen, and we're going to get past this."

tricia.bishop@baltsun.com

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