SafeNet delays results again, may affect loan


October 11, 2006|By Stacey Hirsh | Stacey Hirsh,Sun reporter

SafeNet Inc., the Harford County technology company whose stock option grants are under federal investigation, said yesterday that it may have to accelerate payment of a $250 million loan because of a further delay in releasing its second-quarter results.

The company said the financial statement likely won't be released until later in the fourth quarter, which ends Dec. 31. The company previously had said it expected to file results for the second quarter by early this month.

SafeNet said in a news release that it expected Citibank to demand repayment of subordinated convertible notes due in 2010, because the company had failed to meet a 60-day deadline for filing the report after the initial delay.

Repayment would cost about $253 million, the company said, leaving it with $70 million in cash and no debt. SafeNet said it also would incur a $5 million noncash charge for writing off the deferred debt issuance cost of the notes.

SafeNet's statement said its estimated cash flow from operations for the first half of the year was approximately $25 million.

"The repayment of the loan in no way affects the fundamental health of the company," said Donna St. Germain, a SafeNet spokeswoman.

Analysts said the $70 million in cash leaves SafeNet in a strong financial position.

While one could argue that the diminished cash may limit the company's ability to make acquisitions, SafeNet is slowing down in that area anyway as it works to integrate and improve its current businesses, said Todd C. Weller, an analyst for Stifel Nicolaus in Baltimore, who does not own shares of SafeNet.

"You'll find more investors that believe software companies or tech companies have too much cash on the balance sheet," Weller said. "SafeNet's been generating positive operating cash flow ... so they're fine from a cash perspective."

Wall Street hardly reacted to the news. SafeNet shares rose 39 cents to close at $20.45.

"I think the market has kind of decided that this wasn't a big deal because it doesn't affect operations, and the idea that there's really no delisting in the near term is probably a good sign, too," said Sean Jackson, an analyst with Avondale Partners in Nashville, Tenn., who doesn't own SafeNet shares.

SafeNet said in August that it received a letter from Nasdaq stating it could be delisted for failing to file a timely report for the second quarter. The company met with Nasdaq officials several weeks ago to request an extension, and the company's director of investor relations, Gregg Lampf, said SafeNet expects a decision on that sometime this month.

Analysts said most companies that receive delisting notices are granted extensions.

SafeNet attributed the delays in filing its second-quarter results to the accounting and legal complexities of the investigation into options grants.

SafeNet is one of dozens of publicly traded companies that have come under federal investigation for possible illegal backdating of option grants. Backdating is when options are awarded with an effective date other than their grant date to take advantage of previous declines in the stock. The effect is to make the option potentially more valuable.

The Belcamp company said in May that the U.S. attorney's office for the Southern District of New York had subpoenaed information about stock option awards and that it had received an informal inquiry from the SEC. The company formed a board committee to investigate the option grants. The committee has retained counsel and forensic accountants to help.

SafeNet's internal investigation could cost $12 million this year, with about $6 million of that cost coming in the third quarter, according to SEC filings.

SafeNet has reported earnings of $12.4 million for 2003, 2004 and 2005 combined.

Earlier this month, SafeNet said that it would have to revise financial statements from 2000 through March 31, because some options grants made between 2000 and 2005 were accounted for "using incorrect measurement dates under applicable accounting rules in effect at the time."

The company has not identified the quarters to be restated, but SafeNet has said that it would delay filing its second-quarter results with the SEC until its accounting review is finished.

SafeNet is one of the first companies to go through this process and may set a precedent. "There are going to be other companies that are going to follow SafeNet with the same issue," said Jackson. "We're in kind of uncharted waters here in a lot of ways, because the whole backdating of stock options is still a fairly new issue."

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