0000950133-00-00451610-Q SAFENET INC 2000111420001114120947120928120928 0 0000950133-00-004516 10-Q 4 20000930 20001114 SAFENET INC 0000850313 3663 521287752 DE 1231 10-Q 34 000-20634 764330 8029 CORPORATE DRIVE BALTIMORE MD 21236 4109317500 8029 CORPORATE DR BALTIMORE MD 21236 INFORMATION RESOURCE ENGINEERING INC 19920703 10-Q 1 w42350e10-q.txt QUARTERLY REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-20634 SAFENET, INC. (Exact name of registrant as specified in its charter) -------------------- Delaware 52-1287752 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization)
8029 Corporate Drive, Baltimore, Md. 21236 ------------------------------------------ (Address of principal executive offices) 410-931-7500 ------------ (Registrant's telephone number) Indicate by a check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's Common Stock as of November 14, 2000 was 6,891,807. 2 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999, and the nine months ended September 30, 2000 and 4 1999 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2000 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 6 Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2000 and 1999, and the nine months ended 7 September 30, 2000 and 1999 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16
2 3 SAFENET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, December 31, 2000 1999 ------------- -------------- (unaudited) Assets ------ Current Assets: Cash and cash equivalents $ 26,731 $ 19,161 Short term investments - 501 Accounts receivable, net of allowance for doubtful accounts of $214 and $251 5,740 4,405 Inventories 2,361 2,946 Prepaid expenses 391 282 ------------- -------------- Total current assets 35,223 27,295 Equipment and leasehold improvements, net of accumulated depreciation of $2,807 and $2,347 1,134 1,424 Computer software development costs, net of accumulated amortization of $2,157 and $1,227 1,550 2,107 Goodwill, net of accumulated amortization of $545 and $481 422 486 Prepaid license fees and other assets 879 584 ------------- -------------- $ 39,208 $ 31,896 ============= ============== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 1,831 $ 1,154 Accrued expenses 2,140 1,634 Advance payments and deferred revenue 868 1,472 ------------- -------------- Total liabilities 4,839 4,260 ------------- -------------- Stockholders' equity: Preferred stock, $.01 par value per share. Authorized 500,000 shares, none issued and outstanding - - Common stock, $.01 par value per share. Authorized 15,000,000 shares, issued 6,877,009 shares in 2000 and 6,541,483 shares in 1999 69 65 Additional paid-in capital 50,240 46,547 Accumulated deficit (14,610) (17,681) Accumulated other comprehensive loss (1,330) (1,295) ------------- -------------- Net stockholders' equity 34,369 27,636 ------------- -------------- $ 39,208 $ 31,896 ============= ==============
See accompanying notes to consolidated financial statements. 3 4 SAFENET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ----------- ---------- ----------- ---------- Revenues $ 7,633 $ 3,783 $ 19,941 $ 14,420 Cost of revenues 2,019 1,476 5,348 5,200 ----------- ---------- ----------- ---------- Gross profit 5,614 2,307 14,593 9,220 ----------- ---------- ----------- ---------- Research and development expenses 1,737 1,650 5,408 4,365 Sales and marketing expenses 1,504 1,434 4,515 5,045 General and administrative expense 876 868 2,744 2,000 Amortization of acquired intangible assets 22 23 64 69 Recovery of CyberGuard advance - (238) (275) (238) ----------- ---------- ----------- ---------- Total operating expenses 4,139 3,737 12,456 11,241 ----------- ---------- ----------- ---------- Operating income (loss) 1,475 (1,430) 2,137 (2,021) Interest income, net 398 25 934 71 ----------- ---------- ----------- ---------- Income (loss) before income taxes 1,873 (1,405) 3,071 (1,950) Income tax expense - 188 - 468 ----------- ---------- ----------- ---------- Net income (loss) $ 1,873 $ (1,593) $ 3,071 $ (2,418) =========== ========== =========== ========== Income (loss) per common share - basic and diluted Basic $ 0.28 $ (0.29) $ 0.46 $ (0.45) =========== ========== =========== ========== Diluted $ 0.26 $ (0.29) $ 0.43 $ (0.45) =========== ========== =========== ========== Weighted average number of common shares outstanding: Basic 6,802 5,514 6,694 5,411 Diluted 7,249 5,514 7,201 5,411
See accompanying notes to consolidated financial statements. 4 5 SAFENET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Nine months ended September 30, 2000 (Unaudited - in thousands)
Accumulated Common stock Additional other Net ----------------- paid in Accumulated comprehensive stockholders' Shares Amount capital deficit income (loss) equity -------- -------- ----------- ------------- ----------------- ------------- Balance at December 31, 1999 6,541 $ 65 $ 46,547 $ (17,681) $ (1,295) $ 27,636 Stock options exercised 329 4 3,504 3,508 Stock warrants exercised 7 - 118 - - 118 Net income for the nine months ended September 30, 2000 - - - 3,071 - 3,071 Foreign currency translation adjustment - - - - (375) (375) Unrealized gain from available- for-sale securities - - - - 340 340 Other - - 71 - - 71 -------- -------- ----------- ------------- ----------------- ------------- Balance at September 30, 2000 6,877 $ 69 $ 50,240 $ (14,610) $ (1,330) $ 34,369 ========= ======= ============ =============== ================= ==============
See accompanying notes to consolidated financial statements. 5 6 SAFENET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - in thousands)
Nine Months Ended September 30, ------------------------- 2000 1999 ------------ ----------- Cash flows from operating activities: Net income (loss) $ 3,071 $ (2,418) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,441 775 Amortization of acquired intangible assets 64 69 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (1,393) 1,745 (Increase) decrease in inventories 482 183 (Increase) decrease in prepaid expenses (76) 1 Increase (decrease) in accounts payable 689 (242) Increase (decrease) in accrued expenses 514 160 Increase (decrease) in deferred revenues (603) 185 Other 194 83 ------------ ----------- Net cash provided by operating activities 4,383 541 ------------ ----------- Cash flows from investing activities: Sales of short-term investments 501 - Equipment expenditures (214) (377) Additions to computer software development costs (377) (436) ------------ ----------- Net cash (used in) investing activities (90) (813) ------------ ----------- Cash flows from financing activities: Proceeds from exercise of stock options 3,508 1,568 Proceeds from exercise of stock warrants 118 392 Other (100) 5 ------------ ----------- Net cash provided by financing activities 3,526 1,965 ------------ ----------- Effect of exchange rate changes on cash (249) (384) ------------ ----------- Net increase in cash and cash equivalents 7,570 1,309 Cash and cash equivalents at beginning of period 19,161 5,866 ------------ ----------- Cash and cash equivalents at end of period $ 26,731 $ 7,175 ============ =========== Cash paid for: Interest expense $ - $ - ============ =========== Income taxes $ 57 $ - ============ ===========
See accompanying notes to consolidated financial statements. 6 7 SAFENET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited - in thousands)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 2000 1999 2000 1999 ---------- ----------- ---------- ---------- Net income (loss) $ 1,873 $ (1,593) $3,071 $ (2,418) Other comprehensive income (loss): Unrealized gain (loss) from available-for-sale securities (281) - 340 - Foreign currency translation adjustment (267) 286 (375) (557) ---------- ---------- ---------- ---------- Comprehensive income (loss) $ 1,325 $ (1,307) $3,036 $ (2,975) ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 7 8 SAFENET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of results for the interim periods presented. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the interim period are not necessarily indicative of results to be expected in future periods. (2) Inventories Inventories consist of the following (in thousands):
As of ---------------------------------- September 30, December 31, 2000 1999 ---------------- --------------- Raw materials $ 1,376 $ 1,366 Finished goods 985 1,580 ---------------- --------------- Total $ 2,360 $ 2,946 ================ ===============
(3) Accrued Expenses Accrued expenses consist of the following (in thousands):
As of ---------------------------------- September 30, December 31, 2000 1999 ---------------- --------------- Accrued salaries and commissions $ 1,288 $ 1,110 Other 852 524 ---------------- --------------- Total $ 2,140 $ 1,634 =============== ===============
(4) Income Taxes The income tax expense for the three and nine month periods ended September 30, 1999 represents income taxes for the Company's Swiss subsidiary. There is no income tax expense for the three and nine month periods ended September 30, 2000 (see Note 5). (5) Change in Accounting for Income Taxes The Company has net operating loss carryforwards for tax purposes ("NOLs") that are available to offset future taxable income. Only a portion of the NOLs is attributable to operating activities. The remainder of the NOLs is attributable to tax deductions from stock option plans. For the first and second quarter of 2000, the Company followed the practice of computing its income tax expense using the assumption that current year stock option deductions were used first to offset its financial statement income. NOLs could then offset any excess financial statement income over current year stock option deductions. Because stock option 8 9 deductions are not recognized as an expense for financial reporting purposes, the tax benefit of stock option deductions must be credited to additional paid in capital with an offsetting income tax expense recorded in the income statement. The Company applied this practice for the first two quarters of fiscal 2000. Effective July 1, 2000, the Company changed its accounting for income taxes to recognize the tax benefits from current and prior years' stock compensation deductions after utilization of NOLs from operations (i.e., NOLs determined without deductions from the stock option plans) to reduce income tax expense. The Company believes that this change is to a preferable method because the Company will not realize any tax benefit from stock compensation deductions until it has fully utilized its current and prior net operating loss carryforwards from operations. Thus, this method more accurately reflects the incremental effect of the Company's stock option deductions in the appropriate accounting period. Because the Company was generating NOLs prior to fiscal 2000 rather than using them, this accounting change had no effect on prior years' tax provisions or additional paid in capital. After restating the first and second quarters in fiscal 2000, the effect of the accounting change for each quarter was to increase net income (in thousands) and net income per share as follows:
Net Income -------------------------------------------------------------- Per Share ------------------------------------- Total Basic Diluted ----- ----- ------- First Quarter - - - Second Quarter $276,000 $0.04 $0.04 -------------------------------------------------------------- Total $276,000 $0.04 $0.04 ==============================================================
Further additional paid-in capital was reduced by $276,000 and, as a result of this change in accounting method, accumulated deficit was increased by $276,000. The Company's NOLs for tax purposes, which were fully reserved to the extent of the excess over deferred tax liabilities, relating to operations and stock options amounted to (in thousands):
September 30, 2000 December 31, 1999 ------------------ ----------------- Operations $11,227 $14,298 Options $8,779 $2,800
When realization of the NOL is more likely than not to occur, the benefit related to NOL from operations will be recognized as a reduction of income tax expense. The benefit related to the NOL from stock option deductions will be recognized as tax expense and credited to additional paid-in capital. 9 10 (6) Segments of the Company and Related Information The Company has three reportable segments: products, chips and software designed and manufactured in the United States for sale to companies that will embed the Company's products into their products for ultimate sale to end-users ("Technology Operations"), network security products designed and manufactured in the United States for direct sales to end-users ("Product Operations"), and security products designed and manufactured outside the United States ("European Operations"). The reportable segments are strategic business units that offer different products. The segments are managed separately because each segment requires different technology and marketing strategies. The Technology Operations and Product Operations include some international sales mainly to South America and Asia. Information presented below is as of and for the three and nine month periods ended September 30, 2000 and 1999, respectively (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, ------------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------- Revenues: Technology operations $ 4,124 $ 701 $ 10,484 $ 2,939 Product operations 2,449 1,464 6,969 4,464 European operations 1,060 1,618 2,488 7,017 -------------- --------------- -------------- ------------- Consolidated revenues $ 7,633 $ 3,783 $ 19,941 $ 14,420 ============== =============== ============== ============= Intersegment revenues: Technology operations $ - $ - $ - $ - Product operations 3 - 106 - European operations 4 - 6 - -------------- --------------- -------------- ------------- Intersegment revenues $ 7 $ - $ 112 $ - ============== =============== ============== ============= Reconciling items: Intersegment revenues $ (7) $ - $ (112) $ - -------------- --------------- -------------- ------------- Total consolidated revenues $ 7,633 $ 3,783 $ 19,941 $ 14,420 ============== =============== ============== ============= Operating income (loss): Technology operations $ 1,072 $ (853) $ 1,936 $ (2,415) Product operations 616 (897) 1,326 (2,201) European operations (213) 320 (1,125) 2,595 -------------- --------------- -------------- ------------- Consolidated operating income (loss) $ 1,475 $ (1,430) $ 2,137 $ (2,021) ============== =============== ============== ============= Income (loss) before income taxes: Technology operations $ 1,295 $ (845) $ 2,458 $ (2,392) Product operations 777 (890) 1,704 (2,179) European operations (199) 330 (1,091) 2,621 -------------- --------------- -------------- ------------- Consolidated income (loss) before income taxes $ 1,873 $ (1,405) $ 3,071 $ (1,950) ============== =============== ============== ============= Depreciation and amortization: Technology operations $ 271 $ 80 $ 893 $ 193 Product operations 116 246 503 538 European operations 34 38 109 113 -------------- --------------- -------------- ------------- Consolidated depreciation and amortization $ 421 $ 364 $ 1,505 $ 844 ============== =============== ============== =============
10 11
As of --------------------------------------- September 30, September 30, (in thousands) 2000 1999 -------------- ------------------ ------------------- Segment assets: Technology operations $ 17,174 $ 3,294 Product operations 17,092 6,804 European operations 4,942 7,922 ------------------- ------------------ Consolidated segment assets $ 39,208 $ 18,020 =================== ================== Long lived assets: United States $ 2,449 $ 2,938 Switzerland 235 170 ------------------- ------------------ Consolidated long lived assets $ 2,684 $ 3,108 =================== ==================
Three Months Nine Months Ended September 30, Ended September 30, -------------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------------ ------------------ ----------------- ------------------- Geographic Information Revenues: United States $ 6,285 $ 2,037 $ 16,529 $ 6,897 Switzerland 572 397 1,520 3,627 Other foreign countries 776 1,349 1,892 3,896 ------------------- ------------------ ------------------ ------------------ Consolidated revenues $ 7,633 $ 3,783 $ 19,941 $ 14,420 =================== ================== ================== ==================
For the nine month period ended September 30, 2000, one commercial client of the Technology operations and one commercial client of the Product operations accounted for 29% and 10%, respectively, of the Company's consolidated revenues. For the nine month period ended September 30, 1999, one commercial client of the European operations accounted for 11% of the Company's consolidated revenues. (7) Earnings Per Common Share Basic earnings per share ("EPS") is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the numerator and the denominator of the basic EPS calculation for the effect of all dilutive potential common shares outstanding during the period. Information related to the calculation of basic and diluted EPS is summarized as follows (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, -------------------- --------------------- 2000 1999 2000 1999 -------- ---------- --------- ---------- Net income (loss) $1,873 $ (1,593) $3,071 $ (2,418) ======== ========== ========== ========== Weighted average common shares outstanding basic 6,802 5,514 6,694 5,411 Effect of dilutive securities-options 447 - 507 - -------- ---------- --------- ---------- Adjusted weighted average common shares outstanding diluted 7,249 5,514 7,201 5,411 ======== ========== ========== ==========
During 1999, diluted loss per common share is equal to basic loss per common share because if potentially dilutive securities were included in the computation, the result would be anti-dilutive. These potentially dilutive securities consist primarily of stock options. 11 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the statements in this Item are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include, among others, risks associated with the receipt and timing of future customer orders, price pressures, achieving technical and product development milestones, the ability to negotiate favorable strategic agreements with original equipment manufacturers, and other competitive factors leading to a decrease in anticipated revenues and gross profit margins and product development expenses. OVERVIEW The Company designs, manufactures and markets enterprise network security technology and systems that enable the deployment of secure Virtual Private Network ("VPN") solutions over the Internet and other shared public networks. The Company's technology and products are used in VPN and electronic commerce applications by financial institutions, government agencies, large corporations, telecommunication and Internet service providers to secure data transmissions on private and public computer networks, such as the Internet. The Company's Swiss subsidiary designs, manufactures, and markets cryptographic equipment and systems that enable the deployment of secure VPN solutions over the Internet and other shared public networks primarily in Switzerland and Europe. The Company's historical operating results have been dependent on a variety of factors including, but not limited to, the length of the sales cycle, the timing of orders from and shipments to clients, product development expenses and the timing of development and introduction of new products. The Company's expense levels are based, in part, on expectations of future revenues. The size and timing of the Company's historical revenues have varied substantially from quarter to quarter and year to year. Accordingly, the results of a particular period, or period to period comparisons of recorded sales and profits may not be indicative of future operating results. While Management is committed to the long-term profitability of the Company, the recent growth of the computer security industry has made it important that market share be obtained. The Company has undertaken various strategies in order to increase its revenues and improve its future operating results, including new product offerings such as its SafeNet products for the Internet and the SafeNet/Security Center(TM), a high performance workstation, which automatically manages SafeNet products, and the development of integrated circuits for the original equipment manufacturer market. Management believes that growth in the market for products that provide secure remote access to computer networks will require the Company to increase its future investments in product development, sales and marketing activities. These investments will enable the Company to take advantage of this market opportunity and to achieve long-term profitability thereby maximizing shareholder value. However, there can be no assurance that these strategies will be successful. RESULTS OF OPERATIONS OF THE COMPANY The following table sets forth certain Consolidated Statement of Operations data of the Company as a percentage of revenues for the periods indicated.
Three Months Nine Months Ended September 30, Ended September 30, ------------------------------------------------ 2000 1999 2000 1999 -------- --------- --------- --------- Revenues 100 % 100 % 100 % 100 % Cost of revenues 26 39 27 36 -------- --------- --------- --------- Gross profit 74 61 73 64 -------- --------- --------- --------- Research and development expenses 23 44 27 30 Sales and marketing expenses 20 38 23 35 General and administrative expenses 11 23 14 15 Recovery of CyberGuard advance - (6) (1) (2) -------- --------- --------- --------- Total operating expenses 54 99 63 78 -------- --------- --------- --------- Operating income (loss) 20 (38) 10 (14) Interest income, net 5 1 5 - -------- --------- --------- --------- Income (loss) before income taxes 25 (37) 15 (14) Income tax expense - 5 - 3 -------- --------- --------- --------- Net income (loss) 25 % (42)% 15 % (17)% ======== ========= ========= =========
12 13 The Company has three reportable segments: products, chips and software designed and manufactured in the United States for sale to companies that will embed the Company's products into their products for ultimate sale to end-users ("Technology Operations"), network security products designed and manufactured in the United States for direct sales to end-users ("Product Operations"), and network security products designed and manufactured outside the United States ("European Operations"). The reportable segments are strategic business units that offer different products. The segments are managed separately because each segment requires different technology and marketing strategies. The Technology Operations and Product Operations include some international sales mainly to South America and Asia. Nine months ended September 30, 2000 compared to Nine months ended September 30, 1999 Revenues increased 38%, or $5,521,000, to $19,941,000 for the nine months ended September 30, 2000, from $14,420,000 in 1999. The Technology Operations revenues increased $7,545,000 mainly due to shipments of a software VPN product, SafeNet/Soft-PK to several customers. Revenues from the Product Operations segment increased $2,505,000 primarily due to large shipments of VPN products to several large enterprises as well as an overall increased demand for SafeNet VPN products. The European Operations revenues decreased $4,529,000 as a result of the reduction in the sale of legacy products in Europe. Gross margin increased to 73% for the nine months ended September 30, 2000, from 64% in 1999. Margins on sales of software licenses and SafeNet DSP Chips in the Technology Operations segment led the increase with an overall 84% gross margin compared to a 1999 gross margin of 75% made up of primarily development project sales. Product Operations' margins increased to 66% from 49% on strong sales of higher margin VPN products versus lower margin legacy products in 1999. The gross margin for the European operations decreased to 48% from 69% in 1999 as a result of lower revenues available to recover fixed costs. Research and development expenses increased 24%, or $1,043,000, to $5,408,000 for the nine months ended September 30, 2000, from $4,365,000 in 1999. The increase is primarily attributable to increased personnel costs during 2000 related to the Company's software and integrated circuit development projects in Technology Operations, and the completion of several large consulting contracts during 1999 under which $612,000 of research and development expenses were directly attributable to cost of goods sold. As a percentage of revenues, the expenses were 27% and 30% in 2000 and 1999, respectively. Sales and marketing expenses decreased 11%, or $530,000 to $4,515,000 for the nine months ended September 30, 2000, from $5,045,000 in 1999, due to a decrease in personnel and their salaries, telephone, travel and related expenses as well as scaled down participation in trade shows versus 1999. Expenses decreased despite web site development expenses of $70,000 during the third quarter. As a percentage of revenues, expenses were 23% and 35% in 2000 and 1999, respectively. General and administrative expenses increased 37%, or $744,000, to $2,744,000 for the nine months ended September 30, 2000, from $2,000,000 in 1999. The increase is primarily due to professional fees incurred to export software developed in the United States to the European Operations segment, costs associated with strengthening the executive management team in both the U.S. and Europe, and professional services related to strategic initiative planning. As a percentage of revenues, the expenses were 14% and 15% of revenues in 2000 and 1999, respectively. There was no income tax expense for the nine months ended September 30, 2000 due to net operating loss carryforwards available to offset current year earnings. The 1999 income tax expense of $468,000 was for estimated taxes on the income of the European Operations that has no estimated income tax liability in 2000. The Company had no United States income tax benefit in either period. A valuation allowance for the full amount of the United States net deferred tax assets has been established since the Company's ability to use the United States net operating losses is dependent upon future taxable income. The Company had net income of $3,071,000 for the nine months ended September 30, 2000 compared to a net loss of $2,418,000 for the same period in 1999. The diluted income per common share was $0.43 in 2000 compared to a ($0.45) loss per common share in 1999. Three months ended September 30, 2000 compared to Three months ended September 30, 1999 Revenues increased 102%, or $3,850,000, to $7,633,000 for the three months ended September 30, 2000, from $3,783,000 in 1999. Technology Operations' revenues increased $3,423,000 as a result of shipments of software, chips, and a new hardware implementation of SafeNet Technology called SafeNet/PCI. Revenues from the Product Operations segment 13 14 increased $985,000 primarily due to increased demand for SafeNet VPN products. The European Operations' revenues decreased $558,000 as a result of the reduction in demand of legacy products in Europe. Gross margin increased to 74% for the three months ended September 30, 2000, from 61% in 1999. Margins on sales of software licenses, SafeNet DSP Chips, and SafeNet/PCI products in the Technology Operations segment led the increase with an overall 81% gross margin on a significantly higher revenue volume than the 1999 gross margin of 92% which was made up of primarily software licenses and development project sales. Product Operations' margins increased to 71% from 41% in 1999 on sales of VPN products. The gross profit margin for the European operations decreased to 51% from 65% in 1999 as a result of lower revenues available to recover fixed direct costs. Research and development expenses increased 5%, or $87,000, to $1,737,000 for the three months ended September 30, 2000, from $1,650,000 in 1999. The increase is primarily attributable to increased personnel related costs associated with the Company's software and integrated circuit development projects in Technology Operations. As a percentage of revenues, the expenses were 23% and 44% in 2000 and 1999, respectively. Sales and marketing expenses increased 5%, or $70,000, to $1,504,000 for the three months ended September 30, 2000, from $1,434,000 in 1999 due primarily to the development of a new corporate web-site . As a percentage of revenues, the expenses were 20% and 38% in 2000 and 1999, respectively. General and administrative expenses increased 1%, or $8,000, to $876,000 for the three months ended September 30, 2000, from $868,000 in 1999. As a percentage of revenues, the expenses were 11% and 23% of revenues in 2000 and 1999, respectively. There was no 2000 income tax expense for estimated taxes on the income in the United States due to net operating loss carryforwards available to offset current year earnings. The 1999 income tax expense of $188,000 was for estimated taxes on the income of the European Operations that has no estimated income tax liability in 2000. The Company had no United States income tax benefit in either period. A valuation allowance for the full amount of the United States net deferred tax assets has been established since the Company's ability to use the United States net operating loss is dependent upon future taxable income. The Company had net income of $1,873,000 for the three months ended September 30, 2000 compared to a net loss of $1,593,000 for the same period in 1999. The diluted income per common share was $0.26 in 2000 compared to a ($0.29) loss per common share in 1999. LIQUIDITY AND FINANCIAL POSITION OF THE COMPANY The Company believes that its current cash resources, together with cash flows from operations, will be sufficient to meet its needs for the next year. At September 30, 2000, the Company had working capital of $30,384,000 including cash and cash equivalents of $26,731,000. For the nine months ended September 30, 2000, cash and cash equivalents increased $7,570,000. Significant sources of cash for the Company in 2000 included $4,383,000 from operating activities and $3,626,000 from the exercise of stock options and warrants. INFLATION AND SEASONALITY The Company does not believe that inflation will significantly impact its business. The Company does not believe its business is seasonal, however, because the Company recognizes revenues upon shipment of finished products, such recognition may be irregular and uneven, thereby disparately impacting quarterly operating results and balance sheet comparisons. CHANGE IN ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities at fair value. Adoption of SFAS No. 133 is required in the fiscal year 2001 and is not expected to have a material impact on the Company's financial position or results of operations. 14 15 In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The Company will be required to adopt this SAB in the fourth quarter of fiscal year 2000. The Company is currently evaluating the impact of the SAB on its revenue recognition practices and does not believe that the adoption of this SAB will have a material impact on the Company's financial position or results of operations. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major market risk is to fluctuations in foreign currency exchange rates, principally related to the Swiss Franc. As of September 30, 2000, the Company's investment in its Swiss subsidiary was approximately $4,578,000. A 10% change in the average Swiss Franc exchange rate for the nine months ended September 30, 2000 would have changed the Company's reported earnings for the period by approximately $65,000. A 10% change in the September 30, 2000 Swiss Franc exchange rate would have changed the Company's reported currency translation adjustment for nine months ended September 30, 2000 by approximately $354,000. At September 30, 2000, the Company did not have any interest bearing obligations. In addition, the Company does not hold any derivative instruments and does not have any commodity risk. PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders was held on July 19, 2000. (b) The following six directors were elected for a term of one year or until their respective successors have been duly elected or appointed: For Withheld --- -------- Anthony A. Caputo 5,811,374 9,574 Thomas A. Brooks 5,758,574 62,374 Shelley A. Harrison 5,759,574 61,374 Ira A. Hunt, Jr. 5,753,774 67,174 Douglas E. Kozlay 5,758,574 62,374 Bruce R. Thaw 5,696,474 124,474
There were no broker non-votes. (c) The shareholders approved the Company's name change to SafeNet, Inc. There were 5,744,405 shares cast in favor of the proposal, 1,230 shares cast against the proposal, and 75,313 shares abstaining. There were no broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K. 1B Ernst & Young LLP letter dated November 7, 2000 regarding change in accounting principle. 27 Financial Data Schedule 27.1 Restated Financial Data Schedule The Company did not file any reports on Form 8-k during the three months ended September 30, 2000. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFENET, INC. November 14, 2000 /s/ Anthony A. Caputo ---------------------- ANTHONY A. CAPUTO Chairman, President and Chief Executive Officer November 14, 2000 /s/ Carole D. Argo ------------------- CAROLE D. ARGO Senior Vice President and Chief Financial Officer 16 EX-1.B 2 w42350ex1-b.txt ERNST & YOUNG LLP LETTER 1 Exhibit 1B November 7, 2000 Board of Directors SafeNet, Inc. Note 5 of Notes to Consolidated Financial Statements of SafeNet, Inc., included in its Form 10-Q for the three months and nine months ended September 30, 2000, describes a change in the method of accounting for income taxes. This change, which only impacts fiscal year 2000, relates to the sequencing of the utilization of net operating loss carryforwards and stock compensation deductions. There is no specific authoritative criteria for determining a preferable method of sequencing the utilization of net operating loss carryforwards and stock compensation deductions; however, we conclude that the change in the method of accounting for income taxes is to an acceptable alternative method which, based on your business judgment to make this change for the stated reason, is preferable in your circumstances. We have not yet conducted an audit in accordance with generally accepted auditing standards of any financial statements of the Company and, therefore, we do not express any opinion on any financial statements of SafeNet, Inc. Very truly yours, /s/ Ernst & Young LLP EX-27 3 w42350ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2000 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 FOR SAFENET, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 26,731 0 5,954 214 2,361 35,223 3,941 2,807 39,208 4,839 0 0 0 69 34,300 39,208 2,449 7,633 712 2,019 4,139 0 0 1,873 0 1,873 0 0 0 1,873 .28 .26
EX-27.1 4 w42350ex27-1.txt RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2000 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FOR SAFENET, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 26,731 0 5,954 214 2,361 35,223 3,941 2,807 39,208 4,839 0 0 0 69 34,300 39,208 6,969 19,941 2,358 5,348 12,456 0 0 3,071 0 3,071 0 0 0 3,071 .46 .43