<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1999
MADGE NETWORKS N.V.
Transpolis Schiphol Airport
Polaris Avenue 23
2132 JH Hoofddorp
The Netherlands
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934
Yes No X
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
82- N.A.
Page 1 of 23 Pages
Exhibit Index Appears on Page 17.
1
<PAGE> 2
MADGE NETWORKS N.V.
Form 6-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Information:*
Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 3
31, 1998
Condensed Consolidated Statements of Operations for the three month periods ended 4
June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Operations for the six month periods ended June 5
30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six month periods ended June 6
30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Legal Proceedings 15
Risk Factors 15
Signatures 16
Exhibit Index 17
Exhibit A-- Second Quarter Press Release 18
</TABLE>
--------------------
* The Company's fiscal year ends on December 31 of each year. For the
purposes of presentation, the Company has indicated its fiscal quarters
within the year as ending on a calendar month end, whereas, in fact,
the Company operates on the basis of thirteen week financial quarters.
2
<PAGE> 3
Madge Networks N.V.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
JUNE 30, DECEMBER 31,
1999 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $71,329 $130,494
Accounts receivable. net of allowances for doubtful
accounts of $2,570 at June, 1999 and
$2,604 at December, 1998. 45,063 38,966
Inventories:
Raw materials 3,973 3,114
Finished goods 3,799 8,360
----------------- ------------------
7,772 11,474
Current deferred tax assets 45 51
Prepaid expenses and other current assets 14,319 13,833
----------------- ------------------
Total current assets 138,528 194,818
Property and equipment, net 38,383 26,215
Intangible assets, net 33,361 --
Investments -- 3,624
Long-term deferred tax assets 315 335
================= ==================
Total Assets $210,587 $224,992
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowing $ 726 $ 1,633
Accounts payable and accrued liabilities 59,185 48,282
Other accrued liabilities 37,591 42,379
Income taxes payable 16,641 13,228
Current portions of lease obligations 3,606 2,178
----------------- ------------------
Total current liabilities 117,749 107,700
Long-term liabilities and lease obligations 2,871 899
----------------- ------------------
Total Liabilities 120,620 108,599
Shareholders' equity:
Common shares 24,097 25,182
Additional paid-in capital 115,296 123,658
Treasury stock (7,530) (10,703)
Accumulated deficit (35,239) (16,624)
Accumulated other comprehensive income (6,657) (5,120)
----------------- ------------------
Total shareholders' equity 89,967 116,393
================= ==================
Total Liabilities and Shareholders' Equity $210,587 $224,992
================= ==================
</TABLE>
See accompanying notes
3
<PAGE> 4
Madge Networks N.V.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Net sales:
Continuing $ 53,342 $ 63,185
Discontinued -- 24,111
------------- ------------
53,342 87,296
Cost of sales:
Continuing 30,018 31,678
Discontinued -- 11,710
------------- ------------
30,018 43,388
------------- ------------
Gross profit 23,324 43,908
Operating expenses:
Sales and marketing:
Continuing 18,320 15,366
Discontinued -- 6,536
------------- ------------
18,320 21,902
Research and development:
Continuing 8,995 9,438
Discontinued -- 4,289
------------- ------------
8,995 13,727
General and administrative:
Continuing 6,316 3,708
Discontinued -- 1,914
------------- ------------
6,316 5,622
Special charge 25 --
------------- ------------
Total operating expenses 33,656 41,251
------------- ------------
(Loss) income from operations (10,332) 2,657
Net interest income 596 295
------------- ------------
(Loss) income before income taxes (9,736) 2,952
Provision for income taxes 402 720
============= ============
Net (loss) income $ (10,138) $ 2,232
============= ============
Net (loss) income per share
Basic $(0.25) $0.05
Diluted $(0.25) $0.05
Shares used in computing net (loss) income per share
Basic 40,535 45,738
Diluted 40,535 46,063
</TABLE>
See accompanying notes
4
<PAGE> 5
Madge Networks N.V.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Net sales:
Continuing $ 102,156 $ 128,960
Discontinued -- 48,913
-------------- ------------
102,156 177,873
Cost of sales:
Continuing 57,918 65,673
Discontinued -- 24,506
-------------- ------------
57,918 90,179
-------------- ------------
Gross profit 44,238 87,694
Operating expenses:
Sales and marketing:
Continuing 35,530 30,884
Discontinued -- 12,630
-------------- ------------
35,530 43,514
Research and development:
Continuing 18,370 18,366
Discontinued -- 8,380
-------------- ------------
18,370 26,746
General and administrative:
Continuing 10,184 7,364
Discontinued -- 3,628
-------------- ------------
10,184 10,992
Special charge 25 --
-------------- ------------
Total operating expenses 64,109 81,252
-------------- ------------
(Loss) income from operations (19,871) 6,442
Net interest income 1,658 315
-------------- ------------
(Loss) income before income taxes (18,213) 6,757
Provision for income taxes 402 1,468
============== ============
Net (loss) income $ (18,615) $ 5,289
============== ============
Net (loss) income per share
Basic $(0.44) $0.12
Diluted $(0.44) $0.12
Shares used in computing net (loss) income per share
Basic 41,863 45,499
Diluted 41,863 45,645
</TABLE>
See accompanying notes
5
<PAGE> 6
Madge Networks N.V.
Condensed Consolidated Statements of Cash Flows
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1999 1998
---------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(18,615) $5,289
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 5,821 11,136
Profit (loss) on sale of fixed assets 287 1,453
Changes in assets and liabilities:
Accounts receivable (2,897) 7,367
Net inventories 3,702 13,290
Prepaid expenses and other current assets 2,836 (5,129)
Accounts payable 1,861 (4,266)
Other accrued liabilities (4,788) 18,272
Income taxes payable 3,413 (1,298)
-------------- ----------
Net cash (used in) provided by operating activities (8,380) 46,114
-------------- ----------
Cash flows from investing activities:
Additions to property and equipment (13,027) (11,473)
Purchase of subsidiary (37,743) --
Proceeds from sales of property and equipment 21 14,091
-------------- ----------
Net cash (used in) provided by investing activities $(50,749) $2,618
-------------- ----------
Cash flows from financing activities:
Proceeds from (repayments of) mortgage and lease obligations 3,400 (1,053)
(Repayments of) proceeds from short-term loans (907) 122
Repurchase of common shares (3,453) --
Net proceeds from issue of common shares 803 1,000
-------------- ----------
Net cash (used in) provided by financing activities (157) 69
============== ==========
Net (decrease) increase in cash and cash equivalents $(59,286) $48,801
============== ==========
Cash and cash equivalents at the beginning of the period 130,494 62,106
Effect of exchange rate changes on cash 121 12
-------------- ----------
Cash equivalents at the beginning of the period
(at period-end exchange rates) 130,615 62,118
============== ==========
Cash and cash equivalents at the end of the period 71,329 110,919
============== ==========
Net (decrease) increase in cash and cash equivalents $(59,286) $ 48,801
============== ==========
</TABLE>
See accompanying notes
6
<PAGE> 7
MADGE NETWORKS N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of
Madge Networks N.V. (the "Company"), a company incorporated in The Netherlands,
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The condensed consolidated financial
statements have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation have been made. The condensed consolidated
balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date.
The Company's fiscal year ends on December 31 of each year. For the
purposes of presentation, the Company has indicated its fiscal quarters within
the year as ending on a calendar month end, whereas, in fact, the Company
operates on the basis of thirteen week financial quarters.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's 1998 Annual Report on Form 20-F.
The results of operations for the period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period or for the full year.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment of
product. Net sales from non-recurring technology licensing or engineering is
recognized upon customer acceptance. Software license royalty revenue is
recognized upon notification by the licensee that products incorporating the
Company's software have been shipped by the licensee.
The Company, subject to certain limitations, permits some distributors
to exchange products or to return products in exchange for credits against
future purchases. In addition, in the event that the Company reduces its selling
prices, the Company, subject to certain limitations, credits some distributors
for the difference between the purchase price of the products remaining in the
customer's inventories and the Company's reduced price for such products. An
allowance for sales returns and price reduction adjustments is accrued
concurrently with the recognition of revenue.
Contract service revenue is recognized on an accrual basis over the
life of the contract. Contract revenues invoiced in advance of revenues earned
are recorded as deferred revenue. Telecommunications revenues are recognized
when services are rendered in accordance with customer usage.
7
<PAGE> 8
Inventories
Inventories are stated at the lower of cost or market value, determined
on a weighted average cost method.
Earnings Per Share
Net income per common share information is computed on the weighted
average number of common shares outstanding and dilutive common share
equivalents from the exercise of employee share options using the treasury stock
method. In the periods when the Company reports a net loss, employee share
options are excluded from the calculation because their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share as required by SFAS No. 128 (all amounts in thousands except
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
---------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net (loss) income $(10,138) $2,232 $(18,615) $ 5,289
================ =========== ============ ==============
Weighted average common
shares outstanding 40,535 45,738 41,863 45,449
Common share equivalents
resulting from stock options -- 325 -- 146
---------------- ----------- ------------ --------------
Total common shares and common
equivalents for calculation
of net (loss) income per share
Basic 40,535 45,738 41,863 45,499
================ ============ ============= ==============
Diluted 40,535 46,063 41,863 45,645
================ ============ ============= ==============
Net (loss) income per share:
Basic $ (0.25) $ 0.05 $ (0.44) $ 0.12
================ =========== ============ ==============
Diluted $ (0.25) $ 0.05 $ (0.44) $ 0.12
================ =========== ============ ==============
</TABLE>
2 SPECIAL CHARGE
Special charges incurred in the second quarter of 1999 relate to the
reorganization of operating activities connected with the establishment of the
Enterprise Networks Products Division. The charges incurred provided for costs
relating to facilities of $3.0 million, leasehold costs relating to buildings of
$0.6 million and provisions for writing off fixed assets of $0.5 million.
Planned headcount reductions were provided for previously under provisions made
at the time of the sale of Lannet in August 1998. Facilities and leasehold costs
are expected to be realized through cash payments whereas fixed assets costs are
expected to be non-cash transactions.
In June 1999, after regular review of the provisions originally created
as a special charge on the sale of Lannet in the third quarter of 1998, the
Company reversed $4.1 million of the special charge.
8
<PAGE> 9
The reversal related to forecast product returns and professional fees estimated
at the time of sale that the Company did not incur.
3 COMPREHENSIVE INCOME (LOSS)
Under SFAS No. 130, "Reporting Comprehensive Income," foreign currency
translation adjustments are included in other comprehensive income (loss).
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
-------------------------------- -----------------------------
(Unaudited) (in thousands) Three Months Ended June 30 Six Months Ended June 30
-------------------------------- -----------------------------
1999 1998 1999 1998
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net (loss) income (10,138) 2,232 (18,615) 5,289
Foreign currency translation adjustments (1,519) (1,107) (1,537) (2,189)
------------- ------------
--------------- -------------
Other comprehensive (loss) income (1,519) (1,107) (1,537) (2,189)
=============== ============= ============ =============
Total Comprehensive (loss) income (11,657) 1,125 (20,152) 3,100
=============== ============= ============ =============
The components of accumulated other comprehensive loss are as follows:
June 30, December 31,
1999 1998
---------------- -----------------
Cumulative translation adjustments (6,657) (5,120)
---------------- -----------------
Total accumulated other comprehensive loss (6,657) (5,120)
================ =================
</TABLE>
9
<PAGE> 10
MADGE NETWORKS N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Madge Networks N.V. ("Madge or the Company") is a global managed
network services and product solutions provider specializing in mission-critical
enterprise needs. The Company's goal is to optimize the implementation of
enterprises' voice, video and data networks with the ultimate aim of converging
all networking needs on Internet Protocol (IP) solutions. Madge's main business
centers are located at Wexham Springs, United Kingdom, and San Jose, California.
The Company serves its international customer base through a global network of
distributors and resellers and markets its managed network services primarily
directly to business customers.
During the year ended December 31, 1998, the Company reorganized its
operational and internal reporting structure into two segments. The products
segment consists of the Enterprise Network Products Division and the services
segment consists of the Managed Network Services Division. The Enterprise
Network Products Division was formed by the combination of the Company's former
Token Ring solutions and video networking divisions. The Managed Network
Services Division aims to provide IP-focused managed network services to medium
and large enterprises in targeted market sectors. The division is based at
Wexham Springs, United Kingdom and has operations worldwide. The combination of
these divisions is expected to create operating efficiencies that may reduce the
Company's expense base throughout 1999 and may offset, in part, increased
expenses associated with the newly established services business.
The results of Lannet, the Company's Ethernet business, are
consolidated in the Company's financial statements up to the time it was sold in
August 1998. To the extent that results for periods prior to September 30, 1998
include Lannet's results, the results will not be comparable to results for
later periods. Results presented in the discussion below for the Company's
"continuing" operations exclude Lannet, while "total" results include Lannet for
periods prior to the date of sale.
Special charges incurred in the second quarter of 1999 relate to the
reorganization of operating activities connected with the establishment of the
Enterprise Networks Products Division. The charges incurred provided for costs
relating to facilities of $3.0 million, leasehold costs relating to buildings of
$0.6 million and provisions for writing off fixed assets of $0.5 million.
Planned headcount reductions were provided for previously under provisions made
at the time of the sale of Lannet in August 1998. Facilities and leasehold costs
are expected to be realized through cash payments whereas fixed assets costs are
expected to be non-cash transactions.
In June 1999, after regular review of the provisions originally created
as a special charge on the sale of Lannet in the third quarter of 1998, the
Company reversed $4.1 million of the special charge. The reversal related to
forecast product returns and professional fees estimated at the time of sale
that the Company did not incur.
The Company's operating results have in the past and may in the future
be affected by various risk factors, many of which are beyond the Company's
control. Certain of the statements included in this Report on Form 6-K which
express the Company's "anticipation," "belief," "commitment," "expectation,"
"intention," "goals," "plans" or similar terms, and statements regarding
expectations of significant revenue in 1999, acceleration of development of the
services division, the size of and potential growth or decline in markets for
the Company's products and services, the Company's expected gross profit and
expense levels, the adequacy of the Company's financial resources, the
anticipated outcome of litigation involving the Company, the Company's plans to
10
<PAGE> 11
continue investing in core technologies and new products and services, the
Company's Common Share repurchase program, the date the Company expects its
systems to be Year 2000 compliant, as well as other statements that are not
historical fact, are forward-looking statements within the meaning of the
United States Private Securities Litigation Reform Act of 1995 and involve
risks and uncertainties referred to under the caption "Risk Factors" in the
Company's Annual Report on Form 20-F for the year ended December 31, 1998 and
elsewhere therein. Actual results, actions or events could differ materially.
Risks include, among other factors, competition, potential for quarterly
fluctuations, changes in general economic conditions, the potential need for
alternative resources, market conditions and volatility of the Company's shares,
rapid or unexpected changes in technologies, dependence on suppliers for
Year 2000 compliance, the challenge of managing expenses to changing revenue
and changed priorities and resource allocation resulting from these and other
factors. The Company believes that future operating results will also depend on,
among other factors, demand for its products and services, the Company's ability
to identify and develop new business opportunities and to differentiate its
products and services from those of its competitors.
ACQUISITION OF GAINS
On February 5, 1999 the Company acquired all the outstanding shares of
Gains International (C.I) Limited, Gains Hong Kong Limited and Gains Japan Co.
Limited, private companies incorporated in Guernsey, Channel Islands, Hong Kong
and Japan (collectively "Gains"). The purchase consideration was $46.0 million
in cash. After taking into account the cash balances of Gains and capitalized
acquisition costs, the net cash outflow was $37.7 million. The acquisition was
accounted for under the purchase method, resulting in goodwill of $33.9 million,
which is being amortized over 20 years. Gains is an international carrier
supplying the financial sector, and its acquisition and integration into the
Company's Managed Network Services Division is expected to accelerate the
development of that division.
RESULTS OF OPERATIONS
Net Sales
Net sales from continuing operations, which consist of Enterprise
Network Product Division and Managed Networks Services Division sales, were
$53.3 million in the three months ended June 30, 1999, a decrease of 16%,
compared to $63.2 million for the same period in 1998. Net sales from continuing
operations were $102.2 for the six months ended June 30, 1999, a decrease of
21%, compared to $129.0 million for the same period in 1998. The decrease in
continuing net sales was primarily in the United States where sales were $12.9
million for the second quarter of 1999, a decline of 45%, compared to $23.6
million for the same period in 1998. The decline in net sales in the first six
months of 1999 compared to 1998 was a result of reduced demand for the Company's
networking products. The Company continued working with it's distribution
partners during the three months ended June 30, 1999 to improve supply chain
efficiency, and reduced channel inventories by $4.5 million. Total net sales,
including discontinued operations, were $87.3 million and $177.9 million for the
three months and six months ended June 30, 1998, respectively.
Net sales from continuing operations in the Enterprise Network Products
Division, which consist of Token Ring and video networking products, was $44.4
million for the three months ended June 30, 1999, a decline of 30% from $63.2
million for the same period in 1998. Sales of these products were $88.3 million
in the six months ended June 30, 1999, a decrease of 32%, compared to $129.0
million in the same period of 1998. Sales of these products represent
approximately 83% and 100% of the Company's net sales in the three months ended
June 30, 1999 and 1998, respectively.
Token Ring sales for the three months ended June 30, 1999 were $39.3
million, a decline of 33%, from $58.3 million for the same period in 1998. Sales
of Token Ring products for the six months ended June 30, 1999 were $79.0
million, a decline of 33%, compared to $118.6 million for the same
11
<PAGE> 12
period in 1998. Video networking sales were $5.1 million for the three months
ended June 30, 1999, an increase of 4%, from $4.9 million for the same period in
1998. Sales of video networking products for the six months ended June 30, 1999
were $9.3 million, a decline of 11%, compared to $10.4 million for the same
period in 1998. The Company's plans take into account the possibility that the
market for its legacy Token Ring products (principally adapter cards) is
declining and sales of these products could decline over the longer term. The
Company is focused on gaining market share in this potentially declining market.
The Company anticipates level sales for the division for the remainder of 1999.
Net sales of the Managed Network Services Division, which includes
Gains, were $8.9 million, or 17% of net sales, for the second quarter of 1999
compared to $4.9 million for the first quarter of 1999, an increase of 82%.
Excluding sales to the previous parent of the acquired company, sales for the
division for the three months ended June 30, 1999 were $4.7 million. The Managed
Network Service Division recorded a full quarter's revenue for the Gains
operation in the second quarter of 1999. Madge acquired Gains on February 5,
1999 and hence did not record a full quarter's revenue in the first quarter of
1999. The division did not generate any revenues prior to the first quarter of
1999. The Company anticipates that the Division will continue to grow its
revenue for the remainder of 1999.
Gross Profit
Gross profit from continuing operations was $23.3 million, or 44% of
net sales, for the three months ended June 30, 1999 compared to $31.5 million,
or 50% of net sales, for the same period in 1998. Gross profit from continuing
operations for the six months ended June 30, 1999 was $44.2 million, or 43% of
net sales, compared to $63.3 million, or 49% of net sales, for the same period
in 1998. Gross profit for the Enterprise Network Products Division were 51% for
each of the three months ended June 30, 1999 and 1998. The Managed Networks
Services Division gross profit for the three months ended June 30, 1999 was 5%;
this division had no revenues prior to the first quarter of 1999.
The lower gross margin from continuing operations for the first six
months of 1999 compared to the same period in 1998 resulted primarily from the
increased proportion of revenue derived from the Managed Network Services
Division as well as competitive pricing pressures in the Enterprise Network
Products Division. The Company believes that gross margins for its Enterprise
Network Products Division will remain under pressure primarily because of
continued price competition. Margins in the Company's Managed Network Services
division are expected to remain lower than those achieved by the products
division until economies of scale for this business segment can be realized.
Gross margins for total operations for the three and six months ended June 30,
1999 were 50% and 49%, respectively.
Earnings before interest, tax, depreciation and amortization ("EBITDA")
for the three months ended June 30, 1999 was a loss of $6.7 million or $0.16 per
diluted share, compared to income of $6.0 million or $0.13 per diluted share for
the three months ended June 30, 1998. For the six months ended June 30,1999
EBITDA was a loss of $14.1 million or $0.34 per diluted share and income of
$17.6 million or $0.39 per diluted share for the six months ended June 30, 1998.
Sales and Marketing
Sales and marketing expenses for continuing operations were $18.3
million, or 34% of continuing net sales, for the three months ended June 30,
1999, an increase of 19%, compared to $15.4 million, or 24% of continuing net
sales, for the same period of 1998. For the six months ended June 30, 1999,
sales and marketing expenses from continuing operations were $35.5 million, an
increase of 15%, compared to $30.9 million for the same period in 1998. These
expenses represented 35% and 24% of continuing net sales in 1999 and 1998,
respectively. The increase in sales and marketing expenses for the three and six
12
<PAGE> 13
months ended June 30, 1999 compared to the same periods in 1998 reflected
increased sales and marketing operations associated with the launch of the
Company's Managed Network Services Division and the acquisition of Gains. The
Company expects that its sales and marketing expenses will continue to be a
significant percentage of net sales in the future, but should decline as
a percentage of sales as the Managed Network Services sales grow. Total sales
and marketing expenses were $21.9 million and $43.5 million for the three and
six months ended June 30, 1998, representing 25% and 24% of total net sales,
respectively.
Research and Development
Research and development expenses for continuing operations were $9.0
million, or 17% of continuing net sales, for the three months ended June 30
1999, a decrease of 5%, compared to $9.4 million, or 15% of continuing net
sales, for the same period in 1998. For the six months ended June 30 1999 and
1998, research and development expenses remained unchanged at $18.4 million,
representing 18% and 14% of net sales from continuing operations in 1999 and
1998, respectively. The Company considers research and development expenditures
to be critical to future net sales of the Enterprise Network Products Division,
and intends to continue these expenditures at a significant percentage of the
division's net sales, although absolute dollar expenditures for research and
development may decline. All of the Company's research and development costs
have been expensed as incurred. Total research and development expenses were
$13.7 million and $26.7 million for the three and six months ended June 30 1998,
representing 16% and 15% of total net sales, respectively.
General and Administrative
General and administrative expenses from continuing operations were
$6.3 million, or 12% of continuing net sales, for the three months ended June
30, 1999, an increase of 70%, compared to $3.7 million, or 6% of continuing net
sales, for the same period in 1998. For the six months ended June 30 1999,
general and administrative expenses increased to $10.2 million, or 10% of
continuing net sales, compared to $7.4 million, or 6% of continuing net sales,
for the same period in 1998. The increases in expenditures in 1999 compared to
1998 resulted from increased costs incurred as a result of the establishment of
the Managed Network Services Division and amortization of goodwill relating to
the acquisition of Gains in February 1999. Total general and administrative
expenses were $5.6 million and $11.0 million for the three and six months ended
June 30, 1998 representing 6% of total net sales for both periods.
Income Tax
The Company recorded a provision for income taxes of $0.4 million in the three
months ended June 30 1999. Although on a consolidated basis the Company was in a
net loss position, certain of its entities had net income for the period.
Liquidity and Capital Resources
The Company is currently satisfying its liquidity and capital resource
requirements through available cash, cash equivalents and bank financing
facilities. At June 30, 1999, the Company had cash and cash equivalents of $71.3
million.
The Company and its subsidiaries finance working capital in part
through an uncommitted bank facility of $15 million, and a $3.5 million facility
that allows borrowing up to an equal compensated cash balance of which $0.7
million was outstanding as at June 30, 1999. In October 1997, the Company
entered into a $15.0 million two-year financing arrangement secured by accounts
receivable generated by a U.S. subsidiary. This facility expires in September
1999 and will not be renewed. There were no borrowings against this line as at
June 30, 1999.
13
<PAGE> 14
Net cash used in operating activities for the six months ended June 30,
1999 amounted to $8.4 million. The net cash outflow was attributable to the net
loss for the period offset by depreciation and amortization expense and an
increase in working capital due to decreases in other accrued liabilities,
excluding balances associated with the acquisition of Gains.
Net cash outflow from investing activities for the six months ended
June 30 1999 were $50.1 million. This consisted of approximately $37.7 million
relating to the purchase of Gains in February 1999 and additions to property and
equipment of $13.0 million. Purchases of property and equipment were primarily
for the build-out of Managed Network Services Division's infrastructure, and
other assets to support the Company's business.
Net cash outflow from financing activities for the six months ended
June 30, 1999 represented expenditures for the repurchase of Common Shares
through the Company's Common Share repurchase program of $3.5 million offset by
inflows from new leases relating to assets sold under sale and leaseback
transactions.
During the six months ended June 30, 1999 the Company continued its
Common Share repurchase program. The amount of shares purchased and the timing
of future purchases, if any, will be based on a number of factors, including the
market price of the Common Shares, general market conditions and other factors
that the Company's management deems appropriate. The purpose of the repurchase
program is to take advantage of what the Company considers to be an attractive
valuation of its Common Shares in the financial marketplace and to reserve
shares for issuance under the Company's share option and employee stock purchase
plans.
Although the level of spending will be influenced by many factors, the
Company believes that current resources combined with additional sources of
liquidity and capital will be sufficient to meet the Company's operational
requirements and currently projected capital expenditures through the next
twelve months. The Company is actively reviewing business priorities, resource
allocation and new business opportunities. As a result of this review the
Company may in the future utilize additional funds in excess of its currently
projected requirements.
In a recent press release the Company announced plans to invest
approximately $85 million in its Managed Network Services division over the next
two years. The Company will fund a portion of this investment through internal
working capital and lease funding. The remainder will be funded from other
sources and the Company is currently exploring the options available to meet the
level of investment required. There can be no assurance at this time that the
Company will be able to raise additional funds for such investment or that the
terms of any such funding will be acceptable to the Company.
Year 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Although the Company believes that most of its products and internal systems are
Year 2000 compliant, the Company has identified significant internal information
technology and non-information technology systems that are not, and is working
with the suppliers of these systems and products to upgrade or replace equipment
and/or software to correct potential problems. This process is underway and the
Company has made progress towards ensuring its essential systems are Year 2000
compliant, but has continuing work which it expects to complete by the end of
the third quarter of 1999. The Company is dependent in large part on suppliers
of its software and systems to achieve this goal.
The Company has issued questionnaires to its suppliers and is
questioning its significant suppliers (e.g. the supplier of its main internal
software package and the third party manufacturer of its Token Ring
14
<PAGE> 15
products) further to assess whether they may suffer any problems as a result of
Year 2000 issues that could affect the Company and expects to have carried out
this process by mid-1999.
Through June 30, 1999, the Company incurred expenses to address Year
2000 issues of approximately $1.2 million, representing 11% of the Company's
current information systems budget, related to acquiring or updating internal
systems, products, facilities and supplier issues. Planned expense associated
with actions yet to be taken is now estimated at $0.8 million. Many of the
upgrades needed for Year 2000 compliance have been achieved in the course of
upgrades made for other reasons. There is no assurance, however, that
expenditures beyond those budgeted may not be required.
The Company continues to assess possible impacts of Year 2000 issues,
and worst-case scenarios for the Company could include material difficulties in
obtaining finished products from the Company's contract manufacturers, material
difficulties processing orders for the Company's products, material difficulties
with management information systems relied upon by the Company which might
affect collections, management decisions and financial reporting. The Company
believes that the purchasing patterns of customers and potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct or patch their current systems or purchase upgrades from their suppliers
for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by the Company, which could
result in a material adverse effect on the Company's business, operating results
and financial position. There can be no assurance that Year 2000 issues will not
result in disruption to the Company's business resulting from third party
suppliers' or service providers' business disruption, will not result in
additional risks to the Company's product supply and internal systems, or will
not result in claims from external users of the Company's products, all of which
could result in a material adverse effect on the Company's business, operating
results and financial position.
LEGAL PROCEEDINGS
In August 1996, a class action lawsuit was filed in the United States
District Court for the Northern District of California, San Jose Division,
naming the Company and certain of its executive officers as defendants. The
complaint alleged that the defendants misrepresented or failed to disclose
material facts about the Company's operations, anticipated financial results and
the anticipated success of the Company's products, in violation of the U.S.
federal securities laws. The suit was brought by two individuals, purportedly as
representatives of a class of purchasers of the Company's stock during the
period from October 12, 1995 to June 13, 1996. On June 6, 1997, the Court
dismissed plaintiffs' entire complaint without prejudice. On August 6, 1997, the
plaintiffs filed a new amended complaint. On January 9, 1998, the Court
dismissed that complaint without prejudice. On February 6, 1998, the plaintiffs
filed another amended complaint. On April 3, 1998, the Company and the
individual defendants moved to dismiss that complaint. A hearing on that motion
was held on July 17, 1998. The Court has not yet ruled on the motion. The
Company believes the allegations in the complaints to be without merit and
intends to continue to defend the amended complaint vigorously.
RISK FACTORS
From time to time reference may be made in connection with the United
States Private Securities Litigation Reform Act of 1995 to risks addressed in
the Company's public filings with the Securities and Exchange Commission. Please
refer to the Company's Annual Report on Form 20-F for the year ended December
31, 1998, filed with the Securities and Exchange Commission, for factors which
should be considered carefully by persons investing in the Company's securities.
15
<PAGE> 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.
Madge Networks N.V.
By: /s/ ROBERT MADGE
Robert H. Madge
Managing Director
Date: August 13, 1999
16
<PAGE> 17
EXHIBIT INDEX
Page
Exhibit A Second Quarter Press Release 18
17
<PAGE> 1
MADGE NETWORKS N.V.
Transpolis Schiphol Airport
Polaris Avenue 23
2132 JH Hoofddorp
The Netherlands
Main: (+31) (0) 23 5685526
Fax: (+31) (0) 23 5685528
MADGE NETWORKS N.V. ANNOUNCES REVENUE GROWTH IN SECOND QUARTER 1999 RESULTS
Amsterdam, Netherlands (July 20, 1999) -- Madge Networks N.V. (NASDAQ NM:
MADGF), a global network solutions provider, today announced results for its
second fiscal quarter 1999.1
Madge reported revenues of US$53.3 million for the second fiscal quarter, an
increase of $4.5 million or 9 per cent compared to continuing revenues of $48.8
million for the first quarter of 1999. Continuing revenues for the second
quarter of 1998 were $63.2 million. The net loss of $10.1 million, or $(0.25)
per share, for the quarter compared to a net profit from continuing operations
of $2.2 million, or $0.05 per share, for the second quarter of fiscal 1998.2
For the second quarter Madge reported revenues of $9 million from its Managed
Network Services division. The Enterprise Network Products division, which
includes Token Ring and video networking products, achieved reported revenues of
$44 million. Madge continued working with its product distribution partners
during the second quarter to improve supply chain efficiency, and reduced
channel inventories by an estimated $4.5 million.
Madge continued to invest in its Managed Network Services business but finished
the quarter with cash and cash equivalents of $71 million, a net utilization of
only $4 million during the quarter.
- --------
1 For the purposes of presentation, the Company has indicated its fiscal
quarters within the year as ending on the calendar month end, whereas, in
fact, the Company operates on the basis of thirteen-week financial quarters.
2 Results from Continuing Operations exclude Madge's Ethernet Division Lannet,
disposed of in the third quarter 1998 and Non-Recurring charges incurred in
the year to December 1998.
18
<PAGE> 2
Madge launched its services business globally in May following nine months of
build out and operations set-up, providing managed network services to over 30
countries. Madge's managed services portfolio ranges from mission-critical voice
networking and managed private data networking to premium service Virtual
Private Networks (VPNs) and full service web hosting. This blend of traditional
and Internet services is designed to meet existing needs of enterprises which
operate in a mission-critical environment, while giving them a flexible
migration path towards Internet Protocol (IP) networking.
Also noteworthy during the quarter was Madge's formal entry into the burgeoning
Application Service Provider (ASP) market through the announcement of its
working relationship with Engage Technologies (www.engage.com) to deliver a new
generation of profile driven Internet marketing solutions in Europe. In a
revenue share arrangement, Engage's online advertising management solutions are
backed up by Madge's mission critical Complex Web Hosting Service for delivery
of highly targeted and scalable web advertising services to European blue chip
organizations and new media marketing companies.
The Enterprise Network Products division consolidated Madge's leading position
in the Token Ring switching market, shipping a record 54,000 switch ports - a
sequential increase of 15 per cent. High Speed Token Ring moved into the
mainstream, with sales of more than 11,000 adapters in only the second quarter
of shipment.
Robert Madge, chairman and CEO, Madge Networks N.V., said "I'm pleased to report
the increase in our revenues and the underlying progress of the business. This
quarter has been of great significance for Madge. Our traditional business area
is stable, and with our managed network services business we are well-placed to
capitalize on the growing demand for Internet services. During the quarter we
launched our Internet portfolio and added 41 new direct customers, and we are
beginning to make a name for ourselves in terms of the reliability and
guaranteed service level of our offerings."
19
<PAGE> 3
ABOUT MADGE NETWORKS N.V.
Founded in 1986, Madge Networks (NASDAQ: MADGF) is a global managed network
services and product solutions provider specializing in mission-critical
enterprise needs. The company's goal is to optimize the implementation of
enterprises' voice, video and data networks with the ultimate aim of converging
all networking needs on Internet Protocol (IP) solutions. The company's main
business centers are at Wexham Springs, United Kingdom and Eatontown, New
Jersey. Madge Networks N.V., a company organized under the laws of the
Netherlands, is the parent company of Madge Networks. Information about Madge's
complete range of products and services can be accessed on the World Wide Web at
www.madge.com
PRIVATE SECURITIES LITIGATION REFORM ACT STATEMENT
Investors should take note that certain statements in this press release are
forward-looking and may not give full weight to all of the potential risks
(e.g., changing technologies, difficulties in new product development and
introduction, competition, global economic conditions, and changed resource
allocation resulting from these and other factors). Forward-looking statements
in this press release include statements which refer to HSTR moving into
mainstream, leading position, well placed to capitalize on growing demand and
other statements which are not completely historical. These statements may
differ materially from actual future actions, events or results. For more
information on risk factors, please refer to Madge's SEC filings on Form 20F and
Form 6-K.
Madge, the Madge logo, Madge net and Smart DeskStream are trademarks, and in
some jurisdictions may be registered trademarks of Madge Networks or its
affiliated companies.
Contact: Madge Networks, Wexham Springs, United Kingdom
Internet: www.madge.com
Company Contact: Investor Relations Contact:
Chris Bradley, Chief Financial Officer John Nesbett
MADGE NETWORKS N.V. LIPPERT/HEILSHORN & ASSOC.
Tel: (+44) 1753 661172 Tel: 212-838-3777
20
<PAGE> 4
Madge Networks N.V.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DEC 31,
1999 1998
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments $71,329 $130,494
Accounts receivable, net 45,063 38,966
Inventories 7,772 11,474
Prepaid expenses and other current assets 14,364 13,884
-------------------------------------------------------------------------------------------------------------------
Total current assets 138,528 194,818
Investments, property and equipment, net 72,059 30,174
-------------------------------------------------------------------------------------------------------------------
Total assets $210,587 $224,992
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued liabilities $96,776 $90,661
Income taxes payable 16,641 13,228
Short term borrowings 4,332 3,811
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 117,749 107,700
Long-term obligations 2,871 899
-------------------------------------------------------------------------------------------------------------------
Total liabilities 120,620 108,599
Shareholders' equity 89,967 116,393
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $210,587 $224,992
===================================================================================================================
</TABLE>
21
<PAGE> 5
24
Madge Networks N.V.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
RESULTS OF CONTINUING GROUP RESULTS
OPERATIONS (INCL. DISCONTINUED OPERATIONS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $53,342 $63,185 $53,342 $87,296
Cost of sales 30,018 31,678 30,018 43,388
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 23,324 31,507 23,324 43,908
Operating expenses:
Sales & marketing 18,320 15,366 18,320 21,902
Research & development 8,995 9,438 8,995 13,727
General and administrative 6,341 3,708 6,341 5,622
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 33,656 28,512 33,656 41,251
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (10,332) 2,995 (10,332) 2,657
Net interest income (expense) 596 (95) 596 295
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before tax (9,736) 2,900 (9,736) 2,952
Income tax provision (benefit) 402 720 402 720
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(10,138) $2,180 $(10,138) $2,232
=============================================================================================================================
Earnings per share
Basic $(0.25) $0.05 $(0.25) $0.05
Diluted $(0.25) $0.05 $(0.25) $0.05
Weighted Average Shares Outstanding
Basic 40,535 45,619 40,535 45,619
Diluted 40,535 46,063 40,535 46,063
</TABLE>
22
<PAGE> 6
Madge Networks N.V.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
RESULTS OF CONTINUING GROUP RESULTS
OPERATIONS (INCL. DISCONTINUED OPERATIONS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $102,156 $128,960 $102,156 $177,873
Cost of sales 57,918 65,673 57,918 90,179
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 44,238 63,287 44,238 87,694
Operating expenses:
Sales & marketing 35,530 30,884 35,530 43,514
Research & development 18,370 18,366 18,370 26,746
General and administrative 10,209 7,364 10,209 10,992
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 64,109 56,614 64,109 81,252
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (19,871) 6,673 (19,871) 6,442
Net interest income (expense) 1,658 (204) 1,658 315
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before tax (18,213) 6,469 (18,213) 6,757
Income tax provision (benefit) 402 1,468 402 1,468
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(18,615) $5,001 $(18,615) $5,289
==============================================================================================================================
Earnings per share
Basic $(0.44) $0.11 $(0.44) $0.12
Diluted $(0.44) $0.11 $(0.44) $0.12
Weighted Average Shares Outstanding
Basic 41,863 45,499 41,863 45,499
Diluted 41,863 45,645 41,863 45,645
</TABLE>
23
