<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 October 3, 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 29 Pages
Exhibit Index Appears on Page 23.
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MADGE NETWORKS N.V.
Form 6-K
TABLE OF CONTENTS
Page
----
Financial Information:*
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three month
periods ended September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Operations for the
nine month periods ended September 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Legal Proceedings 16
Risk Factors 17
Signatures 22
Exhibit Index 23
Exhibit A-- Third Quarter Press Release 24
- --------------------
* 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
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MADGE NETWORKS N.V.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
---------------- ----------------
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,341 $ 130,494
Restricted cash 10,500 --
Accounts receivable, net of allowances for doubtful
accounts of $2,568 at September 1999 and
$2,604 at December 1998
38,241 38,966
Inventories:
Raw materials 1,637 3,114
Finished goods 14,765 8,360
--------- ---------
16,402 11,474
Current deferred tax assets 47 51
Prepaid expenses and other current assets 10,746 13,833
--------- ---------
Total current assets 123,277 194,818
Property and equipment, net 43,597 26,215
Intangible assets, net 54,253 --
Investments -- 3,624
Non-current deferred tax assets -- 335
========= =========
Total Assets $ 221,127 $ 224,992
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowing $ 10,872 $ 1,633
Accounts payable and accrued liabilities 67,701 48,282
Other accrued liabilities 45,317 42,379
Income taxes payable 16,413 13,228
Current portions of lease obligations 3,520 2,178
--------- ---------
Total current liabilities 143,823 107,700
Long-term liabilities and lease obligations 3,324 899
--------- ---------
Total Liabilities 147,147 108,599
Shareholders' equity:
Common shares 23,295 25,182
Additional paid-in capital 112,645 123,658
Treasury stock (2,751) (10,703)
Accumulated deficit (51,681) (16,624)
Accumulated other comprehensive income (7,528) (5,120)
--------- ---------
Total shareholders' equity 73,980 116,393
========= =========
Total Liabilities and Shareholders' Equity $ 221,127 $ 224,992
========= =========
</TABLE>
See accompanying notes
3
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<TABLE>
<CAPTION>
MADGE NETWORKS N.V.
Condensed Consolidated Statements of Operations THREE MONTHS ENDED
(Unaudited)(in thousands) SEPTEMBER 30,
1999 1998
-------------- ------------
<S> <C> <C>
Net sales:
Continuing $ 42,193 $ 60,080
Discontinued -- 10,103
-------- --------
42,193 70,183
Cost of sales:
Continuing 26,079 28,626
Discontinued -- 4,943
-------- --------
26,079 33,569
-------- --------
Gross profit 16,114 36,614
Operating expenses:
Sales and marketing:
Continuing 18,262 15,764
Discontinued -- 5,045
-------- --------
18,262 20,809
Research and development:
Continuing 8,001 8,388
Discontinued -- 3,642
-------- --------
8,001 12,030
General and administrative:
Continuing 5,331 5,868
Discontinued -- 538
-------- --------
5,331 6,406
Special (Gain) -- (34,837)
-------- --------
Total operating expenses 31,594 4,408
-------- --------
(Loss) income from operations (15,480) 32,206
Net interest income 377 1,396
-------- --------
(Loss) income before income taxes (15,103) 33,602
Provision (benefit) for income taxes 127 536
Exceptional Charges 1,212 5,226
======== ========
Net (loss) income $(16,442) $ 27,840
======== ========
Net (loss) income per share
Basic $ (0.41) $ 0.62
Diluted $ (0.41) $ 0.61
Shares used in computing net (loss) income per share
Basic 40,095 45,136
Diluted 40,095 45,344
</TABLE>
See accompanying notes
4
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MADGE NETWORKS N.V.
Condensed Consolidated Statements of Operations
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Net sales:
Continuing $ 144,349 $ 189,039
Discontinued -- 59,016
--------- ---------
144,349 248,055
Cost of sales:
Continuing 83,997 94,312
Discontinued -- 29,434
--------- ---------
83,997 123,746
--------- ---------
Gross profit 60,352 124,309
Operating expenses:
Sales and marketing:
Continuing 53,792 46,851
Discontinued -- 17,472
--------- ---------
53,792 64,323
Research and development:
Continuing 26,371 26,769
Discontinued -- 12,007
--------- ---------
26,371 38,776
General and administrative:
Continuing 15,515 13,747
Discontinued -- 4,008
--------- ---------
15,515 17,755
Special (gain) -- (34,837)
--------- ---------
Total operating expenses 95,678 86,017
--------- ---------
(Loss) income from operations (35,326) 38,292
Net interest income 2,035 1,711
--------- ---------
(Loss) income before income taxes (33,291) 40,003
Provision for income taxes 529 2,002
Exceptional Charges 1,237 5,226
========= =========
Net (loss) income $ (35,057) $ 32,775
========= =========
Net (loss) income per share
Basic $ (0.86) $ 0.72
Diluted $ (0.86) $ 0.72
Shares used in computing net (loss) income per share
Basic 40,747 45,529
Diluted 40,747 45,309
</TABLE>
See accompanying notes
5
<PAGE> 6
MADGE NETWORKS N.V.
Condensed Consolidated Statements of Cash Flows
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (35,057) $ 32,775
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 9,758 16,173
(Profit) Loss on sale of fixed assets/subsidiary 602 (34,837)
Changes in assets and liabilities:
Restricted cash (10,500) --
Accounts receivable 3,925 12,399
Net inventories (4,714) 8,605
Prepaid expenses and other current assets 6,722 2,420
Accounts payable 10,377 (33,075)
Other accrued liabilities (6,262) 38,451
Income taxes payable 3,185 (167)
--------- ---------
Net cash (used in) provided by operating activities (21,964) 42,744
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (22,880) (11,881)
(Purchase of) Proceeds from sale of subsidiary (37,743) 74,946
Purchase of Olicom Token Ring Business (12,300) --
Proceeds from sales of property and equipment 21 14,091
--------- ---------
Net cash (used in) provided by investing activities $ (72,902) 77,156
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) mortgage and lease obligations 3,767 (3,290)
Proceeds from short-term loans 9,239 83
Repayment of long-term obligations -- 5,447
Repurchase of common shares (3,457) (8,724)
Net proceeds from issue of common shares 2,133 --
--------- ---------
Net cash (used in) provided by financing activities 11,682 (6,484)
========= =========
Net (decrease) increase in cash and cash equivalents $ (83,184) $ 113,416
========= =========
Cash and cash equivalents at the beginning of the period 130,494 62,106
Effect of exchange rate changes on cash 31 (4)
--------- ---------
Cash and cash equivalents at the beginning of the period 130,525 62,102
(at period-end rate)
========= =========
Cash and cash equivalents at the end of the period 47,341 175,518
========= =========
Net (decrease) increase in cash and cash equivalents $ (83,184) $ 113,416
========= =========
</TABLE>
See accompanying notes
6
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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 September 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.
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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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income $(16,442) $ 27,840 $(35,057) $ 32,775
======== ======== ======== ========
Weighted average common 40,095 45,136 40,747 45,309
shares outstanding
Common share equivalents
resulting from stock options -- 208 -- 220
-------- -------- -------- --------
Total common shares and
common equivalents for
calculation of net (loss) income
per share
Basic 40,095 45,136 40,747 45,309
======== ======== ======== ========
Diluted 40,095 45,344 40,747 45,529
======== ======== ======== ========
Net (loss) income per share:
Basic $ (0.41) $ 0.62 $ (0.86) $ 0.72
======== ======== ======== ========
Diluted $ (0.41) $ 0.61 $ (0.86) $ 0.72
======== ======== ======== ========
</TABLE>
2 SPECIAL CHARGE
During the third quarter of 1999 the company incurred special charges
of $1.2 million. The charges relate to the cost of acquiring the Token Ring
business of Olicom A/S. The charges consisted of legal fees, financing charges
and integration costs relating to the acquisition.
Special charges incurred in the second quarter of 1999 related to the
reorganisation of operating activities connected with the establishment of the
Enterprise Networks Products Division (now Madge.connect). The charges consisted
of costs relating to facilities of $3.0 million, leasehold costs relating to the
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
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<PAGE> 9
leasehold costs were expected to be realised through cash payments whereas
fixed assets costs were expected to be non-cash transactions.
In June 1999, after a 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.
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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net (loss) income (16,442) 27,840 (35,057) 32,775
Foreign currency translation adjustments (871) 1,143 (2,408) (1,046)
------- ------- ------- -------
Other comprehensive (loss) income (871) 1,143 (2,408) (1,046)
======= ======= ======= =======
Total Comprehensive (loss) income (17,313) 28,983 (37,465) 31,729
======= ======= ======= =======
</TABLE>
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Cumulative translation adjustments (7,528) (5,120)
------ ------
Total accumulated other comprehensive loss (7,528) (5,120)
====== ======
</TABLE>
9
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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 operates through
two divisions, Madge.web and Madge.connect, which are expected to be separate
legal structures by the end of this year. Madge.web provides global managed
communications and electronic content delivery, with a focus on supporting the
specialized applications of the financial services and media/publishing
industries. Madge.connect is a leading global supplier of advanced Token Ring
local area network and video networking solutions. The Company serves its
international customer base through a global network of distributors and
resellers for its products and markets its managed network services primarily
directly to business customers.
The Company reorganized its operational and internal reporting
structure in 1999 into products and services segments. Madge.connect, formerly
known as Enterprise Network Products Division, provides products, and Madge.web,
formerly known as the Managed Network Services Division, provides services.
Madge.connect was formed by the combination of the Company's former Token Ring
solutions and video networking divisions. The divisions are headquartered at
Wexham Springs, United Kingdom and have operations worldwide.
In the fourth quarter of 1999 Madge.connect plans to create two
separate groups, one focusing on enterprise products (Token Ring and ISDN) and
the other on new internet access products. The sales and marketing and research
and development functions within Madge.connect will also be re-organized along
these lines and costs will be reduced by reducing the headcount in Madge.connect
by approximately 20% over the next two quarters. The Company is expecting to
incur a special charge in the fourth quarter in relation to this restructuring.
During the third quarter of 1999 the Company incurred special charges
of $1.2 million in connection with the acquisition of the Token Ring business of
Olicom A/S. The charges consisted of legal fees, financing charges and
integration costs relating to the acquisition.
Special charges incurred in the second quarter of 1999 related to the
reorganization of operating activities connected with the establishment of the
Enterprise Network Products Division (now Madge.connect). The charges consisted
of 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. Facilities and leasehold costs are expected to be realized through cash
payments whereas fixed assets costs are expected to be non-cash transactions.
Planned headcount reductions were provided for previously under provisions made
at the time of the sale of Lannet in August 1998.
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 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.
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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 the
expected date that Madge.web and Madge.connect will be separate legal
structures, the acceleration of development of the Madge.web 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, expectations
regarding future special charges and other accounting treatments, future growth,
realization of economies of scale in the Madge.web division, future Madge.web
sale levels, sources of Madge.web funding, the plans to create separate
Madge.connect research and development and sales and marketing groups, saving
costs in Madge.connect by the restructuring referred to above, reductions in
headcount by March 2000 and accounting therefor, the adequacy of the Company's
financial resources, additional sources of funding, concluding other sources of
financing in the next six months, the anticipated outcome of litigation
involving the Company, the Company's plans to continue investing in core
technologies and new products and services, the Company's Common Share
repurchase program, the date that the Company expects its systems to be fully
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" herein and in the Company's Annual
Report on Form 20-F for the year ended December 31, 1998 and elsewhere herein
and therein. Actual results, actions or events could differ materially. Risks
include, among other factors, inability to obtain additional financing,
management of change, retention of key individuals, competition, quarterly
fluctuations, changes in general economic conditions, 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 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 OLICOM A/S TOKEN RING BUSINESS
On August 31, 1999 Madge completed an agreement with Olicom A/S under
which Madge purchased the intellectual property and the rights to manufacture,
sell and develop all of Olicom's Token Ring product portfolio. The transaction
also included Olicom's Token Ring customer base and Madge hired 55 Olicom
employees. The purchase price for the acquisition was $21.5 million, which
included an initial payment of $13.0 million and an amount of $8.5 million
placed in escrow relating to future minimum guaranteed payments to be made over
three years based on a percentage of Madge Token Ring revenues. In addition,
Madge is committed to a further payment of $2.0 million, which has been placed
in escrow and is to be released upon Olicom fulfilling certain technical support
milestones. Madge is also committed to purchase certain Olicom Token Ring
inventory in the quarters following the sale. The agreement resulted in goodwill
and other intangibles of $21.3 million, which is being amortized over a three
year period.
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, respectively (collectively "Gains"). Gains is an international
carrier supplying the financial sector. 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.
11
<PAGE> 12
RESULTS OF OPERATIONS
Net Sales
Net sales from continuing operations, which consist of Madge.connect
and Madge.web sales, were $42.2 million in the three months ended September 30,
1999, a decrease of 30%, compared to $60.1 million for the same period in 1998.
Net sales from continuing operations were $144.3 for the nine months ended
September 30, 1999, a decrease of 24%, compared to $189.0 million for the same
period in 1998. The decrease in continuing net sales was primarily in the United
States where sales were $11.0 million for the third quarter of 1999, a decline
of 55%, compared to $24.6 million for the same period in 1998. The decline in
net sales in the first nine months of 1999 compared to 1998 was primarily a
result of reduced demand for the Company's networking products, which the
Company believes was attributable in the third quarter of 1999 to Year 2000
buying patterns, customer and channel disruption and other impacts resulting
from the Olicom acquisition. The Company also reduced channel inventories by
$3.5 million during the three months ended September 30, 1999. Total net sales,
including discontinued operations, were $70.2 million and $248.1 million for the
three months and nine months ended September 30, 1998, respectively.
Net sales from continuing operations in the Madge.connect division,
which consist of Token Ring and video networking products, were $34.3 million
for the three months ended September 30, 1999, a decline of 43% from $60.1
million for the same period in 1998. Sales of these products were $122.6 million
in the nine months ended September 30, 1999, a decrease of 35% compared to
$189.1 million in the same period of 1998. Sales of these products represented
approximately 81% and 100% of the Company's continuing net sales in the three
months ended September 30, 1999 and 1998, respectively. The Company's plans take
into account that the market for its legacy Token Ring products (principally
adapter cards) is declining. The Company is focused on gaining market share in
this difficult market segment and the acquisition of the Olicom A/S Token Ring
business is part of that strategy. The Company experienced a decline in
Madge.connect sales in the third quarter of 1999, which it believes were
affected by Year 2000 buying patterns that delayed customer purchases as well as
transition issues associated with the Olicom acquisition, such as significant
use of management time and both customer and channel disruption. The Company is
uncertain of the effect these issues will have on sales of Madge.connect in the
fourth quarter of 1999.
Net sales of Madge.web, which includes Gains, were $7.9 million, or 19%
of net sales, for the third quarter of 1999 compared to $8.9 million, or 17% of
net sales for the second quarter of 1999, a decline of 11%. Excluding sales to
the former parent and owner of Gains, sales for the division for the three
months ended September 30, 1999 increased by 4% to $4.9 million. The division
did not generate any revenues prior to the first quarter of 1999. The Company
anticipates level sales for Madge.web for the last quarter of 1999. Madge.web
revenues for the nine months ended September 30, 1999 were $21.7 million and the
Company currently estimates revenues of approximately $29.0 million for the
division for 1999.
Gross Profit
Gross profit from continuing operations was $16.1 million, or 38% of
net sales, for the three months ended September 30, 1999 compared to $31.5
million, or 52% of net sales, for the same period in 1998. Gross profit from
continuing operations for the nine months ended September 30, 1999 was $60.4
million, or 42% of net sales, compared to $94.7 million, or 50% of net sales,
for the same period in 1998. Gross profit for Madge.connect was 54% and 52% for
the three months ended September 30, 1999 and 1998, respectively. The Madge.web
gross profit for the three months ended September 30, 1999 was (32)% compared to
5% for the three months ended June 30, 1999 due to investment in the division
for future growth. Economies of scale in relation to revenue have not yet been
realised in Madge.web business and are reflected in the negative gross profit.
The lower gross profit from continuing operations for the nine months ended
September 30, 1999 compared to the same period in 1998 resulted primarily from
competitive pricing pressures in Madge.connect and also the increased proportion
of revenue derived from Madge.web. The Company believes that gross profit for
Madge.connect will remain under pressure primarily because of continued price
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competition. Long-term gross margins in the Company's Madge.web division are
expected to remain lower than margins achieved by the Madge.connect division,
and in the near-term to remain substantially lower until expected economies of
scale can be realized for Madge.web. Gross margins for total operations for the
three and nine months ended September 30, 1998 were 52% and 50%, respectively.
Sales and Marketing
Sales and marketing expenses for continuing operations were $18.3
million, or 43% of continuing net sales, for the three months ended September
30, 1999, an increase of 16%, compared to $15.8 million, or 26% of continuing
net sales, for the same period of 1998. For the nine months ended September 30,
1999, sales and marketing expenses from continuing operations were $53.8
million, or 37% of continuing net sales, an increase of 15%, compared to $46.9
million, or 25% of continuing net sales, for the same period in 1998. 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 Madge.web sales grow. Total sales and marketing expenses
were $20.8 million and $64.3 million for the three and nine months ended
September 30, 1998, representing 30% and 26% of total net sales, respectively.
The increase in sales and marketing expenses for the three and nine months ended
September 30, 1999 compared to the same periods in 1998 reflected increased
sales and marketing operations associated with the launch and expansion of
Madge.web and the acquisition of Gains.
Research and Development
Research and development expenses for continuing operations were $8.0
million, or 19% of continuing net sales, for the three months ended September
30, 1999, a decrease of 5%, compared to $8.4 million, or 14% of continuing net
sales, for the same period in 1998. For the nine months ended September 30,
1999, research and development expenses were $26.4 million or 18% of continuing
net sales, compared to $26.8 million, or 14% of net continuing sales for the
same period in 1998. The great majority of research and development expenses
were incurred by Madge.connect. As discussed above, the strategy in
Madge.connect is to reduce research and development headcount and to create two
separate groups focussed on different products. As a result the Company expects
that research and development expenditure will decline over the coming quarters.
All of the Company's research and development costs have been expensed as
incurred. Total research and development expenses were $12.0 million and $38.8
million for the three and nine months ended September 30 1998, representing 17%
and 16% of total net sales, respectively.
General and Administrative
General and administrative expenses from continuing operations were
$5.3 million, or 13% of continuing net sales, for the three months ended
September 30, 1999, a decline of 10%, compared to $5.9 million, or 10% of
continuing net sales, for the same period in 1998. For the nine months ended
September 30, 1999, general and administrative expenses increased to $15.5
million, or 11% of continuing net sales, compared to $13.7 million, or 7% 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 Madge.web and amortization of goodwill relating to the
acquisition of Gains in February 1999. Total general and administrative expenses
were $6.4 million and $17.8 million for the three and nine months ended
September 30, 1998 representing 9% and 7% of total net sales, respectively. The
anticipated reduction of headcount in Madge.connect will reduce general and
administrative costs over the longer term; however there will be an associated
charge with the reduction in headcount in the fourth quarter of 1999.
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<PAGE> 14
Earnings before interest, tax, depreciation and amortization
Earnings before interest, tax, depreciation and amortization ("EBITDA")
for the three months ended September 30, 1999 was a loss of $12.8 million or
$0.32 per diluted share, compared to income of $30.1 million or $0.66 per
diluted share for the three months ended September 30, 1998. For the nine months
ended September 30, 1999 EBITDA was a loss of $26.2 million or $0.64 per diluted
share, compared to income of $44.1 million or $0.97 per diluted share for the
nine months ended September 30, 1998.
Income Tax
The Company recorded a provision for income taxes of $0.1 million in
the three months ended September 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 September 30, 1999 the Company had cash and cash equivalents of
$47.3 million. An additional $10.5 million of cash is restricted and held in
escrow in relation to the Olicom A/S agreement. The payment of $2.0 million from
the escrow account to Olicom is contingent upon attainment by Olicom of
technical support milestones and the remaining $8.5 million is a minimum payment
due on future Token Ring sales. During the three months ended September 30, 1999
two Madge.connect UK entities entered into a two-year invoice discounting
arrangement for up to $30.0 million, secured by accounts receivable generated by
European and US Madge.connect sales and on all the other assets of the
Madge.connect UK entities. This facility expires in September 2001. The
availability of financing under this facility depends upon the value and age of
accounts receivable in the Madge.connect UK sales entity and completion of
certain documentation with regard to US accounts receivables. There were
borrowings of $10.2 million against this line as at September 30, 1999. The
Company and its subsidiaries also finance working capital in part through a $3.5
million facility that allows borrowing up to an equal compensated cash balance,
of which $0.7 million was outstanding on September 30, 1999.
Net cash used in operating activities for the nine months ended
September 30, 1999 amounted to $22.0 million. The net cash outflow was
attributable to the net loss for the period and the increase in restricted cash,
offset by depreciation and amortization expense and a decrease in working
capital. The net decrease in working capital was due to movements in accounts
payable and inventories, due to balances associated with the acquisition of
Olicom A/S and reduced Token Ring sales, respectively. All movements in
operating cash flows exclude balances associated with the acquisition of Gains.
Net cash outflow from investing activities for the nine months ended
September 30, 1999 were $72.9 million. This consisted of approximately $37.7
million relating to the purchase of Gains in February 1999 and $12.3 million
relating to the purchase price for the acquisition of Olicom's Token Ring
business, which includes amounts placed in escrow relating to future minimum
guaranteed payments and to assumed warranty liabilities in respect of existing
Olicom products. Additions to property and equipment totaled $22.9 million.
Purchases of property and equipment were primarily for the build-out of the
Madge.web infrastructure. Net cash outflow from financing activities for the
nine months ended September 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. As discussed above, an invoice discounting arrangement
resulted in a net cash inflow of $10.2 million, which is reflected in proceeds
from short-term loans.
The Company was not active in its Common Share repurchase program
during the third quarter. 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
14
<PAGE> 15
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 spending levels are influenced by many factors, the Company
believes that current resources, combined with available sources of liquidity
and capital will be sufficient to meet the Company's operational requirements
and currently projected capital expenditures through mid-2000. During the third
quarter of 1999 the Company announced plans to invest approximately $85 million
in its Madge.web division over the next two years. The Company plans to fund
this investment primarily through lease funding and other sources of financing
and the Company is currently exploring the options available to meet these
investment plans. The Company is also actively considering other sources of
financing, which it anticipates concluding in the next six months. There can be
no assurance at this time that its currently projected requirements will be
sufficient or that its requirements will remain the same given the fact its
business is changing and Madge is actively reviewing business priorities,
resource allocation and new business opportunities. There can also be no
assurance 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. See also "Risk Factors -Risks Related to our Financial Condition and
our Business."
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, services and internal
systems are Year 2000 compliant, the Company has identified 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. The Company believes that this
process is nearly complete. The Company has made significant progress towards
ensuring its essential systems are Year 2000 compliant, but has a small number
of areas where continuing work is necessary, the bulk of which it expects to
complete by the end of the fourth quarter of 1999. The Company is dependent in
large part on suppliers of its software and systems to achieve this goal. As of
the date of this filing the Company has a number of application patches to be
installed, systems to be upgraded, contingency plans to be checked and other
actions to be taken. In some cases, the Company may choose not to invest in
equipment rental or take other actions where the cost exceeds the perceived
benefit (e.g., rental of back-up generators may be prohibitively expensive).
While the Company believes it has addressed the Year 2000 risk appropriately,
key risks remain if contingency plans, upgrades or other actions are not
completed satisfactorily, or if management's estimation of risk proves to be
incorrect.
The Company has issued questionnaires to its suppliers and is
questioning its significant suppliers (e.g. the supplier of its main internal
software package, the third party manufacturer of its Token Ring products and
the suppliers of bandwidth to support the Company's provision of Madge.web
services) further to assess whether they may suffer any problems as a result of
Year 2000 issues that could affect the Company. The Company believes that this
process is almost complete, however the Company will be continuing to question
suppliers up to and beyond the December 31, 1999 and it is possible that issues
could arise which have not yet been identified.
In August 1999, Madge purchased substantially all of the Token Ring
business of Olicom A/S and has received warranties from Olicom A/S in respect of
Year 2000 capabilities of Olicom products. While the Company has not
independently verified these warranties, the Company is questioning significant
suppliers of the new Madge products to assess whether they may suffer any
problems as a result of Year 2000 issues.
15
<PAGE> 16
Through September 30, 1999, the Company incurred expenses to address
Year 2000 issues of approximately $1.6 million, representing 15% of the
Company's current information systems budget, related to acquiring or updating
internal systems, products, services, facilities and supplier issues. Planned
expense associated with actions yet to be taken is now estimated at $0.1
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 is still assessing 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
experienced a decline in sales in the third quarter of 1999, which the Company
believes may have resulted in part from customers' focus on Year 2000 issues.
The Company believes that the purchasing patterns of customers and potential
customers may be further affected by Year 2000 issues as companies experience
Year 2000 problems and expend significant resources to overcome or address them.
Expenditures by customers to address Year 2000 issues may result in reduced
funds available to purchase products such as those offered by the Company and
reduced attention to acquiring networking products, 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 customers' third
party suppliers' and/or service providers' business disruption, will not result
in additional risks to the Company's product supply, services and internal
systems, or will not result in claims from external users of the Company's
products or services, 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. On
December 8, 1999 the plaintiffs moved for leave to file an amended complaint,
and the Company intends to oppose that motion at the appropriate time. The
Company believes the allegations in the complaints to be without merit and
intends to continue to defend the amended complaint vigorously.
In addition, from time to time, the Company and its subsidiaries are
involved in disputes relating to claims arising out of its operations in the
normal course of business. Among other things, such claims may relate to
allegations of patent infringement, employment-related claims, product warranty
claims and level of service claims. As of the date of this report, the Company
is not a party to any legal proceedings the adverse outcome of which, in
management's opinion, individually or in the aggregate, would have a material
adverse effect on the Company's financial position. If a class action litigation
described above were to be decided adversely to the Company, the Company's
results of operations and financial position could be adversely affected. See
also "Description of Business - Risk Factors - Intellectual Property and
Proprietary Rights" in the Company's Annual Report on Form 20-F for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.
16
<PAGE> 17
RISK FACTORS
From time to time, in connection with the United States Private
Securities Litigation Reform Act of 1995, reference may be made to risks
addressed in the Company's public filings with the Securities and Exchange
Commission. Please refer to the discussion herein and in 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.
RISKS RELATED TO OUR FINANCIAL CONDITION AND OUR BUSINESS
We have had difficulty managing our changing operations and acquisitions, which
has harmed and may continue to harm our business.
We acquired several businesses over the last four years, including
Lannet Data Communications, Ltd. in November 1995, Teleos Communications, Inc.
in February 1996, Gains International in February 1999 and the Token Ring
business of Olicom A/S in August 1999. These companies previously operated
independently, and we have had difficulty integrating their operations into our
own. For example, as previously warned, we experienced problems with channel
integration of Lannet's products. Although we sold Lannet to Lucent Technologies
in August 1998, we may experience integration problems with regard to the
remaining entities, which may be similar to those experienced in the past or
possibly new problems. Because of these acquisitions and changes in our
operations, we have continued to reallocate resources from our pre-acquisition
products to our newer offerings. These reallocations could decrease our revenue.
The continuing challenge of managing our current products and operations may
lead us to further readjust our business priorities and resource allocation.
Such adjustments could harm our business.
Madge reorganized its operational and internal reporting structure in
1999 into products and services segments. We now operate through two divisions,
Madge.web and Madge.connect, which are expected to be separate legal structures
by the end of this year. Madge.web provides global managed communications and
electronic content delivery with a focus on supporting the specialized
applications of the financial services and media/publishing industries.
Madge.connect is a global supplier of our traditional Token Ring local area
network and video networking solutions. This corporate structure, which includes
our recent acquisition of Gains, is untested and our Madge.web market largely
unproven. If we are unsuccessful in establishing these separate legal entity
divisions and developing their businesses, our operations will be further
strained.
The restructuring of the Company's business and sale of Lannet resulted
in a net reduction in headcount of approximately two-thirds between July 1997
and September 1998. Previous centers of business, including San Jose,
California, Tokyo and Hong Kong, were substantially downsized or closed. These
events have adversely affected and are expected to continue to adversely affect
our business. The challenge of managing expenses to changing sources of revenue
may lead us to adjust further our business priorities and resource allocation.
As a result of the acquisitions described above and ongoing
restructuring and downsizing, our existing and new management personnel have had
increased responsibilities, which has strained and may continue to strain
operational, management, financial and other resources and weaken our ability to
retain employees. Due to the level of technical and management expertise
necessary to support growth and success, Madge must recruit and retain highly
qualified and well-trained personnel. There may be only a limited number of
persons with requisite skills to serve in these positions, and it may become
increasingly difficult for us to hire or retain such personnel over time. In
addition, there can be no assurance that we will successfully integrate new
acquisitions into its operations.
17
<PAGE> 18
We will need additional funds to support our growth.
Although spending levels are influenced by many factors, Madge believes
that current resources, combined with available sources of liquidity and capital
will be sufficient to meet our anticipated needs for working capital and capital
expenditure through mid-2000. During the third quarter of 1999, we announced
plans to invest approximately $85 million in Madge.web over the next two years.
We plan to fund this investment primarily through lease funding and other
sources of financing and we are currently exploring the options available to
meet these investment plans. There can be no assurance at this time that our
currently projected requirements will be sufficient or that our requirements
will remain the same given the fact our business is changing and we actively
review business priorities, resource allocation and new business opportunities.
We did not generate cash from operations in the nine months ended September 30,
1999. We will need to generate additional cash flow from operations to meet our
anticipated needs for working capital and capital expenditures, or will need to
raise additional capital within the next six months. If during such period, or
thereafter, we are not successful in generating sufficient cash flow from
operations or in raising additional capital when required in sufficient amounts
and on acceptable terms, these failures could have a material adverse effect on
Madge's business, results of operations and financial condition. If we raise
additional funds through the issuance of equity or convertible debt securities
of the parent company or any subsidiary, the percentage ownership of our
stockholders may be reduced.
Our revenue, expenses, liquidity and operating results are subject to
significant fluctuation, which could contribute to disparate quarterly results.
We have experienced quarterly fluctuations in operating results and
anticipate that these fluctuations will continue. Various factors contribute to
this uncertainty, including:
o economic conditions specific to the personal computer and computer
networking industries, including the impact that Year 2000 issues may have
on the purchase and installment of computer and computer networking
equipment,
o general economic conditions,
o the pattern of end-user purchasing cycles,
o the introduction of new products by us and our competitors,
o the timing of operating expenditures,
o the size and timing of customer orders,
o the mix of products sold, and
o the mix of distribution channels through which our products are sold.
We also believe that, in our industry, net sales in the first quarter
of each year are typically weak, and that pattern may be exacerbated as a result
of Year 2000 issues. We operate with little backlog and our net sales are
dependent on orders booked and shipped in that quarter. Additionally, a
significant portion of our operating expenses is fixed expenditures, based
primarily on sales forecasts determined months or years in advance. If net sales
do not meet our expectations in any period, our operating results will be
adversely affected. Moreover, restructuring expenses has strained and may
continue to strain our cash resources. In the year ended December 31, 1996 and
the nine months ended September 30, 1999 we did not generate cash from
operations. If actual expenditures exceed estimates or if the timing of the
charges changes, we will expense additional amounts in future quarters. Any one
or combination of these factors and our failure to adequately anticipate their
effect could contribute to wide period-to-period fluctuations and could
materially and adversely affect our business.
18
<PAGE> 19
We continue to be dependent upon revenue generated by our token ring business.
Our revenue has largely been derived from the sale and licensing of
Token Ring products and technology. We derived approximately 65%, 65% and 72% of
our net sales from our Token Ring products for the years ended December 31,
1996, 1997 and 1998, respectively. Further, in part as a result of the sale of
Lannet in August 1998, our Token Ring products accounted for 81% of our net
sales for the nine months ended September 30, 1999. Thus, we depend upon the
continued market acceptance of Token Ring and related technologies. But our
total sales of Token Ring adapter cards have declined over for the last two
years and we believe they could continue to decline. If the Token Ring market
remains static, or declines further, our net sales and profitability could
further decrease unless the Company is successful in its strategy of building
market share.
We rely on third-party suppliers of Internet capacity, the interruption or loss
of which would harm our Madge.web operations.
Madge.web leases transmission capacity from many suppliers, both to
link customers to our network and for other transmissions. We could experience
delays or interruptions in transmission capacity from these suppliers.
Additionally, we may be unable to obtain such services within the requisite time
periods or at a reasonable cost. We may also be unable to purchase international
capacity where it is economically and legally feasible. Any failure to obtain
transmission capacity in a particular jurisdiction or any interruption of local
access could disrupt our service.
Loss or modification of our relationships with third-party distributors and
resellers would harm our operations and sales.
A majority of our sales are fulfilled and distributed worldwide through
a network of distributors, large system integrators, value-added resellers and
original equipment manufacturers. Our indirect distribution channels vary by
division and from country to country. In the United States, the distribution
channels include major national distributors, such as Ingram Micro, Inc. and
Tech Data Corporation, Inc. In Europe, Asia and other markets, we sell our
products through a combination of locally based distributors and resellers, as
well as directly to end-users. We generally do not have long-term contracts with
these distributors and resellers. The Company must now also depend on
distributors of the former Olicom product line, many of which do not have an
established relationship with the Company. The loss of a distributor or reseller
in a particular region could impair our operations in that region. Any resulting
declines in sales could decrease revenue. Until alternative distribution
channels could be established, if at all, our business would suffer.
Our products may contain defects that may cause us to incur significant costs,
divert our attention from product development and result in the loss of
customers.
Networking products frequently contain undetected software and hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may occasionally be found. In addition, our products are
often embedded in or deployed in conjunction with our customers' products, which
incorporate a variety of components produced by third parties. We may on
occasion sell products which are manufactured by others and for which Madge
lacks resources and familiarity to trouble-shoot and service effectively. As a
result, when problems occur, it may be difficult to identify the source of the
problem. If problems are found, we may divert resources to address the problem
and may incur significant damages or warranty and repair costs. We may divert
the attention our engineering personnel from product development and we could
face significant customer relation problems or the loss of customers. These
problems may then adversely impact our business.
19
<PAGE> 20
Returns or warranty costs in excess of our budgeted amounts could harm our
revenues.
The terms of our reseller and distributor relationships subject us to
certain risks. we grant limited rights to exchange unsold products for new
purchases. Although we allow for projected returns, these allowances may not be
sufficient to offset product returns in the future. In addition, we provide
price protection to our distributors. a significant decrease in the price of our
products, which exceeds the amounts that we have reserved, could have an adverse
effect on our operating results. Moreover, although we believe that our reserves
are adequate to cover future warranty costs, the warranty reserves may not cover
actual costs. if any one of these allowances is inadequate, our revenue could
decrease.
The loss of the services of our management and other key employees could harm
our results of operations and inhibit growth.
Our success depends on the contributions of Robert H. Madge, our
principal founder and chief executive officer. The loss of Mr. Madge's services
could harm our results of operations and competitive position. We also depend
upon a limited number of members of senior management and other key employees.
The loss of the services of key personnel following our 1997 and 1998
restructuring has compromised and could continue to compromise the efficiency of
our operations. We may also lose key personnel as a result of the Madge.connect
restructuring mentioned in "Management's Discussion and Analysis - General"
which may have an adverse impact upon our business. In addition, our
acquisitions since 1995 and subsequent restructuring strained and may continue
to strain operational, financial and other resources and may weaken our ability
to attract and retain employees. Due to the level of technical and management
expertise necessary to our industry, we must recruit and retain highly qualified
and well-trained personnel. Competition for these employees is intense. If we
cannot attract and retain qualified personnel, our business and prospects will
suffer.
If we fail to establish or maintain relationships with parties that agree to
resell our products on an original equipment manufacturer basis, our revenue
will decrease.
We anticipate that a significant portion of our future revenue will be
derived from sales to customers that integrate our products into their own or
resell our products under their own brand names. Therefore, our revenue will be
increasingly dependent upon the ability and willingness of these original
equipment manufacturers to promote products that incorporate our products and
technology. Their ability and willingness to do so is based upon a number of
factors, such as
o our timely development of new products with increased reliability,
functionality, speed and performance at acceptable prices to end users,
o the compatibility of our technology with emerging industry standards,
o general industry competition, and
o overall economic conditions.
Many of these factors are beyond our control. Additionally, these
customers may have profitability or other incentives to promote internal
solutions or competing products in lieu of products incorporating our
technology. Sales by these customers also could compete with our products,
possibly hurting our sales, reducing our margins and adversely affecting the
marketability of our products. Our inability to promote sales through these
manufacturers could decrease our revenue.
The Company may also enter into agreements to obtain products from
another manufacturer or manufacturers for resale on a Madge-labeled or OEM
basis, such as the Company's agreement with Intel. The Company will be dependent
in any such arrangement upon the manufacturer of products to provide the Company
20
<PAGE> 21
with timely shipments at a cost-effective basis, and may also depend upon its
OEM supplier for technology, intellectual property indemnification, support and
other assistance. There is no guarantee that an OEM supplier can or will
continue to provide such things on a cost-effective basis.
We depend upon our international operations, which subject us to currency
exchange rate fluctuations.
We derived approximately $300.2 million, $252.6 million, $199.7 million
and $110.8 million, or 62%, 66%, 66% and 77% of our net sales from operations
outside of the Americas in the years ended December 31, 1996, 1997 and 1998, and
the nine months ended September 30, 1999, respectively. We expect that
international sales will continue to represent a majority of our revenue. A
significant portion of this international business is conducted in currencies
other than the U.S. dollar. As a result, we are subject to currency exchange
rate fluctuations and the associated difficulty of administering business
globally. Fluctuations in the value of foreign currencies cause revenue or other
numbers tied to the U.S. dollar to change in comparison with similar numbers in
previous periods. Due to the number of currencies involved, the constantly
changing currency exposures, and the substantial volatility of currency exchange
rates, we cannot predict the effect of exchange rate fluctuations upon future
operating results. These exchange rate fluctuations could distort the results of
our operations.
21
<PAGE> 22
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: December 16, 1999
22
<PAGE> 23
EXHIBIT INDEX
Page
----
Exhibit A Third Quarter Press Release 24
23
<PAGE> 1
[LOGO]
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
Press Information
MADGE NETWORKS N.V.
THIRD QUARTER 1999 RESULTS
Amsterdam, Netherlands (October 27, 1999) -- Madge Networks N.V. (NASDAQ NM:
MADGF), a global network solutions provider, today announced results for its
third fiscal quarter 1999.1
Madge reported revenues of US$42.2 million for the third fiscal quarter, a
decrease of $11.1 million or 21 per cent compared to revenues of $53.3 million
for the second quarter of 1999. Continuing revenues for the third quarter of
1998 were $60.1 million.2
The net loss was $16.4 million, or $(0.41) per share, compared to a net profit
from continuing operations of $1.9 million, or $0.04 per share, for the third
quarter of fiscal 1998. Results for the 1999 quarter include a non-recurring
charge of $1.2 million and the balance sheet reflects an initial cash payment of
$13 million in connection with the Company's acquisition of the Token Ring
business of Olicom A/S on August 31, 1999.
On August 26, 1999, Madge announced a new company structure to support its
strategy to deliver managed network and hosting services as well as product
solutions to its global customer base. The Company's two divisions, formerly
known as Managed Network Services and Enterprise Network Products, now operate
- --------
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 of Continuing Operations exclude Madge's Ethernet Division Lannet,
disposed of in the third quarter 1998 and NonRecurring charges incurred in the
year to December 1998.
<PAGE> 2
autonomously as Madge.web and Madge.connect respectively, and are expected to be
separate legal structures by the end of this year.
MADGE.WEB
Madge.web provides global managed communications and electronic content
delivery, with a focus on supporting the specialized applications of the
financial services and media/publishing industries. During the third quarter,
the division added 42 new customers. Madge.web revenues for the third fiscal
quarter decreased to $8 million from $9 million in the second quarter,
reflecting a decline in revenues derived from the former parent of Gains
International, which Madge acquired in February 1999. However, external revenues
for Madge.web of $4.9 million, excluding results from the Gains parent company,
increased by five per cent this quarter.
MADGE.CONNECT
Madge.connect is a leading global supplier of advanced Token Ring local area
network and video networking solutions. Madge.connect revenues decreased to $34
million from $44 million in the second quarter. The Company believes that
Madge.connect sales were impacted by Y2K-related purchasing delays and the
transitional impact as it acquired Olicom's Token Ring business. The third
quarter revenues were further impacted by a reduction in channel inventories of
$3.5 million in anticipation of a continued Y2K effect on the Token Ring
business in the fourth quarter.
Robert Madge, Chairman of Madge Networks N.V., said: "Our third quarter results
reflect difficult trading conditions for Madge.connect's Token Ring business
combined with heavy investment in Madge.web. We are continuing our
investment-led strategy, while taking appropriate actions to restore the balance
in our business model and improve our cash flow -- aiming for a major
improvement in our results by the first quarter of 2000. We see a further boost
to the business in both Madge.connect and Madge.web as a result of the
acquisition of Olicom's substantial customer base."
<PAGE> 3
ABOUT MADGE NETWORKS N.V.
Founded in 1986, Madge Networks (NASDAQ NM: 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.web and Madge.connect. 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., management of change, Y2K risks, competition, availability of financing,
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 timing of separate legal structures of Madge.web and
Madge.connect, Y2K effect, continuing investment-led strategy, restoring
balance, boost to business in Madge.connect and Madge.web, improving cash flow,
major improvement in results by the first quarter of 2000, 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, please
refer to Madge's SEC filings on Form 20-F and Form 6-K.
Madge, the Madge logo, Madge.web and Madge.connect 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
Lisa Ellis, Director of Investor & Public Relations
MADGE NETWORKS N.V.
Tel: 917-368-8104
<PAGE> 4
Madge Networks N.V.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SEPT 30, DEC 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments(1) $ 57,841 $130,494
Accounts receivable, net 38,241 38,966
Inventories 16,402 11,474
Prepaid expenses and other current assets 10,793 13,884
-------- --------
Total current assets 123,277 194,818
Investments, property and equipment, net 43,597 30,174
Intangible assets, net 54,253 --
-------- --------
Total assets $221,127 $224,992
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $113,018 $ 90,661
Income taxes payable 16,413 13,228
Short term borrowings 14,392 3,811
-------- --------
Total current liabilities 143,823 107,700
Long-term obligations 3,324 899
-------- --------
Total liabilities 147,147 108,599
Shareholders' equity 73,980 116,393
-------- --------
Total liabilities and shareholders' equity $221,127 $224,992
======== ========
</TABLE>
(1) Cash includes a balance of $10.5M that has restricted use.
<PAGE> 5
Madge Networks N.V.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
RESULTS OF CONTINUING(1) GROUP RESULTS
OPERATIONS (INCL. DISPOSED DIVISION &
NON-RECURRING ITEMS)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPT 30, SEPT 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 42,193 $ 60,080 $ 42,193 $ 70,183
Cost of sales 26,079 28,626 26,079 33,569
-------- -------- -------- --------
Gross profit 16,114 31,454 16,114 36,614
Operating expenses:
Sales & marketing 18,262 15,764 18,262 20,809
Research & development 8,001 8,388 8,001 12,030
General and administrative 5,331 5,868 5,331 6,406
Total operating expenses 31,594 30,020 31,594 39,245
-------- -------- -------- --------
(Loss) income from operations (15,480) 1,434 (15,480) (2,631)
Net interest income 377 987 377 1,396
-------- -------- -------- --------
(Loss) income before income taxes (15,103) 2,421 (15,103) (1,235)
Non-Recurring (Charges)/Gains (1,212) -- (1,212) 29,611
(Loss) income before tax (16,315) 2,421 (16,315) 28,376
Income tax provision (benefit) 127 533 127 536
-------- -------- -------- --------
Net (Loss) income $(16,442) $ 1,888 $(16,442) $ 27,840
======== ======== ======== ========
Earnings per share
Basic $ (0.41) $ 0.04 $ (0.41) $ 0.62
Diluted $ (0.41) $ 0.04 $ (0.41) $ 0.61
Weighted Average Shares Outstanding
Basic 40,095 45,136 40,095 45,136
Diluted 40,095 45,344 40,095 45,344
</TABLE>
(1) Results of Continuing Operations exclude Madge's Ethernet Division Lannet,
disposed of in the third quarter 1998 and NonRecurring charges incurred in
the year to December 1998.
<PAGE> 6
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
RESULTS OF CONTINUING(1) GROUP RESULTS
OPERATIONS (INCL. DISPOSED DIVISION &
NON-RECURRING ITEMS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 144,349 $ 189,039 $ 144,349 $ 248,055
Cost of sales 83,997 94,312 83,997 123,746
--------- --------- --------- ---------
Gross profit 60,352 94,727 60,352 124,309
Operating expenses:
Sales & marketing 53,792 46,851 53,792 64,323
Research & development 26,371 26,769 26,371 38,776
General and administrative 15,515 13,747 15,515 17,755
Total operating expenses 95,678 87,367 95,678 120,854
--------- --------- --------- ---------
(Loss) income from operations (35,326) 7,360 (35,326) 3,455
Net interest income 2,035 783 2,035 1,711
--------- --------- --------- ---------
(Loss) income before income taxes (33,291) 8,143 (33,291) 5,166
Non-Recurring (Charges)/Gains (1,237) -- (1,237) 29,611
--------- --------- --------- ---------
(Loss) income before tax (34,528) 8,143 (34,528) 34,777
Income tax provision (benefit) 529 1,985 529 2,002
--------- --------- --------- ---------
Net (Loss) income $ (35,057) $ 6,158 $ (35,057) $ 32,775
========= ========= ========= =========
Basic $ (0.86) $ 0.14 $ (0.86) $ 0.72
Diluted $ (0.86) $ 0.14 $ (0.86) $ 0.72
Weighted Average Shares Outstanding
Basic 40,747 45,529 40,747 45,529
Diluted 40,747 45,309 40,747 45,309
</TABLE>
(1) Results of Continuing Operations exclude Madge's Ethernet Division Lannet,
disposed of in the third quarter 1998 and NonRecurring charges incurred in
the year to December 1998.
