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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 September 30, 2000
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 40 Pages
Exhibit Index Appears on Page 32.
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MADGE NETWORKS N.V.
Form 6-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Financial Information:*
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 (unaudited) and the nine months ended
September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Forward Looking Statements 10
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Legal Proceedings 17
Risk Factors 18
Signatures 31
Exhibit Index 32
Exhibit A -- Third Quarter Press Release 33
</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.
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Madge Networks N.V.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,676 $ 19,471
Restricted cash 11,374 10,500
Accounts receivable, net of allowance for doubtful
accounts of $3,367 and $4,152 at September 30,
2000 and December 31, 1999, respectively 19,702 38,655
Inventories
Raw materials 2,308 833
Finished goods 6,759 15,327
--------- ---------
9,067 16,160
Current deferred tax assets 38 44
Prepayments and other current assets 14,345 10,758
--------- ---------
Total current assets 91,202 95,588
Property and equipment, net 60,989 44,834
Goodwill, net of accumulated amortization 30,305 32,528
Intangible assets, net of accumulated amortization 13,793 19,548
--------- ---------
Total assets $ 196,289 $ 192,498
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowing $ 22,284 $ 7,107
Accounts payable 11,899 13,514
Deferred consideration 6,147 8,500
Accrued wages and related liabilities 4,099 5,196
Other accrued liabilities 55,658 65,429
Income taxes payable 15,075 16,715
Current portions of lease obligations 4,577 3,298
--------- ---------
Total current liabilities 119,739 119,759
Long-term liabilities and lease obligations 8,377 3,563
--------- ---------
Total liabilities 128,116 123,322
Shareholders' equity:
Common shares 29,145 23,340
Additional paid-in capital 169,562 110,009
Treasury stock (404) (404)
Retained deficit (116,642) (56,937)
Accumulated other comprehensive loss (13,488) (6,832)
--------- ---------
Total shareholders' equity 68,173 69,176
--------- ---------
Total liabilities and shareholders' equity $ 196,289 $ 192,498
========= =========
</TABLE>
See accompanying notes
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Madge Networks N.V.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Madge.web sales $ 8,261 $ 7,280 $ 23,568 $ 20,570
Madge.connect sales 29,024 34,913 99,378 123,779
--------- --------- --------- ---------
Net sales 37,285 42,193 122,946 144,349
Cost of sales: 31,576 26,079 95,952 83,997
--------- --------- --------- ---------
Gross profit 5,709 16,114 26,994 60,352
Operating expenses:
Sales and marketing 14,822 18,262 50,414 53,792
Research and development 4,698 8,001 16,018 26,371
General and administrative 6,631 5,331 18,207 15,515
Special charges 882 1,212 882 1,237
--------- --------- --------- ---------
Total operating expenses 27,033 32,806 85,521 96,915
Loss from operations (21,324) (16,692) (58,527) (36,563)
Net interest income (expense) (320) 377 (800) 2,035
--------- --------- --------- ---------
Loss before income taxes (21,644) (16,315) (59,327) (34,528)
Provision for income taxes 14 127 378 529
--------- --------- --------- ---------
Total net loss $ (21,658) $ (16,442) $ (59,705) $ (35,057)
========= ========= ========= =========
Net loss per share
Basic $ (0.46) $ (0.41) $ (1.35) $ (0.86)
Diluted $ (0.46) $ (0.41) $ (1.35) $ (0.86)
Shares used in computing net loss per share
Basic 46,832 40,095 44,297 40,747
Diluted 46,832 40,095 44,297 40,747
</TABLE>
See accompanying notes
4
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Madge Networks N.V.
Condensed Consolidated Statements of Cash Flows
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (59,705) $ (35,057)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 11,618 8,771
Amortization of goodwill 9,978 987
Loss on disposal of fixed assets 1,493 602
Changes in assets and liabilities:
Accounts receivable 18,953 3,925
Restricted cash (874) (10,500)
Net inventories 7,093 (4,714)
Prepaid expenses and other current assets (3,581) 6,722
Accounts payable (1,615) 10,377
Other accrued liabilities (10,868) (6,262)
Income taxes payable (1,640) 3,185
Deferred consideration (2,353) --
--------- ---------
Net cash used in operating activities (31,501) (21,964)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (36,140) (22,880)
Purchase of subsidiary - Gains -- (37,743)
Purchase of Olicom (2,000) (12,300)
Proceeds from sale of property and equipment 305 21
--------- ---------
Net cash used in investing activities (37,835) (72,902)
--------- ---------
Cash flows from financing activities:
Proceeds from mortgage and lease obligations, net 6,093 3,767
Proceeds from short-term loan, net 15,177 9,239
Repurchase of common shares -- (3,457)
Proceeds from issue of common shares 65,358 2,133
--------- ---------
Net cash provided by financing activities 86,628 11,682
Net increase(decrease) in cash and cash equivalents $ 17,292 $ (83,184)
========= =========
Cash and cash equivalents at the beginning of the period $ 19,471 $ 130,494
Effect of exchange rate changes on cash (87) 31
--------- ---------
Cash and cash equivalents at the beginning of the period
(at period end exchange rates) 19,384 130,525
Cash and cash equivalents at the end of the period 36,676 47,341
========= =========
Net increase(decrease) in cash and cash equivalents $ 17,292 $ (83,184)
========= =========
</TABLE>
See accompanying notes
5
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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., 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 us 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, 1999 has been derived from the audited consolidated financial
statements at that date.
Our fiscal year ends on December 31 of each year. For the purposes of
presentation, we have indicated our fiscal quarters within the year as ending on
a calendar month end, whereas, in fact, we operate 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, 1999
included in our 1999 Annual Report on Form 20-F.
Revenue recognition
Madge.web - Our net revenues are comprised of a mix of recurring
contractual, usage-based and event-based revenues. Contractual service revenue
is recognized ratably over the life of the contract. Contract revenues invoiced
in advance of revenues earned are recorded as deferred revenue. Usage-based and
event-based revenues are recognized when services are rendered in accordance
with customer usage over the contract period.
Madge.connect - We recognize revenue from product sales upon shipment
of product. Net sales from non-recurring technology licensing or engineering is
recognized on customer acceptance. Software license royalty revenue is
recognized upon notification by the licensee that products incorporating our
software have been shipped by the licensee. Subject to certain limitations, we
permit some distributors to exchange products or to return products in exchange
for credits against future purchases. In addition, in the event we reduce our
selling prices, we credit our distributors for the difference between the
purchase price of products remaining in the distributors' inventories and our
reduced price for such products, subject to certain limitations. An allowance
for sales returns and price reduction adjustments, based on historical
experience, is accrued concurrently with the recognition of revenue.
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Inventories
Inventories are stated at the lower of cost or market value, determined
on a weighted average cost method.
Goodwill and other intangible assets
We amortize goodwill and other intangible assets on a systematic basis
over their estimated useful lives, which range from three to ten years. Goodwill
has been calculated as the excess of the purchase consideration paid over fair
value of the net assets acquired. The basis for other intangible assets has been
calculated through cash flow analysis to determine the fair value of the
specific intangible assets. The carrying amount of goodwill is reviewed on a
regular basis for indicators of impairment. Indicators of impairment include an
adverse change in the opportunities or business climate in which we operate.
Should indicators of impairment exist, such impairment will be reviewed through
the examination of discounted cash flows.
Following a re-evaluation of the value of the Gains business in the
second quarter of 2000, and the related period over which the value is to be
recognized to the Madge.web business, as well as an examination of market
practice, we determined the estimated useful life of the goodwill arising from
the acquisition of Gains to be 10 years as opposed to the original estimate of
20 years. This resulted in an increase in the total net loss of $0.5 million, or
$0.01 per share, for the three months ended September 30, 2000. The total
increase in the net loss for the nine months ended September 30, 2000 was $1.4
million, or $0.03 per share as a result of this change.
Accrued warranty costs
We provide limited warranties on our software and hardware products.
Warranty periods range from 90 days for some software products to lifetime
warranties for some hardware products. We have the option to either repair or
replace defective products or return the price paid. We accrue for expected
future warranty costs.
Foreign currency translation
We account for foreign currency in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency Translation".
Under this Statement, assets and liabilities of our non-U.S. dollar subsidiaries
are translated into U.S. dollars at exchange rates in effect at the close of the
period. The resulting translation adjustments are excluded from net earnings,
and accumulated as a separate component of shareholders' equity. The income and
expenses of these operations are translated at average monthly market exchange
rates.
Foreign currency transaction gains and losses are included in results
of operations in the periods in which they occur. The total amount of currency
transaction gain recognized in the three months ended September 30, 2000 was
$2,204,000 and for the three months ended September 30, 1999 was $108,000. The
total amount of currency transaction gain/(loss) recognized in the nine months
ended September 30, 2000 was $3,485,000 and for the nine months ended September
30, 1999 was $(53,000).
Per share data
Basic earnings per share ("EPS") is calculated using the weighted
average number of common shares outstanding. Diluted EPS is calculated based on
the weighted average number of
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common shares plus the dilutive common shares from the potential exercise of
employee share options. In periods when the Company reports a net loss, diluted
EPS is not reported because the effect of potential common shares is
anti-dilutive.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss (21,658) (16,442) (59,705) (35,057)
======= ======= ======= =======
Weighted average common shares outstanding 46,832 40,095 44,297 40,747
Total common shares and common equivalents for
calculation of net loss per share:
Basic and diluted 46,832 40,095 44,297 40,747
======= ======= ======= =======
Net loss per share:
Basic & diluted $ (0.46) $ (0.41) $ (1.35) $ (0.86)
======= ======= ======= =======
</TABLE>
2. SEGMENTAL INFORMATION
Our businesses are organized, managed and internally reported as
separate services and products segments which are reportable under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
service segment of Madge (Madge.web) supplies networking services to businesses,
with expertise in IP-enabled networks. The product business segment
(Madge.connect and Red-M) develops, manufactures and markets networking
products. Our services segment established its business in the second half of
1998, and generated its first revenue in the first quarter of 1999. During 1998,
the services segment incurred immaterial costs and as a result this segment is
included within the "Corporate and Other" results in the table below.
Red-M was established in the first quarter of 2000 and started
generating costs from that time. As a start-up company, Red-M has generated a
high level of research and development costs.
We are an integrated enterprise characterized by substantial
inter-segmental co-operation, cost allocation and inventory transfers.
Therefore, management does not represent that these segments, if operated
independently, would report the operating results and other financial
information shown.
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BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
(In thousands) Three months ended Nine months ended
(Unaudited) September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES
Madge.web $ 8,261 $ 7,280 $ 23,568 $ 20,570
Madge.connect 29,024 34,913 99,378 123,779
Red-M -- -- -- --
Corporate and other -- -- -- --
--------- --------- --------- ---------
Total company 37,285 42,193 122,946 144,349
OPERATING INCOME:
Madge.web (19,342) (12,071) (52,600) (23,092)
Madge.connect 2,323 (1,851) 2,482 (6,441)
Red-M (3,538) -- (7,601) --
Corporate and other (767) (2,770) (808) (7,030)
--------- --------- --------- ---------
Total company (21,324) (16,692) (58,527) (36,563)
Net interest income (expense) (320) 377 (800) 2,035
--------- --------- --------- ---------
Loss before income taxes $ (21,644) $ (16,315) $ (59,327) $ (34,528)
========= ========= ========= =========
</TABLE>
The above table is based on management estimates and may include
differences from U.S. generally accepted accounting principles, including
estimates of costs and allocation of overheads between divisions.
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,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss (21,658) (16,442) (59,705) (35,057)
Foreign currency translation adjustments (2,133) (601) (6,656) (2,138)
-------- -------- -------- --------
Other comprehensive loss (2,133) (601) (6,656) (2,138)
-------- -------- -------- --------
Total comprehensive loss $(23,791) $(17,043) $(66,361) $(37,195)
======== ======== ======== ========
</TABLE>
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The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
September 30, December
2000 31, 1999
-------- --------
(Unaudited)
<S> <C> <C>
Cumulative translation adjustments $(13,488) $ (6,832)
-------- --------
Total accumulated other comprehensive loss $(13,488) $ (6,832)
======== ========
</TABLE>
FORWARD LOOKING STATEMENTS
Our operating results have in the past and may be in the future affected by
various risk factors, many of which are beyond our control. Certain of the
statements included in this Form 6-K express our "anticipation," "belief,"
"commitment," "expectation," "intention," "goals," "plans" or similar terms,
regarding, the success and growth of Madge.web and Red-M, economies of scale
being achieved by Madge.web, expected dates for the launch of our products and
services, the adequacy of our financial resources and our ability to raise
additional financing.
Such statements 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 in this Form 6-K and in our Annual Report on Form 20-F for the year
ended December 31, 1999 under "Description of Business -- Risk Factors." Actual
results, actions or events could differ materially.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Madge Networks N.V. ("Madge") is a global provider of advanced
Internet-centric network services and products and mission-critical enterprise
solutions. We operate through three subsidiary groups, Madge.web, Madge.connect
and Red-M. Madge.web is a global provider of rich content applications and
managed network services. Madge.connect is a global supplier of product
solutions for mission critical enterprise networks. Red-M is a developer of
wireless Internet server products that will provide Internet and Intranet access
from a wide range of mobile devices in the workplace. We market our Madge.web
services primarily directly to business customers and serve our customer base
for Madge.connect products through a global network of distributors and
resellers. Our Red-M sales model is currently being developed but we expect to
sell through a combination of resellers and direct selling. The first products
from Red-M are expected to be available by the end of this year to third parties
primarily for testing. We expect to make commercial shipments in volume by the
end of the first quarter of 2001.
Until October 2000, the Red-M group was within the Madge.connect legal
structure, it is now owned directly by Madge Networks N.V. and as such is a
separate division of the group.
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Special Charges, Gains and Merger-Related Expenses
During September 2000 we set up two new significant provisions to cover
the restructuring program that has been put in place. The first provision was
for $2.0 million to cover the sale of the Video Networking Business to Yorktel
Acquisition Corporation (Yorktel). The provision covered inventory of $0.7
million, fixed assets of $1.1 million and headcount costs of $0.2 million. This
provision was offset by income of $1.1 million to give a net charge of $0.9
million. The second provision was for $1.0 million to cover the restructuring of
the Dallas office for Madge.connect. The provision covered fixed assets of $0.7
million, facilities costs of $0.2 million and headcount costs of $0.1 million.
This was to consolidate the functions carried out in Dallas into our head office
at Wexham, United Kingdom.
In the fourth quarter of 1999, Madge.connect created two separate
groups, one focusing on enterprise products (Token Ring and ISDN) and the other
on new Internet related access products (now called Red-M). The sales and
marketing and research and development functions within Madge.connect were also
re-organized along these lines and the related costs were reduced, including
reductions in the headcount in Madge.connect. A special charge of $6.2 million
was taken in the fourth quarter relating to this restructuring. Headcount in
Madge.connect, including the headcount reduction related to this restructuring,
net of the increased headcount in Red-M, has fallen by 49% since the beginning
of the fourth quarter 1999.
Offset against the charge of $6.2 million described above was a release
of $15 million of reserves relating to the sale of Lannet in the third quarter
of 1998. The release was a special credit to operating expenses in the fourth
quarter of 1999 and was related to original estimates for reimbursement
obligations that did not occur. In addition, in June 1999, as part of our
regular review of the provisions originally created as a special charge on the
sale of Lannet in the third quarter of 1998, we reversed $4.1 million of the
special charge. The reversal related to forecast product returns and
professional fees estimated at the time of sale we did not incur.
During the third quarter of 1999, we 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 integration costs, legal fees and financing
charges 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 have been and are expected to be
realized through cash payments whereas fixed assets costs are expected to be
non-cash transactions.
Sale of Video Networking
In September 2000 Madge.connect sold its Video Networking business to
Yorktel, a provider of scalable, multi-service network solutions for
videoconferencing and distance learning applications, based in New Jersey. As
part of this agreement, key staff transferred to Yorktel and Yorktel agreed to
acquire inventory we own to support this business over the following twelve
months. Alliance with Magnifi
In September 2000 Madge.web entered into a strategic alliance with
Magnifi, a California-based, privately-owned, developer and operator of
business-to-business extranet services targeted at the marketing and brand
management requirements of large international organizations. The alliance
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will provide businesses with premium service, rich content management solutions
and project management tools to support the end-to-end marketing process - from
strategic planning and creative development to program execution and
assessment.Magnifi's workflow, brand and asset management extranet solutions are
tailored to the marketing environment, enabling global marketing teams to
collaborate online with each other, their agencies and partners around the
world. As part of the strategic alliance, Madge.web will integrate Magnifi's
solutions into its global, managed infrastructure, the "Overnet." These content
management solutions are designed to complement Madge.web's other services for
all stages of the rich content value chain (encompassing content creation,
management and marketing). Under the alliance, Madge.web is also Magnifi's
exclusive partner in Europe for sales and support, enabling Magnifi to expand
their services to the region. In addition, Madge.web's European web hosting
service and managed private connectivity to Magnifi's U.S. operations will
strengthen service delivery to European users. During the fourth quarter of
2000, Madge.web also acquired $2.0 million worth of Series E preferred stock of
Magnifi, giving us 623,053 or 8.1% of the fully diluted Series E stock or
approximately 1.3% holding of Magnifi's total fully diluted equity as at October
31, 2000.
Alliance with Inktomi Corporation
In August 2000, we entered into a strategic technology and marketing
alliance with Inktomi Corporation, a developer of scalable Internet
infrastructure software. Under the agreement Madge.web will use Inktomi's
technology to enhance our Overnet, our private overlay network which by-passes
the public Internet, allowing Madge.web to offer global content distribution
services specifically for content-intensive industries such as financial
services and media. As part of this agreement Inktomi has committed to make an
equity investment in Madge.web. More details of this appear in the "Liquidity
and Capital Resources" section below.
Acquisition of Olicom A/S Token Ring Business
On August 31, 1999, we completed an agreement with Olicom A/S, under
which we purchased the intellectual property and the rights to manufacture, sell
and develop Olicom's Token Ring product portfolio. The transaction also included
Olicom's Token Ring customer base and we hired 55 Olicom employees. (Although
see above reference to Madge.connect headcount reduction). The purchase price
for the acquisition was $21.5 million, which included an initial payment of
$12.3 million, $8.5 million placed in escrow relating to future minimum
guaranteed payments to be made over three years based on a percentage of our
Token Ring revenues and $0.7 million related to the assumption of a warranty
liability. In the three months ended September 30, 2000 we did not pay anything
from the escrow. During November 2000, we paid $1.3 million from the escrow,
which relates to the royalty payments due on our sales. We were also committed
to purchase certain Olicom Token Ring inventory in the six months following the
sale. The agreement, inclusive of $1.2 million of acquisition related expenses,
resulted in $24.5 million of specific intangible assets, which are being
amortized utilizing a reducing percentage method, which approximates the
forecast reduction in Token Ring sales over a three year period. Accumulated
amortization as of September 30, 2000 was $10.7 million.
Acquisition of Gains
On February 5, 1999, we 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
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net cash outflow was $37.7 million. The acquisition was accounted for under the
purchase method, resulting in goodwill of $33.9 million, which was being
amortized on a straight-line basis over 20 years. Following a re-evaluation of
the value of the Gains business, and the related period over which the value is
to be recognized in the Madge.web business, as well as an examination of market
practice, we determined the estimated useful life of the goodwill arising from
the acquisition of Gains to be 10 years as opposed to the original estimate of
20 years and the remaining asset is being amortized on a straight line basis
over this period. This resulted in an increase in the total net loss of $0.5
million, or $0.01 per share, for the three months ended September 30, 2000.
Accumulated amortization as of September 30, 2000 was $3.6 million.
RESULTS OF OPERATIONS
Net Sales
Total sales were $37.3 million in the three months ended September 30,
2000, a decrease of 12%, compared to $42.2 million for the same period in 1999.
For the nine months ended September 30, 2000, total sales were $122.9 million, a
decrease of 15% compared to $144.3 million for the same period in 1999.
In September 2000, Madge.connect sold its Video Networking business
(Video). Net sales (excluding Video) for the three months ended September 30,
2000 were $34.3 million, a decrease of 7%, compared to $37.0 million (excluding
Video), for the same period in 1999. For the nine months ended September 30,
2000, net sales (excluding Video) were $112.8 million, a decrease of 13%,
compared to $129.8 million (excluding Video), for the same period in 1999.
Net sales for Madge.connect (including Video), were $29.0 million for
the three months ended September 30, 2000, a decline of 17% from $34.9 million
(including Video), for the same period in 1999. Sales of these products
represented approximately 78% and 83% of our total net sales (including Video),
in the three months ended September 30, 2000 and 1999, respectively. Net sales
for Madge.connect (including Video), were $99.4 million for the nine months
ended September 30, 2000, a decrease of 20% compared to the $123.8 million
(including Video), for the same period in 1999.
Net sales (excluding Video), for Madge.connect were $26.0 million for
the three months ended September 30, 2000, a decline of 12%, compared to $29.7
million (excluding Video), for the same period in 1999. Sales of these products
represented approximately 76% and 80% of our total net sales in the three months
ended September 30, 2000 and 1999, respectively. Net sales (excluding Video),
for Madge.connect for the nine months ended September 30, 2000 were $89.3
million, a decrease of 18% compared to $109.2 million (excluding Video), for the
same period in 1999. Net sales (excluding Video), for Madge.connect for the
three months ended June 30, 2000 were $22.4 million. The Token Ring market
continues to decline generally but sales in the three months ended September 30,
2000 levelled off from the large decline we experienced in the three months
ended June 30, 2000. Despite our strategy of gaining market share, by such
things as the acquisition of the Olicom A/S Token Ring business, the results for
the three months ended September 30, 2000 reflect the ongoing decline of the
market for Token Ring products. We expect this market decline to continue and we
are taking steps to further streamline our Token Ring business accordingly,
including steps to reduce fixed overheads.
Net sales of Madge.web, which includes the trader voice connectivity
service acquired with Gains, were $8.3 million, or 22% of total net sales, for
the three months ended September 30, 2000, an increase of 13%, compared to $7.3
million, or 17% of total net sales for the same period in
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1999. Net sales of Madge.web for the nine months ended September 30, 2000 were
$23.6 million, an increase of 15% compared to $20.6 million for the same period
in 1999. We anticipate sales growth from Madge.web's Internet Protocol services
during 2001, following the deployment of additional sales headcount and
infrastructure in Europe during the fourth quarter of 2000. The rate of growth
for Madge.web's other services will be less than for our Internet Protocol
services.
There were no sales of Red-M products in the three month ended
September 30, 2000. We do not anticipate recording sales revenue for Red-M until
at least the first quarter of 2001.
Gross Profit
Gross profit from operations was $5.7 million, or 15% of net sales, for
the three months ended September 30, 2000, a decrease of 65%, compared to $16.1
million, or 38% of net sales, for the same period in 1999. Gross profit from
operations for the nine months ended September 30, 2000 was $27.0 million, or
22% of net sales, a decrease of 55% compared to $60.4 million, or 42% of net
sales for the same period in 1999.
Gross profit (excluding Video), for the three months ended September
30, 2000 was $4.4 million, a decrease of 67%, compared to $13.3 million
(excluding Video), for the same period in 1999. For the nine months ended
September 30, 2000, gross profit (excluding Video), was $22.8 million, a
decrease of 58%, compared to $53.8 million (excluding Video), for the same
period in 1999. Our reduced gross margin is a result of a change in the
proportion of sales coming from Madge.web, where we experience, and will
continue to experience, lower gross margins than we do in Madge.connect.
Gross profit (excluding Video), for Madge.connect for the three months
ended September 30, 2000 was $11.6 million compared to $15.9 million (excluding
Video), for the same period in 1999. For the nine months ended September 30,
2000, gross profit (excluding Video), for Madge.connect was $41.9 million
compared to $56.5 million (excluding Video), for the same period in 1999.
Gross profit (including Video), for Madge.connect was $12.9 million and
$18.7 million for the three months ended September 30, 2000 and 1999
respectively. Gross profit (including Video), for the nine months ended
September 30, 2000 and 1999 was $46.1 million and $63.1 million, respectively.
Gross loss for Madge.web for the three months ended September 30, 2000
was $7.2 million compared to a gross loss of $2.6 million for the same period in
1999 due to significant continuing investment in bandwidth network operations
and infrastructure in Madge.web. Madge.web continued its aggressive investment
plans to develop the business and enhance its global Overnet, our private
overlay network that by-passes the public Internet, including investing in its
content distribution network capabilities and the addition of new points of
presence in Europe. Economies of scale in relation to revenue have not yet been
realized in the Madge.web business and are reflected in the negative gross
profit. Gross loss for the nine months ended September 30, 2000 was $19.1
million compared to gross loss of $2.7 million for the same period in 1999.
We believe that gross profit for Madge.connect will continue to decline
primarily due to the continuing decline in the market for Token Ring products.
Long-term gross margins in Madge.web are expected to remain lower than margins
achieved by Madge.connect, and in the near-term to remain substantially lower
until expected economies of scale can be realized for Madge.web.
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Red-M had no gross profit in the three months ended September 30, 2000.
All its costs are presented as operating expenses.
Sales and Marketing
Sales and marketing expenses were $14.8 million, or 40% of net sales,
for the three months ended September 30, 2000, a decrease of 19%, compared to
$18.3 million, or 43% of net sales, for the same period of 1999. Sales and
marketing expenses were $50.4 million, or 41% of net sales, for the nine months
ended September 30, 2000, a decrease of 6% compared to $53.8 million, or 37% of
net sales, for the same period of 1999. We expect that our sales and marketing
expenses will continue to be a significant percentage of net sales in the
future. Madge.connect sales and marketing expenses have declined and will
decline further during the balance of 2000 and in 2001 as we take steps to
further streamline this business and reduce headcount. Madge.web and Red-M sales
and marketing expenses will increase over the balance of 2000 and in 2001 as we
further invest in our operations.
Research and Development
Research and development expenses were $4.7 million, or 13% of net
sales, for the three months ended September 30, 2000, a decrease of 41%,
compared to $8.0 million, or 19% of net sales, for the same period in 1999.
Research and development expenses were $16.0 million, or 13% of net sales, for
the nine months ended September 30, 2000, a decrease of 39%, compared to $26.4
million, or 18% of net sales, for the same period in 1999. The majority of
research and development expenses during the nine months ended September 30,
2000 were incurred by Madge.connect. However, we have reduced our research and
development expenditure on Token Ring product ranges in line with the declining
market for these products and increased research and development expenditure on
Red-M products and, to a lesser extent on Madge.web services. Research and
development in Madge.web has increased as we have invested in additional network
personnel responsible for the design and integration of the Overnet and system
architecture. We expect that group wide research and development expenditure
will increase steadily for the rest of 2000 and during 2001. All of our research
and development costs have been and are expected to be expensed as incurred.
General and Administrative
General and administrative expenses were $6.6 million, or 18% of net
sales, for the three months ended September 30, 2000, an increase of 24%,
compared to $5.3 million, or 13% of net sales, for the same period in 1999. The
increase was due to the amortization of the intangibles acquired from Olicom and
corporate overheads offset by gains in foreign currency translations. General
and administrative expenses were $18.2 million, or 15% of net sales, for the
nine months ended September 30, 2000, an increase of 17%, compared to $15.5
million, or 11% of net sales, for the same period in 1999.
Earnings before interest, tax, depreciation and amortization
Earnings before interest, tax, depreciation and amortization ("EBITDA")
for Madge.connect for the three months ended September 30, 2000 was a profit of
$1.7 million compared to a loss of $0.7 million for the same period in 1999.
EBITDA for Madge.connect (excluding Video), was $2.1 million for the three
months ended September 30, 2000, compared to a loss of $0.9 million for the same
period in 1999. The initial expenses in Red-M contributed a loss of $3.5 million
to the
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Madge.connect EBITDA in the three months ended September 30, 2000. EBITDA for
Madge.connect for the nine months ended September 30, 2000 was a profit of $4.8
million compared to a loss of $2.5 million for the same period in 1999. EBITDA
for Madge.connect (excluding Video), for the nine months ended September 30,
2000 was a profit of $4.6 million compared to a profit of $2.5 million for the
same period in 1999. EBITDA for Red-M for the nine months ended September 30,
2000 was a loss of $7.5 million.
EBITDA for the three months ended September 30, 2000 for Madge.web was
a loss of $15.7 million, compared to a loss of $10.3 million for the same period
in 1999. EBITDA for the nine months ended September 30, 2000 for Madge.web was a
loss of $43.4 million, compared to a loss of $19.9 million for the same period
in 1999 and reflect the significant investment in sales and operational
resources for future growth.
Income Tax
We did not record a further provision for income taxes in the three
months ended September 30, 2000. The provision for the nine months ended
September 30, 2000 was $0.4 million. Although on a consolidated basis Madge was
in a net loss position, certain of our entities had net income for the period.
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2000, we had cash and cash equivalents of $36.7
million. An additional $11.4 million of cash was restricted, of which $6.2
million was held in the Olicom escrow discussed above, and $5.2 million is held
on deposit against leased assets for the Madge.web datacenter in New York City.
In the quarter, we did not make any payments to Olicom from the escrow account.
We paid $1.3 million from the escrow in November 2000, which relates to royalty
payments due on our sales. The $6.2 million held in escrow is a minimum payment
due on current and future Token Ring sales. We finance working capital in part
through a $30 million two-year financing arrangement secured on accounts
receivable generated by U.K. and U.S. Madge.connect entities. Availability of
financing under this facility depends upon the level of receivables for these
entities. The arrangement expires in September 2001 and the amount outstanding
under the arrangement as at September 30, 2000, was $2.2 million.
Net cash used in operating activities for the nine months ended
September 30, 2000 was $31.5 million. The net cash outflow was attributable to
the net loss for the period of $59.7 million and the net increase in working
capital of $5.1 million mainly due to movements in accounts receivable,
prepayments and other accrued liabilities.
Net cash used in investing activities for the nine months ended
September 30, 2000 was $37.8 million due to additions to property and equipment.
Purchases of property and equipment were primarily for the build-out of the
Madge.web infrastructure, including the Content Distribution Network.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $86.6 million. Cash inflow was attributable to the issue
of common shares of $65.3 million, sale-lease back transactions of $6.1 million
and $20.0 million received under a Loan Agreement with Volendam Investeringen
N.V., a private investment company sponsored by our Chairman and Chief Executive
Officer, Robert Madge (see below for further details). These cash inflows were
off-set by outflows on short-term loans of $4.8 million. During January and
February 2000, we raised approximately $29.9 million from the sale of common
shares through a public offering of 2,663,900
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common shares. We sold these shares for prices ranging from $10.50 to $13.63,
our expenses were approximately $0.7 million and our net proceeds approximately
$29.2 million. A further $30.0 million was raised by selling 9,411,763 shares to
Volendam Investeringen N.V. at a price of $3.1875 per share during July, August
and September 2000 for net proceeds of $29.7 million.
In July 2000 Volendam Investeringen N.V. agreed to invest $30.0 million
in the common shares of Madge Networks N.V. (which has occurred) and to invest
$30.0 million in the equity of Madge.web N.V. The latter is exercisable during
November and December 2000 at our option and we plan to call in this option in
December 2000 and to issue the shares in January 2001. The Loan Agreement we
entered into with Volendam Inversteringen N.V. on September 26, 2000 under which
we have drawn down $20.0 million of a total $30.0 million available states that
we can repay these monies by exercising our option to cause Volendam to invest
in Madge.web N.V. shares in accordance with our original agreement with them. We
expect to repay the loan by exercising our option and to receive the additional
$10.0 million for shares in Madge.web N.V. by the time we issue the shares in
Madge.web N.V. to Volendam.
We did not generate cash from operations in either the year ended
December 31, 1999 or the nine months ended September 30, 2000. We have funded
our investments in Madge.web and Red-M through various sources of financing
including $29.2 million in net proceeds we received from our public offering,
$29.7 million in net proceeds we received from the sale to Volendam
Investeringen N.V. of common shares as mentioned above and the $20 million we
have borrowed from Volendam Investeringen N.V. to date. We plan to fund our
future investment in Madge.web and Red-M through lease funding and other sources
of financing including possible private offerings of a portion of the shares in
Madge.web N.V. or Red-M. On August 10, 2000 we also signed an agreement with
Inktomi Corporation whereby they committed to invest in Madge.web shares,
subject to certain conditions, at the next round of financing, which is expected
to be completed during the first quarter of 2001. In addition to possible
private offerings of a portion of the shares of Madge.web or Red-M, we are
exploring options available to meet our additional investment requirements
including a public offering of shares of Madge.web, or of Madge Networks as well
as bank credit or capital lease facilities. In February 2001, we expect to
receive $7.0 million from Celestica, subject to us making quarterly overhead
payments to them at an agreed level, as deferred consideration for the sale of
our Irish manufacturing plant to Celestica in February 1998. 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 believe our current liquidity
levels and committed financial resources are sufficient to satisfy our operating
and investment needs for the first six months of 2001. Our business, results of
operations and financial condition will be materially adversely affected if we
are not successful in closing our proposed financings, including raising the
additional capital described above, in sufficient amounts and on acceptable
terms. 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 shareholders will likely be reduced.
LEGAL PROCEEDINGS
In August 1996, a class action lawsuit was filed in the U.S. District
Court for the Northern District of California, San Jose Division, naming Madge,
Madge Networks, Inc. and certain of our former and current executive officers as
defendants. The complaint alleged that the defendants misrepresented or failed
to disclose material facts about our operations, anticipated financial results
and the anticipated success of our 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 our stock during the period from
October 12, 1995 to June 13, 1996. In November 1996 and August 1997, the
plaintiffs filed amended complaints, each of which the Court dismissed without
prejudice. On
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February 6, 1998, the plaintiffs filed another amended complaint. On April 3,
1998, we and the individual defendants moved to dismiss that complaint. A
hearing on that motion was held on July 17, 1998. Before the Court ruled on that
motion to dismiss, plaintiffs sought permission from the Court to file another
amended complaint. The Court granted plaintiffs' request and on February 4, 2000
the plaintiffs filed a fifth amended complaint. On March 3, 2000, we moved to
dismiss the most recent complaint. By Order dated May 25, 2000, the Court
granted our motion. On May 31, 2000, the Court entered judgment for us and the
other defendants. The plaintiffs filed a notice of appeal against this ruling.
The plaintiffs filed their opening appellate brief on November 14, 2000.
Although the Ninth Circuit Court of Appeals has issued a briefing schedule
calling for briefing to be completed in December 2000, but that schedule may be
extended in response to requests from Madge or the plaintiffs. The Court of
Appeals has not yet announced a date for its hearing of the appeal. We believe
the allegations in the complaints to be without merit and intend to continue to
defend the trial court's dismissal of the claims vigorously.
In addition, from time to time, Madge and our 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
service claims. If the judgment in the class action litigation described above
were to be successfully appealed by the plaintiffs, our results of operations
and financial position could be adversely affected. In spite of this claim, as
of the date of this report, we are 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 our financial position.
RISK FACTORS
From time to time, in connection with the United States Private
Securities Litigation Reform Act 1995, reference may be made to risks addressed
in our public filings with the Securities and Exchange Commission. All the
following factors should be considered carefully before making an investment
decision. If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
that event, the trading price of our securities could decline, and you may lose
part or all of your investment.
RISKS RELATED TO OUR FINANCIAL CONDITION AND OUR BUSINESS
We need significant additional capital and if we cannot obtain this funding on
commercially reasonable terms, our business will suffer.
We did not generate cash from operations in either the year ended
December 31, 1999 or the nine months ended September 30, 2000. We have funded
our investments in Madge.web and Red-M through various sources of financing
including $29.2 million in net proceeds we received from our public offering,
$29.7 million in net proceeds we received from the sale to Volendam
Investeringen N.V. of common shares as mentioned above and the $20 million we
have borrowed from Volendam Investeringen N.V. to date. We plan to fund our
future investment in Madge.web and Red-M through lease funding and other sources
of financing including possible private offerings of a portion of the shares in
Madge.web N.V. or Red-M. On August 10, 2000 we also signed an agreement with
Inktomi Corporation whereby they committed to invest in Madge.web shares,
subject to certain conditions, at the next round of financing, which is expected
to be completed during the first quarter
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of 2001. In addition to possible private offerings of a portion of the shares of
Madge.web or Red-M, we are exploring options available to meet our additional
investment requirements including a public offering of shares of Madge.web, or
of Madge Networks as well as bank credit or capital lease facilities. In
February 2001, we expect to receive $7.0 million from Celestica, subject to us
making quarterly overhead payments to them at an agreed level, as deferred
consideration for the sale of our Irish manufacturing plant to Celestica in
February 1998. 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 believe our
current liquidity levels and committed financial resources are sufficient to
satisfy our operating and investment needs for the first six months of 2001. Our
business, results of operations and financial condition will be materially
adversely affected if we are not successful in closing our proposed financings,
including raising the additional capital described above, in sufficient amounts
and on acceptable terms. 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 shareholders will likely be reduced.
If our Madge.web services are not effective or of high quality or if our market
does not grow as we expect, our Madge.web revenues will not increase and our
business and financial results will suffer.
We believe that establishing and maintaining high quality service is
critical for attracting and expanding our targeted Madge.web customer base. If
our Madge.web services are not effective or of high quality, our revenues will
suffer.
Although we have, through the acquisition of Gains, gained a customer
base and services geared toward the financial services industry, our business
plan contemplates rapid expansion into new markets with newly developed
services. Both the markets and our Madge.web services are new and unproven. If
our customer base does not expand or if our services are not accepted in the
marketplace, our business and prospects will be harmed. The market for our new
Madge.web services depends on several uncertain events and factors, including:
- the effectiveness of our marketing strategy and efforts;
- our ability to demonstrate the value and quality of our
Madge.web services;
- the extent of our network and data center coverage;
- our ability to provide timely, effective customer support;
- our distribution and pricing strategies as compared to those
of our competitors;
- our industry reputation; and
- general economic conditions such as downturns in the rich
content and Internet service markets.
If the market for our Madge.web services fails to develop, or develops
more slowly than expected, our business will be adversely affected.
European use of the Internet and Internet applications that require high-speed
Internet access may not increase as we expect.
Our Madge.web business plan assumes that use of the Internet and
Internet applications will increase substantially in Europe over the next few
years, in a manner similar to the increased use in the United States in the past
few years. We may not grow as planned or achieve profitability if those
assumptions do not materialize.
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Our Madge.web data centers, points of presence and the networks we rely on are
sensitive to harm from human actions and natural disasters. Any resulting
disruption could significantly damage our business and reputation.
Madge.web's reputation for providing reliable service largely depends
on the performance and security of our Overnet, our private overlay network
which by-passes the public Internet, and includes our data centers, points of
presence and equipment, and of the network infrastructure of our bandwidth
providers. In addition, our customers may store confidential information on our
servers. However, our data centers, points of presence and equipment, the
networks we use, and our customers' information are subject to damage and
unauthorized access from human error, breaches of security, natural disasters,
power loss, capacity limitations, software defects, telecommunications failures,
intentional acts of vandalism, including computer viruses, and other events and
factors that can cause interruptions in service or reduced capacity for our
customers, and could potentially jeopardize the security of our customers'
confidential information. Despite precautions we have taken and may take in the
future, the occurrence of a security breach, a natural disaster, interruption in
service or other unanticipated problems could seriously damage our business and
reputation and cause us to lose customers. Additionally, the time and expense
required to eliminate computer viruses and alleviate other security problems
could be significant and could impair our service quality.
We also typically provide our Madge.web customers with service level
agreements. If we do not meet the required service levels, we may have to
provide credits to our customers and could lose repeat business from them, which
could significantly reduce our revenues. In addition, although these agreements
disclaim our liability for any lost profits or other consequential damages, a
customer could still bring a lawsuit against us claiming such damages as the
result of a problem that the customer may ascribe to us. There can be no
assurance a court would enforce any limitations on our liability, and the
outcome of any lawsuit would depend on the specific facts of the case and legal
and policy considerations beyond our control. If we do not prevail in any such
claim, we could be liable for substantial damage awards. Such damage awards
might not be covered by our insurance policy or exceed our liability insurance
by significant amounts, both of which would seriously harm our business.
We may be unable to achieve our Madge.web operating and financial objectives due
to significant competition in our sector of Internet applications and
infrastructure services and this may harm our business.
The market for Internet applications and infrastructure services is
highly competitive with few substantial barriers to entry. Many competitors of
Madge.web, particularly the large telecommunications companies, such as ATT,
Cable & Wireless, BT and MCI WorldCom, have substantially greater financial,
technical and marketing resources, larger customer bases, more points of
presence, longer operating histories, greater name recognition and more
established relationships in the industry than we possess.
In addition, the current and potential competitors of Madge.web include
web hosting service providers, Internet service providers, telecommunications
and large information technology outsourcing firms. Madge.web competitors may
operate in one or more of these areas and include companies such as Loudeye
Technologies, Akamai, Digex, Digital Island, DoubleClick, Equant, iBEAM, Intel,
IBM, Navisite, PSINet and Servecast. In the specific area of trader voice
connectivity services, the primary competitor of Madge.web is IXnet (now part of
Global Crossing).
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Competitors of Madge.web may be able to expand their network
infrastructures and service offerings more quickly than we can. They may also
have a lower cost base, may bundle other services that could allow them to
reduce the relative prices of their services below levels that we could compete
with, may price their services based on the success of the event or offering
that the service is provided to support rather than charging a flat fee, which
could make their service more attractive for potential customers, or may
generally adopt more aggressive pricing policies. In addition, some competitors
have entered and will likely continue to enter into joint ventures or alliances
to provide additional services that may be competitive with those Madge.web
provide. We also believe the markets in which Madge.web competes are likely to
experience consolidation in the near future, which could result in increased
price and other competition that would make it more difficult for us to compete.
We cannot predict the outcome of our Madge.web development efforts with
RealNetworks, Engage Technologies, Inktomi and Magnifi and if we fail to
maintain these strategic alliances or build new alliances, our ability to
generate revenues would suffer.
Madge.web currently has strategic alliances with RealNetworks, Engage
Technologies, Inktomi and Magnifi. We depend on these relationships to:
- increase usage of our Madge.web services;
- generate revenues from shared service offerings; and
- expand our customer base.
In order to benefit from these strategic alliances, we have invested,
and expect to continue to invest, significant resources to upgrade our network
and increase Madge.web's service offerings. Because these alliances are in their
early stages, we cannot assure you that the ventures will be successful or that
we will see a return on our investment. If RealNetworks, Engage Technologies,
Inktomi or Magnifi terminate their agreements with us, we will cease to receive
revenues from these alliances.
In addition, part of our strategy is, and our success depends in part
on, our ability to continue to develop and maintain strategic alliances with
leading Internet companies and rich content providers that wish to enter the
European market or, alternatively, will give us access to new markets. If we are
not able to develop these alliances, sales of our services and our ability to
maintain or increase our Madge.web customer base may be substantially
diminished.
The market for Internet advertising is uncertain and we may fail to generate the
advertising revenues that we expect.
Through agreements with Engage Technologies, Madge.web expects to
continue to derive revenues from advertising. The demand and continued market
acceptance for Internet advertising is uncertain, however, and our advertising
revenues may not materialize. Additionally, there are currently no broadly
accepted standards for the measurement of the effectiveness of Internet
advertising, and the industry may need to develop standard measurements to
support and promote Internet advertising as a significant advertising medium. If
these standards do not develop, existing advertisers may not continue their
levels of Internet advertising and advertisers that have traditionally relied
upon other advertising media may be reluctant to advertise on the Internet,
which will effect our ability to generate advertising revenue.
We rely on a limited number of third parties for key components of our Overnet,
the loss of which could harm our operations.
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We are dependent on a limited number of third party providers, such as
Nortel, Cisco, Hewlett Packard and Newbridge, to supply key components of
Madge.web's Overnet, including networking and other equipment and facilities for
operating data centers. We also lease all our bandwidth capacity. While we have
entered into agreements for networking equipment, for operating data centers and
for leasing bandwidth capacity and facilities, these are short term agreements
or, in some cases, provided on purchase order only. Any failure to obtain
networking and other equipment, facilities and bandwidth capacity in the amounts
or, in the case of facilities for operating data centers, in the locations, we
require could impede our growth and cause our financial results to suffer.
We rely on a limited number of third parties to supply Madge.web with software
and technology, the loss of which could force us to use inferior substitute
technology or to cease offering our Madge.web services.
We license, and expect to continue to license or otherwise obtain
access to, the intellectual property of third parties. In addition, we use, and
will use in the future, third party software that may not continue to be
available to us on commercially reasonable terms or at all. Our loss of, or
inability to maintain or obtain, any required intellectual property could
require us to use substitute technology, which could be more expensive or of
lower quality or performance, or could force us to cease offering some or all of
our Madge.web services. Moreover, our license agreements are non-exclusive. Our
competitors may have access to the same technology that we license, which would
allow them to offer similar services in direct competition to us.
Regulatory uncertainties could restrict our ability to generate Madge.web
revenues.
We face regulatory and market access barriers for our Madge.web
services in various countries resulting from restrictive laws, policies and
licensing requirements, in particular with respect to our trader voice
connectivity services. Even though all the major markets for our Madge.web
services are now open to competition and the regulatory regimes have been
streamlined significantly, in some countries, voice services still remain
heavily regulated and licenses are still required. It is unclear whether our
other Madge.web services will require a license in the countries in which we
currently operate or intend to operate. Some restrictive telecommunications laws
and practices give rise to, and may in future give rise to, residual
constraints, risks and uncertainties that could affect our ability to fully
develop and market our Madge.web services.
In countries where some or all telecommunications services are subject
to a monopoly or provided by a few suppliers only, we may be required to enter
into an arrangement with the incumbent public telecommunications organization
before providing our Madge.web services. Compliance issues may exist for certain
services in a number of countries. There can be no assurance that we will be
able to either enter into or maintain the requisite commercial agreements in the
countries in which we currently or in the future intend to offer our Madge.web
services or will be able to comply with local regulatory requirements at a
reasonable cost or at all.
Privacy and security concerns, particularly related to the use of our software
on the Internet, may limit the effectiveness of and reduce the demand for our
Madge.web services.
The effectiveness of our Madge.web services relies in part on the use
of end user registrations, purchase transactions and surveys which are provided
to us through our agreement with Engage Technologies. Our collection and use of
this data for end-user profiling of customers may raise privacy and security
concerns and we may in the near future be regulated by online privacy
legislation. Our Madge.web customers generally have implemented security
measures to
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protect their end-user data from disclosure or interception by third parties.
However, the security measures may not be effective against all potential
security threats. If a well publicized breach of data security were to occur,
our Madge.web services may be perceived as less desirable, adversely affecting
our future revenues and profitability.
In addition, due to privacy concerns, some Internet commentators,
consumer advocates, and governmental or legislative bodies have suggested
legislation to limit the use of end user profiling data. In addition, Internet
users can, if they choose, configure their browsers to limit the collection of
data for end user profiling. If many Internet users choose to limit the use of
end user profiling technologies, or if major countries or regions adopt
legislation or other restrictions on the use of end user profiling data, our
Madge.web services would be less useful to our customers, and our sales and
profits could decrease.
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 72%, 74% and 71% of
our net sales from our Token Ring products for the years ended December 31, 1998
and 1999 and the nine months ended September 30, 2000, respectively. Thus, we
depend upon the continued market acceptance of Token Ring and related
technologies. Our total sales of Token Ring adapter cards have declined over for
the last three years, with a dramatic decline between the three months ended
March 31, 2000 and the three months ending June 30, 2000. Although this
quarter's sales have been slightly higher than those in the second quarter, we
expect Token Ring sales to continue to decline. As the Token Ring market
declines further, our net sales and profitability will further decrease unless
we are successful in our strategy of generating revenue from Madge.web and Red-M
in order to counteract the declining Token Ring market. In April 2000, we
outsourced our technical support function to Vital Networks LLC ("Vital") and
although Vital agreed to provide our Madge.connect customers with certain
measurable levels of support, this relationship, and Vital's ability to deliver
the kind of service Madge.connect had previously been providing directly to its
customers, is untested. Our Madge.connect customers will ultimately all be
required to pay for technical support services that we had provided ourselves
free of charge. This may reduce customer satisfaction and could have an adverse
impact on our future revenues.
We are dependent upon a limited number of product suppliers and subcontractors.
The chipsets and components used in certain of our products are
currently available only from a single source or limited sources. For example,
chipsets used in certain of our Token Ring adapter card products are currently
available only from Texas Instruments or NEC Corporation. The nature of the high
technology components business is such that the vendors supplying such chips and
components are few and it takes time and effort to identify and qualify
alternative sources for such components. While our operating results have not,
to date, been materially adversely affected by any shortages, we have
experienced delays in the receipt of certain of our key components. The
inability to obtain sufficient key components as required, or to develop
alternative sources as we anticipate could be required in the future, could
result in increased costs and delays or reductions in product shipments which,
in turn, could have a material adverse effect on our results of operations.
Our continued reliance upon third-party manufacturers and suppliers
involves several potential risks, including the absence of adequate capacity,
the unavailability of or interruptions in access to certain process technologies
and reduced control over delivery schedules, manufacturing yields and costs. In
the event that a significant subcontract manufacturer or supplier were to become
unable or unwilling to continue to manufacture our key products in required
volumes, we would be
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required to identify and qualify acceptable additional sources for our products
or to manufacture the products ourselves. The identification and qualification
process could lead to delays and additional costs and no assurances can be given
that additional sources will become available to us on a timely basis or that we
could manufacture such products ourselves on a timely or cost-effective basis.
In addition, if any other significant source partner were to establish a
strategic working relationship with one or more of our competitors or were to
enter into direct competition with us, our business could be materially
adversely affected.
We are currently establishing relationships with suppliers and subcontractors to
produce our new range of Red-M products.
We are currently establishing relationships with suppliers and
subcontractors to produce our new range of Red-M products. We may be unable to
secure agreements with such parties to guarantee Red-M the level and flexibility
of supply that we require for this business to meet our projected returns. If we
experience quality problems that require reworks and even re-design of our
products, we could incur significant additional expenses and could lose valuable
months in getting our products to market. Such problems would have an adverse
effect on our business and our ability to secure financing for Red-M.
If we do not develop revenue-generating products from our Red-M research and
development group, our business will be harmed.
If our Red-M research and development expenditures do not result in
revenue-generating products or services, our results of operations could be
adversely affected. We have focused a significant portion of our resources on
the development of products and services for the developing, and largely
unproven mobile-Internet marketplace that Red-M is aimed at. We will face risks
to our business if the markets and industry standards for these new Red-M
products and services do not develop as expected. We will also need to invest in
educating our Red-M sales force and other personnel on changing technology,
evolving industry standards and new product and service offerings, some of which
we anticipate will be sold to markets in which we have little or no experience.
For example, it is envisaged that Red-M products will be sold to the consumer
market, a market we have little experience of and which has a set of regulatory
requirements that we have never had to address before. There can be no assurance
that we will be able to respond effectively to technological changes, or new
industry standards or will be successful in our current or future product and/or
service development efforts. From time to time we may announce plans to develop
new products, new product features and services. Although we have announced and
may in the future announce expected shipment dates for certain products and
features, or dates for launching new services, schedules for high technology
products and services are difficult to predict, and there can be no assurance
that we will achieve our expected shipment dates or launch dates for new
services. Our business could be adversely affected if we were to incur
significant delays, if any of our development projects were to be unsuccessful
or were not to gain market acceptance. Our Madge.connect and Red-M products may
also be subject to safety and Federal Communications Commission standards in the
United States and other regulatory approvals. Failure to meet these standards or
to obtain those approvals/licenses could have an adverse impact on our business.
Another key element to our success will be our ability to ensure continued
compatibility and operability of our Red-M and Madge.connect products with
products from other leading networking vendors, as well as with various personal
computer architectures and network operating systems. To this end we test our
Red-M and Madge.connect products for operability with the products of other
leading vendors and also performance benchmark testing. There can be no
guarantee we will be able to maintain this compatibility.
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Loss or modification of Madge.connect relationships with third-party
distributors and resellers would harm our operations and sales.
Substantially all of our Madge.connect product sales are fulfilled and
distributed world wide through a network of distributors, value-added resellers
and original equipment manufacturers. Our Madge.connect 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 Madge.connect products predominantly through distributors and resellers, but
also in certain circumstances, directly to end-users. In Europe we have recently
undertaken a restructuring of our channel relationships and substantially
reduced the number of channel partners and third party commission agents we deal
with directly in order to streamline our business to reflect the declining Token
Ring market. Any contracts we have with our channel partners and third party
commission agents are typically not long-term. We also depend on distributors of
the former Olicom product line, many of which do not have an established
relationship with us. The loss of a distributor or reseller or a sales
commission agent 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. The loss of a significant number of key sales personnel including
sales commission agents would also affect our ability to manage our distributors
and resellers and continue to secure revenue from them, particularly during this
period when we are trying to reduce the number of channel partners we deal
through. Red-M is in the process of setting up a network of third-party
distributors and resellers and is looking at new ways to incentivise these
partners, which will be key to its success. The different type of products Red-M
will be marketing, in some cases to a different type of purchaser, will probably
require a different type of reseller than we have previously retained. Finding
and building a relationship with such resellers may prove difficult and if this
were the case, our business would fail to develop as projected.
If we fail to establish or maintain relationships with parties that agree to
resell our Madge.connect and Red-M products on an original equipment
manufacturer basis, our revenue will decrease.
We anticipate that a portion of our future Madge.connect and Red-M
revenue will be derived from sales to customers that integrate our existing and
new 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, including:
- our timely development of new products with increased reliability,
functionality, speed and performance at acceptable prices to end users;
- the compatibility of our technology with emerging and changing industry
standards;
- general industry competition; and
- 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 impacting our Madge.connect and Red-M sales, reducing our margins and
adversely affecting the marketability of our products. Our inability to promote
sales through these manufacturers could decrease our revenue.
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We may also enter into agreements to obtain products from another
manufacturer or manufacturers for resale on a Madge or Red-M-labelled or OEM
basis. We are dependent in any such arrangement upon the manufacturer of
products to provide us with timely shipments of quality products on a
cost-effective basis, and may also depend upon our 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.
Returns or warranty costs from our Madge.connect business in excess of our
budgeted amounts could harm our results of operations.
The terms of our Madge.connect reseller and distributor relationships
subject us to certain risks. we grant some resellers and distributors limited
rights to exchange unsold products for new purchases. Although we allow for
projected returns and to date have been fairly accurate with these predictions,
these allowances may not be sufficient in the future to offset Madge.connect
product returns in the future. In addition, we provide price protection to
certain distributors. a significant decrease in the price of our Madge.connect
products, which exceed the amounts that we have reserved, could have an adverse
effect on our operating results. Moreover, the warranty reserves may not cover
actual costs. if any one of these allowances is inadequate, our profitability
could decrease. We may soon need to create a reserve for the warranty returns
for Red-M products and these will have similar inherent risks as our existing
reserves for Madge.connect but, at least initially, it will be more difficult to
calculate as this is a new product and market sector for us.
We have had difficulty managing our changing operations and acquisitions, which
has harmed and may continue to harm our business.
We reorganized our operational and internal reporting structure in 1999
into two separate products and services subsidiary groups, Madge.web and
Madge.connect, which became separate legal entities at the end of 1999. We also
launched a third division, Red-M in May 2000 which became a third separate legal
entity grouping in October 2000. Madge.web is a global provider of rich content
applications and managed networks services. Madge.connect is a global supplier
of product solutions, for mission critical enterprise networks. Red-M is a
developer of wireless Internet server products that provide Internet and
Intranet access from a wide range of mobile devices in the workplace. Our
ability to operate within this corporate structure, which includes our
acquisition of Gains within the Madge.web group, is untested, and our Madge.web
and Red-M businesses are largely unproven. Because the Token Ring industry
serviced by Madge.connect continues to decline, if we are unsuccessful in
developing the Madge.web and Red-M businesses, our business and results of
operations will suffer significantly.
The ongoing restructuring within the Madge.connect group to create a
more simplified business model is anticipated to be completed by end of the
first quarter 2001 and will mean Madge.connect will have a significantly reduced
headcount from the fourth quarter of 1999. As a result, a number of sales
offices world-wide have been or will be closed or substantially downsized as we
plan to move to a model of using independent sales agents in most countries
either in addition to, or more often, instead of our own employees. 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 our reorganization, the ongoing restructuring and
downsizing and certain acquisitions that we made over the last five years that
we were not completely successful in integrating into our operations, our
management personnel have had increased responsibilities, which has strained and
continues to strain operational, management, financial and other resources
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and weaken our ability to retain employees. In addition, there can be no
assurance that we will successfully integrate any future acquisitions into our
operations.
If we lose the services of our management and other key employees and are unable
to recruit high caliber new employees, our results of operations will be harmed
and our growth inhibited.
Our success depends significantly 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. Loss of the services of key personnel in previous restructurings
compromised the efficiency of our operations and there is no assurance that our
current or future restructurings would not have the same effect. In addition,
our acquisitions and subsequent restructurings 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 for our Madge.web and Red-M divisions in particular.
Competition for these employees is intense. If we cannot attract and retain
qualified personnel, our business and prospects will suffer.
Our products or services may contain defects that may cause us to incur
significant costs, divert our attention from product development, expansion of
our Madge.web and Red-M businesses and/or result in the loss of customers.
Information Technology products frequently contain undetected software
and hardware defects when first introduced or as new versions are released. Our
Madge.connect products and planned new Red-M 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 we lack resources and
familiarity to trouble-shoot effectively. As a result, when problems occur, it
may be difficult to identify the source of the problem. Our Madge.web services
rely upon an often complex series of network, connections and transmissions,
some of which are, or will be brand new and as yet untested. If problems are
found, in either our Madge.connect or Red-M products or Madge.web services, we
may divert resources to address the problem and may incur significant damages or
warranty and repair costs. We may divert the attention of our engineering
personnel from product and/or services development and we could face significant
market acceptance or customer relation problems or the loss of customers. These
problems may then adversely impact our business.
Our revenue, expenses, liquidity and operating results are subject to
significant fluctuation, which could contribute to disparate quarterly results,
resulting in fluctuation in the price of our common shares.
We have experienced quarterly fluctuations in operating results and
anticipate that these fluctuations will continue. Various factors contribute to
this uncertainty, including:
- the timing of operating expenditures;
- the size and timing of customer orders;
- the mix of products sold by Madge.connect and also the mix of those that
Red-M will sell;
- the mix among Madge.web services, Madge.connect and Red-M products sold;
- the mix of distribution channels through which our products and services
are sold;
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- economic conditions specific to the personal computer, computer networking
and wireless industries;
- the pattern of end-user purchasing cycles;
- the introduction of new products and services by us and our competitors;
and
- general economic conditions or the price we can charge for our products and
services.
Madge.web enters into customer contracts, typically for one year or
more, that provide for either monthly or quarterly payments, and as such
Madge.web revenue is also subject to fluctuations as customer contracts end,
tariff rates change and new contracts are signed. Madge.connect ships products
to order and generally operates with little backlog, although we sometimes
receive end-of-quarter orders that are not shipped until the following quarter.
We are unsure how the pattern of orders for Red-M products will develop. A
significant portion of our operating expenses are 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 have strained and may
continue to strain our cash resources. In the year ended December 31, 1999 and
the nine months ended September 30, 2000, we did not generate cash from
operations. If actual expenditures exceed estimates or if the timing of the
restructuring charges changes, we will need to expense additional amounts in
future quarters. Any one or a 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.
We may not have adequately protected our intellectual property.
Our ability to compete successfully depends, in part, on our ability to
protect the proprietary technology contained in our products, services and
Overnet. We currently rely on a combination of patent, trademark, copyright and
trade secret laws and contractual provisions to establish and protect
proprietary rights in our Madge.connect and Red-M products and Madge.web
services. We generally enter into confidentiality and/or license agreements with
our employees, distributors, customers, suppliers and fellow developers that
limit access to and distribution of our proprietary information. Olicom has
warranted that the intellectual property we acquired from it does not infringe
third party rights. We also rely upon a number of third party licenses that
Olicom had in order to continue to produce their products. All material licenses
have been assigned; however we have reached only oral agreements regarding a
number of licenses of lesser importance. In addition, the products Red-M is
developing may well be jointly developed with our competitors in this developing
market. Our ability to protect our intellectual property and get rights from
others to use their intellectual property will be key to our success in this
market.
We have received letters alleging or implying that our Madge.connect
products infringe certain patents of third parties, including a letter from each
of Lucent Technologies, Nortel and Hitachi and may receive similar claims in the
future. In 1999 we entered into a three year license with IBM whereby we
licensed from them a number of their patents and they licensed from us a number
of our Madge.connect patents. There can be no assurance that we will obtain a
future license from IBM when this license expires or from any other third party,
if required in the future, on commercially acceptable terms. We can similarly
give no assurances that third parties will not assert infringement claims
against us in the future with respect to current or future Madge.connect or
Red-M products or Madge.web services. Any such assertion could require expending
significant sums in litigation, could require the payment of damages, and could
require the use of other, more expensive and/or less suitable technology, the
development of non-infringing technology or the acquisition of licenses to the
technology that is the subject of asserted infringement.
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We depend upon our international operations, which subject us to currency
exchange rate fluctuations.
We are a global company, with our headquarters and most of our
operations based outside the United States. We derived approximately $252.6
million, $199.7 million and $145.0 million, or 66%, 66% and 74%, of our total
net sales from operations outside of the Americas in the years ended December
31, 1997, 1998 and 1999, respectively. We expect that international sales will
continue to represent a majority of our net revenues. A significant portion of
our transactions are in currencies other than the U.S. dollar, principally the
British pound. 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.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our common share price has been, and is likely to continue to be, volatile and
could drop unexpectedly.
The trading price of our common shares has been volatile and may
continue to be volatile in response to the following factors:
- quarterly variations in our operating results;
- announcements of technical innovations, new products or services by us or
our competitors;
- investor perception of us, the markets we operate in or the Internet in
general;
- changes in financial estimates by securities analysts; and
- general economic and market conditions.
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. Declines in the market price of our common
shares could also materially adversely affect employee morale and retention, our
access to capital and other aspects of our business.
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If our share price remains volatile, we may become subject to securities
litigation, which is expensive and could divert our resources.
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many Internet-related companies have been subject to this type of litigation. If
the market value of our common shares experiences adverse fluctuations, and we
become involved in this type of litigation, regardless of the outcome, we could
incur substantial legal costs and our management's attention could be diverted,
causing our business to suffer.
Our founder continues to exercise control over us and could have interests that
differ from shareholders' interests.
Various trusts established by Robert Madge, our principal founder and
chief executive officer, indirectly owned approximately 53% of the outstanding
common shares as of September 30, 2000. Therefore, the various trustees, as a
group, have the power to control or influence matters submitted for shareholder
approval, including the election of directors. Certain transactions, which also
require shareholder approval, will be more difficult to consummate without the
support of the trusts. Such transactions include proxy contests, acquisitions,
tender offers, open market purchase programs or other purchases of common shares
that could give our shareholders the opportunity to realize a premium over the
then-prevailing market price for their shares. In addition, Mr. Madge personally
holds options to purchase common shares, of which options with respect to 1.17%
of our outstanding common shares have vested or will vest within 60 days from
September 30, 2000.
Our charter documents and the laws of The Netherlands could make it more
difficult for a third party to acquire us.
The shareholders have authorized our Management Board to issue
preferential shares and common shares for a fixed period of time without further
shareholder approval. The issuance of such preferred shares and common shares,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting shares of Madge Networks N.V.
It may be difficult to enforce a U.S. judgement against us and our executive
officers and directors or to serve process on a substantial majority of our
executive officers and directors.
Because substantially all of our assets and the assets of our executive
officers and directors are located outside the United States, a judgment
obtained in the United States against us or any of these individuals may not be
collectible within the United States. Furthermore, service of process upon these
individuals, most of whom reside outside the United States, may be difficult to
obtain. In addition, judgments of U. S. courts, including judgments against us
or our executive officers and directors based upon allegations of violations of
U. S. federal or state securities laws, may not be enforceable in The
Netherlands or elsewhere outside the United States.
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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 H. Madge
-------------------
Robert H. Madge
Managing Director
Date: December 21, 2000
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EXHIBIT INDEX
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Exhibit A Third Quarter Press Release 33
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32
