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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 April 2, 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.
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Page 1 of 31 Pages
Exhibit Index Appears on Page 24.
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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 March 31, 2000 (unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Forward Looking Statements 9
Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Legal Proceedings 13
Risk Factors 14
Signatures 23
Exhibit Index 24
Exhibit A--First Quarter Press Release 25
</TABLE>
----------
[FN]
* 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.
</FN>
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Madge Networks N.V.
Condensed Consolidated Balance Sheets
(in thousands) (Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,195 $ 19,471
Restricted cash 9,224 10,500
Accounts receivable net of
Allowance for doubtful accounts
at December 31, 1999 of $4,152
and March 31, 2000 of $4,023 41,363 38,655
Inventories
Raw materials 2,564 833
Finished goods 10,771 15,327
---------- ----------
13,335 16,160
Current deferred tax assets 42 44
Prepayments and other current assets 17,766 10,758
---------- ----------
Total current assets 100,925 95,588
Property and equipment, net 45,045 44,834
Goodwill, net of accumulated amortization 32,104 32,528
Intangible assets, net of accumulated amortization 16,831 19,548
---------- ----------
Total assets $ 194,905 $ 192,498
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowing $ 4,627 $ 7,107
Accounts payable 14,187 13,514
Deferred consideration 7,224 8,500
Accrued wages and related liabilities 4,010 5,196
Other accrued liabilities 55,795 65,429
Income taxes payable 15,779 16,715
Current portions of lease obligations 2,723 3,298
---------- ----------
Total current liabilities 104,345 119,759
Long-term liabilities and lease obligations 2,956 3,563
---------- ----------
Total Liabilities 107,301 123,322
Shareholders' equity:
Common shares 25,055 23,340
Additional paid-in capital 143,403 110,009
Treasury stock (404) (404)
Retained deficit (72,029) (56,937)
Accumulated other comprehensive income (8,421) (6,832)
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Total shareholders' equity 87,604 69,176
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Total liabilities and shareholders' equity $ 194,905 $ 192,498
========== ==========
</TABLE>
See accompanying notes
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Madge Networks N.V.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
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<S> <C> <C>
Madge.web sales $ 7,868 $ 4,903
Madge.connect sales 43,642 43,911
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Net sales 51,510 48,814
Cost of sales: 36,063 27,900
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Gross profit 15,447 20,914
Operating expenses:
Sales and marketing 19,103 17,210
Research and development 5,682 9,375
General and administrative 5,399 3,868
--------- ---------
Total operating expenses 30,184 30,453
--------- ---------
Loss from operations (14,737) (9,539)
Interest and other income (expense), net (115) 1,062
--------- ---------
Loss before income taxes (14,852) (8,477)
Provision for income taxes 240 --
--------- ---------
Net loss $ (15,092) $ (8,477)
========= =========
Net loss per share
Basic $ (0.36) $ (0.20)
Diluted $ (0.36) $ (0.20)
Shares used in computing loss per share
Basic 41,993 41,400
Diluted 41,993 41,400
</TABLE>
See accompanying notes
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Madge Networks N.V.
Condensed Consolidated Statements of Cash Flows
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,092) $ (8,477)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 3,308 6,284
Amortization of goodwill and other intangible assets 3,170 --
Loss on disposal of fixed assets 28 --
Changes in assets and liabilities:
Accounts receivable (2,708) (1,676)
Restricted cash 1,276 --
Net inventories 2,825 212
Prepaid expenses and other current assets (7,006) 3,704
Accounts payable 673 (6,781)
Other accrued liabilities (10,820) (2,062)
Income taxes payable (936) 3,712
Deferred consideration (1,276) --
--------- ---------
Net cash used in operating activities (26,558) (5,084)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (5,180) (10,729)
Purchase of subsidiary - Gains -- (37,743)
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Net cash used in investing activities (5,180) (48,472)
--------- ---------
Cash flows from financing activities:
Repayments of mortgage and lease obligations (1,182) (258)
Repayments of short-term loan (2,480) (947)
Repurchase of common shares -- (1,961)
Net proceeds from issue of common shares 35,109 795
--------- ---------
Net cash provided by (used in) financing activities 31,447 (2,371)
--------- ---------
Net decrease in cash and cash equivalents $ (291) $ (55,927)
========= =========
Cash and cash equivalents at the beginning of the period $ 19,471 $ 130,494
Effect of exchange rate changes on cash 15 71
Cash and cash equivalents at the beginning of the period
(at period end exchange rates) 19,486 130,565
Cash and cash equivalents at the end of the period 19,195 74,638
========= =========
Net decrease in cash and cash equivalents $ (291) $ (55,927)
========= =========
</TABLE>
See accompanying notes
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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 inter-company 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 its 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
Contract service revenue is recognized on an accrual basis ratably over the
life of the contract. Contract revenues invoiced in advance of revenues earned
are recorded as deferred revenue. Telecommunications revenues are recognized
when services are rendered in accordance with customer usage.
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 customers' inventories and our reduced price for such products, subject
to certain limitations. An allowance for sales returns and price reduction
adjustments is accrued concurrently with the recognition of revenue.
Inventories
Inventories are stated at the lower of cost or market value, determined on
a weighted average cost method.
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Goodwill and other intangible assets
We amortize goodwill and other intangible assets on a systematic basis over
the estimated useful lives, which range from three to twenty 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 amounts 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.
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
Madge accounts 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 March, 31 2000 was
$420,000 and for the three months ended March 31, 1999 was $141,000.
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 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.
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<TABLE>
<CAPTION>
Three months ended March 31, (in thousands) 1999 2000
--------- ----------
<S> <C> <C>
Numerator for the basic and diluted net loss per share:
Net loss $ (15,092) $ (8,477)
========= ==========
Denominator for basic and diluted net loss per share:
Weighted average shares outstanding 41,993 41,400
========= ==========
Net loss per share:
Basic and diluted $ (0.36) $ (0.20)
</TABLE>
2. 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>
Three months ended March 31, (in thousands) 1999 2000
--------- ----------
<S> <C> <C>
Net (loss) income $ (15,092) $ (8,477)
--------- ----------
Foreign currency adjustments (1,589) (18)
--------- ----------
Other comprehensive loss (1,589) (18)
--------- ----------
Total comprehensive loss $ (16,681) $ (8,495)
========= ==========
</TABLE>
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
<S> <C> <C>
Cumulative translation adjustments $ (8,421) $ (6,832)
-------- --------
Total accumulated other comprehensive loss $ (8,421) $ (6,832)
======== ========
</TABLE>
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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, 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 solutions.
Our strategy is based on optimizing voice, video and data convergence via
Internet Protocol (IP) solutions. We operate through two subsidiary groups,
Madge.web and Madge.connect. Madge.web is a global provider of rich content
applications and managed network services. Madge.connect is a global supplier of
products solutions for mission critical enterprise networks. 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.
We reorganized our operational and internal reporting structure in 1999
into services and products segments. Madge.web, formerly known as the Managed
Network Services Division, provides services, and Madge.connect, formerly known
as Enterprise Network Products Division, provides products. We formally launched
a new division, Red-M, in May 2000. Red-M is developing wireless Internet server
products that provide Internet and Intranet access from a wide range of mobile
devices in the workplace.
Reductions in Madge.connect expenditure
Starting in the fourth quarter 1999, we have been undergoing a
consolidation of our Madge.connect group to create a more simplified business
model and we will be continuing this process by significantly reducing the
headcount in this division over the remainder of 2000. As part of this reduction
on April 17, 2000 we outsourced the Madge.connect Technical Support function to
Vital Network Services LLC ("Vital"). The European employees of this group were
transferred to Vital and the employment of the remaining personnel was
terminated. We are also currently in negotiations with a partner for our video
networking division based in Eatontown, New Jersey. It is anticipated that this
will further reduce our Madge.connect cost base in the second half of 2000.
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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 Subsequent to
the acquisition of Olicom, we have reduced and plan to further reduce headcount
on our Token Ring business as we simplify the business operation. 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 addition, we are committed to a further payment of $2.0 million,
which has been placed in escrow and is to be released upon Olicom fulfilling
certain technical support milestones which have been met. We were also committed
to purchase certain Olicom Token Ring inventory in the quarters following the
sale. The agreement, inclusive of $1.2 million of acquisition related expenses,
resulted in $22.5 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 March 31, 2000 was $5.5 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 net cash outflow was $37.7 million. The
acquisition was accounted for under the purchase method, resulting in goodwill
of $33.9 million, which is being amortized on a straight-line basis over 20
years. Accumulated amortization as of March 31, 2000 was $1.8 million.
RESULTS OF OPERATIONS
Net Sales
Total sales were $51.5 million in the three months ended March 31, 2000, an
increase of 6%, compared to $48.8 million for the same period in 1999.
Net sales from Madge.connect, which consist of Token Ring and video
networking products, were $43.6 million for the three months ended March 31,
2000, a decline of 1% from $43.9 million for the same period in 1999. Sales of
these products represented approximately 85% and 90% of our net sales in the
three months ended March 31, 2000 and 1999, respectively. The market for our
Token Ring products continues to decline. We are focused on gaining market share
in this mature market segment, although we expect our revenues from Token Ring
to continue to decline.
Through our Red-M subsidiary, we are focused on bringing to market new
products that provide Internet and intranet access from a wide range of mobile
devices in the workplace. We do not anticipate significant revenues from these
products in 2000.
Net sales of Madge.web, which includes the trader voice connectivity
service acquired with Gains in February 1999, were $7.9 million, or 15% of net
sales, for the three months ended March 31, 2000 compared to $4.9 million, or
10% of net sales, for the three months ended March 31, 1999, an increase of 60%.
The three months to March 31, 1999
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include Gains net sales only from February 5, 1999. We anticipate significant
sales growth from Madge.web during 2000.
Gross Profit
Gross profit from operations was $15.4 million, or 30% of net sales, for
the three months ended March 31, 2000 compared to $20.9 million, or 43% of net
sales, for the same period in 1999. Gross profit for Madge.connect was $22.3
million and $21.4 million for the three months ended March 31, 2000 and 1999,
respectively. The Madge.web gross loss for the three months ended March 31, 2000
was $6.9 million compared to $0.5 million gross loss for the three months ended
March 31, 1999.
We believe that gross profit for Madge.connect will remain under pressure
primarily because of continued price competition. 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 through revenue growth in Madge.web.
Sales and Marketing
Sales and marketing expenses were $19.1 million, or 37% of net sales,
for the three months ended March 31, 2000, an increase of 11%, compared to $17.2
million, or 35% of net sales, for the same period of 1999. This increase
reflects the addition of headcount and resources in Madge.web. We expect that
our sales and marketing expenses will continue to be a significant percentage of
net sales in the future, but should decline as a percentage of sales as
Madge.web sales grow and the planned headcount reductions in Madge.connect
occur.
Research and Development
Research and development expenses were $5.7 million, or 11% of net sales,
for the three months ended March 31, 2000, a decrease of 39%, compared to $9.4
million, or 19% of net sales for the same period in 1999. The majority of
research and development expenses were incurred by Madge.connect. The strategy
in Madge.connect is to reduce research and development headcount focused on
Token Ring and to re-allocate resources to Red-M. As a result we expect that
research and development expenditure will decline over the coming quarters. All
of our research and development costs have been expensed as incurred. Research
and development in Madge.web has increased as we have invested in additional
network personnel responsible for the design and integration of the network and
systems architecture.
General and Administrative
General and administrative expenses were $5.4 million, or 10% of net sales,
for the three months ended March 31, 2000, an increase of 40%, compared to $3.9
million, or 8% of net sales for the same period in 1999. The increases in
expenditures in 2000 compared to 1999 resulted from increased costs incurred as
a result of the establishment of Madge.web and amortization of goodwill relating
to the acquisition of Gains in February 1999 and amortization of the intangible
asset acquired from Olicom in September 1999. The anticipated reduction of
headcount in Madge.connect will reduce general and administrative costs in
Madge.connect over the longer term.
Earnings before interest, tax, depreciation and amortization
Earnings before interest, tax, depreciation and amortization ("EBITDA") for
the three months ended March 31, 2000 for Madge.web was a loss of $14.2 million,
compared to a
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loss of $10.6 million for the three months ended March 31, 1999. EBITDA for
Madge.connect for the three months ended March 31, 2000 was a profit of $5.0
million compared to a profit of $3.2 million for the three months ended March
31, 1999.
Income Tax
We recorded a provision for income taxes of $0.2 million in the three
months ended March 31, 2000. Although on a consolidated basis we were in a net
loss position, certain of our entities had net income for the period.
Liquidity and Capital Resources
We are currently satisfying our liquidity and capital resource requirements
through available cash, cash equivalents and bank financing facilities. At March
31, 2000, we had cash and cash equivalents of $19.2 million. An additional $9.2
million of cash is restricted and held in escrow in relation to the Olicom A/S
agreement as discussed above. The payment of $2.0 million from the escrow
account to Olicom is contingent upon attainment by Olicom of technical support
milestones and the remaining $7.2 million is a minimum payment due on future
Token Ring sales. Subsequent to March 31, 2000 we paid $1.1 million from this
royalty escrow account in respect of sales by us during the three months ended
March 31, 2000, bringing the amount held in the escrow account to $8.1 million.
Madge and our subsidiaries finance working capital in part through a $30 million
two-year financing arrangement secured by accounts receivable generated by U.K.
and U.S. Madge.connect entities. We also have a $3.5 million facility that
allows borrowing up to an equal compensated cash balance. Amounts outstanding
under these arrangements as at March 31, 2000 were $3.2 million and $1.4
million, respectively.
Net cash used in operating activities for the three months ended March 31,
2000 was $26.6 million. The net cash outflow was attributable to the net loss
for the period and the net decrease in working capital mainly due to movements
in prepaid and other current assets and other accrued liabilities. Prepayments
and other current assets increased in the three months ended March 31, 2000 to
$17.8 million from $10.8 million of December 31, 1999. This increase was due in
part to a prepayment we made to Celestica, the subcontract manufacturer of our
Madge.connect products, to cover overhead expenses as per our agreement with
them. Other accrued liabilities were reduced in the three months ended March 31,
2000 to $55.8 million from $65.4 million as of December 31, 1999. This decrease
was mainly due to releases from provisions, including restructuring provisions,
relating to previous periods.
Net cash outflow from investing activities for the three months ended March
31, 2000 was $5.2 million. Additions to property and equipment totalled $5.2
million. Purchases of property and equipment were primarily for the build-out of
the Madge.web infrastructure, including the Madge Broadcast Network.
Net cash from financing activities for the three months ended March 31,
2000 was $31.4 million. The net cash inflow was attributable to the issue of
common shares of $35.1 million, offset by outflows on leases and short-term
loans of $1.2 million and $2.5 million, respectively. During January and
February 2000, we sold 2,663,900 common shares in a public offering at per share
prices ranging from $10.50 to $13.63. The gross proceeds of the offering were
approximately $29.9 million, expenses were approximately $0.7 million and our
net proceeds were approximately $29.2 million.
We did not generate cash from operations in the year ended December 31,
1999 or the three months ended March 31, 2000. Although spending levels are
influenced by many factors, based upon our current plans we will need to raise
additional capital before the end of fiscal year 2000. We are currently
exploring the options available to meet our investment plans including a public
or private offering of a portion of the shares of Madge.web, lease funding and
other sources of finance. We believe that we will be able to obtain additional
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funds through private or public equity, bank credit facility or capital lease
facilities. There can be no assurance at this time that our currently projected
requirements will remain the same given the fact our business is changing and we
are actively reviewing business priorities, resource allocation and new business
opportunities. If during such period, or thereafter, we are not successful in
raising additional capital when required in sufficient amounts and on acceptable
terms or in generating sufficient cash flow from operations, these failures
could have a material adverse effect on our business, results of operations and
financial condition. If we raise additional funds through the issuance of equity
or convertible debt securities of the parent company or any subsidiary, the
percentage ownership of our shareholders may 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 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, however, have 30 days from the
entry of the judgment to file a notice of appeal against this ruling. Even if
the plaintiffs do 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 appealled 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.
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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 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 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. 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
developing 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 recent acquisition
of Gains within the Madge.web group, is untested and our Madge.web and Red-M
businesses 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 means a further reduction in headcount from the fourth
quarter 1999 level. This is anticipated to be completed by end of 2000 and will
mean Madge.connect will have a significantly reduced headcount. As a result a
number of sales offices world-wide 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 reorganisation, 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 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.
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 the year ended December 31,
1999 and the three months ended March 31, 2000. Although spending levels are
influenced by many factors, based upon our current plans we will need to raise
additional capital before the end of fiscal year 2000. We are currently
exploring the options available to meet our investment plans including a public
or private offering of a portion of the shares of Madge.web, lease funding and
other sources of finance.. We believe that we will be able to obtain additional
funds through private or public equity, bank credit facility or capital lease
facilities. There can
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be no assurance at this time that our currently projected requirements will
remain the same given the fact our business is changing and we are actively
reviewing business priorities, resource allocation and new business
opportunities. If during such period, or thereafter, we are not successful in
raising additional capital when required in sufficient amounts and on acceptable
terms, generating sufficient cash flow from operations, these failures could
have a material adverse effect on our business, results of operations and
financial condition. If we raise additional funds through the issuance of equity
or convertible debt securities of the parent company or any subsidiary, the
percentage ownership of our shareholders may be reduced.
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;
- the mix between services and products sold;
- the mix of distribution channels through which our products and services
are sold;
- economic conditions specific to the personal computer and computer
networking industries;
- the pattern of end-user purchasing cycles;
- the introduction of new products and services by us and our competitors;
and
- general economic conditions which may effect such things or the price we
can charge for our products and services;
Typically in Madge.connect, net sales in the first quarter of each year are
generally weak. 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 generally
operates with little backlog, although we sometimes receive end-of- quarter
orders that are not shipped until the following quarter. Additionally, 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 three months ended March 31, 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 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 continue to be dependent upon revenue generated by our token ring business
Our revenue has largely been derived from the sale and licensing of Token
Ring products and technology. We derived approximately 65%, 72% and 74% of our
net sales from our Token Ring products for the years ended December 31, 1997,
1998 and 1999, 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
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last three years and we believe they will continue to decline. If the Token Ring
market remains static, or declines further, our net sales and profitability
could further decrease unless we are successful in our strategy of building
market share and of bringing to market new products and services 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 customers with certain measurable levels of support, this
relationship, and Vitals' ability to deliver the kind of service Madge had
previously been providing directly to its customers, is untested. Our 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 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 that 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. For
instance, we have encountered difficulties in acquiring adequate and timely
quantities of two of our custom Application Specific Integrated Circuits
("ASIC") used in certain of our products and have been notified of the
discontinuation of a number of our key components and in acquiring sufficient
quantities of memory. 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 required to identify and qualify acceptable additional
sources for its 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.
The switches and routers used in the Madge.web Overnet are provided
primarily by Nortel and Cisco. The components we use are, however, based on
industry standards, and alternate sources of comparable equipment exist. Our
suppliers also sell products to our competitors and may become competitors
themselves. There can be no assurance that we will not experience delays in
receiving components from our suppliers, or that such suppliers will not enter
into exclusive arrangements with our competitors or stop selling their products
to us at commercially reasonable terms or at all. In the event that we are
required to seek alternate sources of switches and routers, we are likely to
experience delays in obtaining the requisite equipment and may be required to
pay higher prices for such equipment. Such delays, while unlikely in
management's view to adversely affect the provision of services to our
customers,
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is likely to result in delays or increased costs of expanding and maintaining
the Madge.web Overnet.
We rely on third-party suppliers of Internet capacity, the interruption or loss
of which would harm our Madge.web operations
Madge.web leases transmission capacity from many suppliers, both to link
customers to our network and for other transmissions. We could experience delays
or interruptions in transmission capacity from these suppliers. Additionally, we
may be unable to obtain such services within the requisite time periods or at a
reasonable cost. We may also be unable to purchase international capacity where
it is economically and legally feasible. Any failure to obtain transmission
capacity in a particular jurisdiction or any interruption of local access could
disrupt our service and harm our Madge.web operations and customer relationships
and could restrict our planned growth.
We operate our Madge.web services in a regulated industry that is evolving
quickly and we are unable to predict these changes, some of which could restrict
our ability to generate revenue
We hold direct licenses to operate voice services in the United States (a
FCC214 license) and in the United Kingdom (a ISVR license). In all other
countries in which we operate we are currently entitled to operate voice, and,
if required, other services pursuant to agreements we have with third party
local carriers, who themselves hold the required licenses. We believe that we
are substantially in compliance with applicable telecommunications regulations
in the markets we have entered and in the markets we intend to enter in through
2000. In countries where some or all telecommunications services are subject to
a monopoly we may be required to enter into an arrangement with the incumbent
public telecommunications organization before providing 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 services or will be able to comply with local regulatory
requirements at a reasonable cost or at all.
In recent years there have been a number of United States and foreign
legislative and other initiatives seeking to control or affect the content of
information provided over the internet. Some of these initiatives would impose
criminal liability upon persons sending or displaying, in a manner available to
minors, indecent material or material harmful to minors. Liability would also be
imposed on an entity knowingly permitting facilities under its control to be
used for such activities or other illegal purpose. These initiatives would also
greatly increase our obligations with respect to the tracking, storage and
retrieval of information carried by our network. These initiatives may decrease
demand for internet access, deter the development of internet content,
substantially increase our costs of operation and/or have other adverse effects
on our business.
Loss or modification of our relationships with third-party distributors and
resellers would harm our operations and sales
A majority of our product sales are fulfilled and distributed world wide
through a network of distributors, value-added resellers and original equipment
manufacturers. Our indirect distribution channels vary by division and from
country to country. In the United States, the distribution channels include
major national distributors, such as Ingram Micro, Inc. and Tech Data
Corporation, Inc. In Europe, Asia and other markets, we sell our products
predominantly through distributors and resellers, but also in certain
circumstances, directly to
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end-users. We generally do not have long-term contracts with these distributors
and resellers and we are increasingly selling our Madge.connect products through
third party sales commission agents who are not our employees. We must now 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.
If we do not develop revenue-generating products from our research and
development group, our business will be harmed
To the extent that the level of our research and development expenditures
do not result in revenue-generating products or services, our results of
operations could be adversely affected. We focus a significant portion of our
resources on the development of products and services for unproven or developing
technology markets. We will face risks to our business in the event that the
markets for these new products and services do not develop as expected. We will
also need to invest in making our existing and future products easier to
understand, install and use and in educating our 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 of operating. 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 services need certain licenses and
have to meet certain regulatory approvals for us to be able to market them in
different countries. Our 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 interoperability of
our 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 products for interoperability 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.
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
Networking products frequently contain undetected software and hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may occasionally be found. In addition, our products are
often embedded in or deployed in conjunction with our customers' products, which
incorporate a variety of components produced by third parties. We may on
occasion sell products which are manufactured by others and for which we lack
resources and familiarity to trouble-shoot effectively. As a
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result, when problems occur, it may be difficult to identify the source of the
problem. Our 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 the products or services division, 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.
Returns or warranty costs in excess of our budgeted amounts could harm our
results of operations
The terms of our 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 product returns in the
future. In addition, we provide price protection to certain distributors. a
significant decrease in the price of our 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.
The loss of the services of our management and other key employees could harm
our results of operations and inhibit growth
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.
If we fail to establish or maintain relationships with parties that agree to
resell our products on an original equipment manufacturer basis, our revenue
will decrease
We anticipate that a portion of our future 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 changing industry standards;
- general industry competition; and
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- 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
sales, reducing our margins and adversely affecting the marketability of our
products. Our inability to promote sales through these manufacturers could
decrease our revenue.
We may also enter into agreements to obtain products from another
manufacturer or manufacturers for resale on a Madge-labeled or OEM basis, such
as our agreement with Intel. 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.
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 sales. A significant portion of our transactions
are in currencies other than the U.S. dollar. As a result, we are subject to
currency exchange rate fluctuations and the associated difficulty of
administering business globally. Fluctuations in the value of foreign currencies
cause revenue or other numbers tied to the U.S. dollar to change in comparison
with similar numbers in previous periods. Due to the number of currencies
involved, the constantly changing currency exposures, and the substantial
volatility of currency exchange rates, we cannot predict the effect of exchange
rate fluctuations upon future operating results. These exchange rate
fluctuations could distort the results of our operations.
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
network. 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 products and services. We generally enter into
confidentiality and/or license agreements with our employees, distributors,
customers and suppliers, 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 products infringe
certain patents of third parties, including a letter from Lucent Technologies
and a letter from Hitachi
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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 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
products. 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.
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.
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.
RISKS RELATED TO OUR CAPITAL STRUCTURE
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 44.03% of the outstanding
common shares as of March 31, 2000. Therefore, the trustees 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,
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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 1.2%
of our outstanding common shares have vested or will vest within 60 days from
March 31, 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.
Because judgments against Netherlands corporations are not enforceable in the
United States, you may have difficulty asserting claims against us
Judgments of United States courts, including judgments against us or our
officers and directors based upon allegations of violations of United States
federal or United States 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 MADGE
-------------------
Robert H. Madge
Managing Director
Date: June 16, 2000
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EXHIBIT INDEX
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Exhibit A First Quarter Press Release 25
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