<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1999
REGISTRATION NO. 333-83665
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3679 77-0389091
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2460 NORTH FIRST STREET, SUITE 100
SAN JOSE, CA 95131-1023
(408) 383-5300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHANDRASHEKAR M. REDDY
PRESIDENT, CHIEF EXECUTIVE OFFICER
SAGE, INC.
2460 NORTH FIRST STREET, SUITE 100
SAN JOSE, CA 95131-1023
(408) 383-5300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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JOHN W. CAMPBELL III, ESQ. NORA L. GIBSON, ESQ.
RUSSELL J. WOOD, ESQ. PETER S. BUCKLAND, ESQ.
E. JOHN PARK, ESQ. ALAN C. WANG, ESQ.
MORRISON & FOERSTER LLP BROBECK PHLEGER & HARRISON, LLP
425 MARKET STREET ONE MARKET, SPEAR STREET TOWER
SAN FRANCISCO, CA 94105-2482 SAN FRANCISCO, CA 94105
(415) 268-7000 (415) 442-0900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering. [ ]
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If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE(3)
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Common Stock, par value $0.01 per share..... 3,450,000 $10.00 $34,500,000.00 $9,591.00
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(1) Includes 450,000 shares of common stock that the underwriters have the
option to purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933, as
amended.
(3) A registration fee of $9,591 was paid on September 30, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1999
[SAGE LOGO]
3,000,000 SHARES
COMMON STOCK
Sage, Inc. is offering 3,000,000 shares of its common stock. This is our
initial public offering, and no public market currently exists for our shares.
We have applied to have the shares we are offering approved for quotation on the
Nasdaq National Market under the symbol "SAGI."
We anticipate that the initial public offering price will be between $8.00
and $10.00 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Sage, Inc....................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Sage has granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of its common stock to cover over-allotments.
-------------------------
ROBERTSON STEPHENS
PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
The date of this prospectus is , 1999.
<PAGE> 3
Front Cover Spread
1. Text:
"Display Processing Technologies"
"Image Processing"
"Flat Panel Displays (FPD) and Digital CRTs have a fixed resolution
(resolution). However, these displays receive input resolutions that are
not specific - in fact, they vary greatly. Sage has the technology to
convert these various types of input resolutions to an optimal resolution
for each particular display, while maintaining clear, crisp images."
2. Picture of the incoming resolution for a "800 x 600 pixels or
phosphorescent dots" display and picture of the converted resolution on an
XGA Monitor for a 1024 x 768 pixels display "Without Sage" processing and
"With Sage" processing.
3. Picture of the incoming resolution for a "1280 x 1024 pixels" display and
picture of the converted resolution on an XGA Monitor "1024 x 768 pixels"
display "Without Sage" processing and "With Sage" processing.
4. Text:
"SmartSet(TM)"
"Image is often misplaced and distorted due to incompatibilities with
Graphics Controller timing signals from PC"
"Image is automatically adjusted to optimize position and all
artifacts/distortion eliminated"
5. Picture of an XGA Monitor for a "1024 x 768 pixels" display "Without Sage"
processing and "With Sage" processing.
6. Text:
"Video Processing"
"Whether viewing a movie or watching TV, the ability to see a crisp, clean,
high-resolution picture is becoming increasingly important. Sage's video
processing technologies dramatically improve video image quality, thus
enhancing viewer experience, through advanced proprietary algorithims."
7. Picture of "Decode" image.
8. Text:
"We DECODE by carefully isolating the key elements of the video signal. The
color content is separated from the luminance or brightness. Our time-base
correction removes picture jitter, which is typical with VCR type sources."
9. Picture of "De Interlace" image.
10. Text:
"We DE-INTERLACE through a complex, motion sensitive process of combining
information from even and odd frames and interpolating to 'fill in the
blanks.' Our intelligent line doubling removes both the scan lines and
motion artifacts found in most television displays."
11. Picture of "Enhance" image.
12. Text:
"We ENHANCE by analyzing the picture details. Edges are sharpened, small
details are increased, and color transitions are enhanced. This improves
the clarity of the picture and adds vibrancy and depth."
Description of Inside Front Cover
1. Sage logo graphic
2. Text:
"High Performance Display Processing Solutions."
"Bridging the World. . .to Displays."
3. Graphic presentation showing input/sources (TV Antenna, Personal Computer,
VCR/DVD, Coax Cable, Terrestrial Digital Broadcasting and Satellite) and
output/applications (Flat Panel Monitor, Digital CRT Monitor, All-in-One
PC, Large Screen Projection TV, Plasma Display and Projector).
Description of Inside Back Cover
1. Text:
"Electronic Information Displays"
"Enabled by Sage, Inc."
"Today's PC/IV conversion resulted in the rapidly growing demand for video
enabled monitors. Sage, Inc. provides interface solutions for image
improved Digital CRT monitors and for space, weight and power saving Flat
Panel monitors, each having a distinct area of applications."
2. Graphic presentations showing Flat Panel display advantages.
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Note Regarding Forward-Looking Statements................... 15
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 29
Management.................................................. 40
Certain Transactions........................................ 47
Principal Stockholders...................................... 49
Description of Capital Stock................................ 51
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 57
Experts..................................................... 57
Where You Can Find Additional Information................... 57
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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We own or have rights to trademarks that we use in conjunction with the
sale of our products. Sage, SmartSet, AutoSet, SureSync, Cheetah2, Cheetah3 and
Cheetah4 are trademarks that are owned by us. This prospectus also makes
reference to trademarks and trade names of other companies.
i
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PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information
that you should consider before buying shares in the offering. You should read
the following summary together with the more detailed information and
consolidated financial statements, and the notes to those consolidated financial
statements, appearing elsewhere in this prospectus. This prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in those
forward-looking statements as a result of the factors described under the
heading "Risk Factors" and elsewhere in this prospectus.
OUR BUSINESS
Sage, Inc. designs, develops and markets high performance display
processors used in digital displays. Our integrated semiconductor solutions are
compatible with existing personal computers and display monitors, and emerging
display devices, including flat panel monitors, flat panel televisions,
projection devices, digital cathode ray vacuum tube displays, Internet
appliances and touch-screen displays used in retail and industrial settings.
Digital displays have substantial advantages over traditional analog displays.
Digital displays offer a more compact form factor, generate less heat, consume
less power and produce less radiation. All displays require that incoming
display signals be processed in order to display images, and there are more than
100 different varieties of display signals in use today. Display manufacturers
seek display processing solutions that can function effectively with the large
number of existing and emerging analog and digital signals, ensure the
compatibility of new displays with the large installed base of personal
computers, or PCs, and provide consumers with plug and play capability.
We offer a family of state-of-the-art digital display processors that
provide highly integrated analog-to-digital conversion, signal reformatting and
color processing capabilities. We design and sell circuit boards that are built
around our semiconductors as turnkey display processing solutions for specific
display applications. Our solutions are designed with a common architecture,
configurable software and modular components that can be easily and rapidly
incorporated into digital display devices. We sell our processing solutions to
leading display manufacturers, including Fujitsu, Ltd. and its subcontractors
and NEC Corporation. Of our total revenues for the six months ended September
30, 1999, Fujitsu and its subcontractors represented 3.6%, and NEC represented
29.3%.
We were the first company to introduce a fully effective automatic display
adjustment feature and the first to integrate mode detection, reformatting,
color depth processing and customized on-screen displays onto a single display
processor. Our objective is to be the leading provider of display signal
processing solutions for display manufacturers by:
- offering the highest performance semiconductor solutions that are fully
compatible with all signal modes and display types;
- focusing our sales efforts on the leading display manufacturers;
- emphasizing our strong customer relationships by providing superior
on-site engineering support as well as easy-to-use custom design tools;
- providing display processors that allow our customers to differentiate
their products through customized features; and
- leading the display signal processing industry in technological advances.
CORPORATE INFORMATION
We were formed as a California corporation in May 1994. In May 1999, we
were reincorporated in Delaware. Our principal executive office is located at
2460 North First Street, Suite 100, San Jose, California 95131-1023, and our
telephone number at this address is (408) 383-5300.
1
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THE OFFERING
Common stock offered............................ 3,000,000 shares
Common stock to be outstanding after this
offering........................................ 9,805,795 shares
Use of proceeds................................. We intend to use the offering
proceeds for working capital
and general corporate
purposes.
Proposed Nasdaq National Market symbol.......... SAGI
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The common stock outstanding after the offering is based on the number of
shares outstanding as of September 30, 1999 and excludes:
- 1,016,095 shares subject to outstanding options as of September 30, 1999
at a weighted average exercise price of $3.00 per share;
- 578,782 additional shares available for grant under our 1997 Stock Plan
as of September 30, 1999; and
- 189,659 shares subject to outstanding warrants as of September 30, 1999
at a weighted average exercise price of $4.36 per share.
Except as otherwise noted, all information in this prospectus:
- reflects a three-for-one reverse stock split in our common stock,
implemented on October 1, 1999;
- reflects the automatic conversion of our outstanding preferred stock into
common stock immediately prior to the closing of this offering; and
- assumes that the underwriters' over-allotment option will not be
exercised.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
--------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
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CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ -- $ 251 $1,758 $ 1,495 $ 7,132 $ 1,346 $ 7,460
Gross profit (loss)..... -- 68 622 (144) 2,218 469 2,923
Loss from operations.... (57) (383) (701) (2,686) (4,862) (2,669) (4,104)
Net loss................ $ (57) $ (384) $ (708) $(2,775) $ (4,751) $(2,616) $(4,021)
====== ====== ====== ======= ======== ======= =======
Net loss per share:
Basic and diluted..... $(0.04) $(0.19) $(0.32) $ (1.08) $ (2.00) $ (1.07) $ (1.36)
====== ====== ====== ======= ======== ======= =======
Pro forma............. $ (0.96) $ (0.67)
======== ========
Shares used in computing
net loss per share:
Basic and diluted..... 1,400 1,995 2,246 2,578 2,381 2,444 2,953
Pro forma............. 4,965 5,994
</TABLE>
The pro forma net loss per share is calculated assuming that all
outstanding shares of convertible preferred stock are converted into common
stock at the beginning of the periods presented, or on the date of issuance of
the preferred stock, whichever is later.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $4,033 $28,143
Working capital............................................. 3,332 27,442
Total assets................................................ 7,563 31,673
Total current liabilities................................... 3,311 3,311
Total stockholders' equity.................................. 4,252 28,362
</TABLE>
The consolidated balance sheet data appearing above at September 30, 1999,
as adjusted, gives effect to our receipt of the net proceeds from the sale of
the shares offered hereby at an assumed initial public offering price of $9.00
per share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
3
<PAGE> 8
RISK FACTORS
You should carefully consider the risk factors described below, and all
other information contained in this prospectus, before making an investment
decision regarding our common stock. The risks and uncertainties described below
are not the only ones we face. If any of the events or circumstances described
below arise, our business, financial condition or results of operations could be
seriously harmed, the value of our common stock could decline and you could lose
all or part of your investment. Additional risks and uncertainties not presently
known to us, or that may be currently considered by us to be immaterial, may
also impair our business operations.
RISKS RELATED TO OUR OPERATIONS
A SIGNIFICANT AMOUNT OF OUR REVENUES COMES FROM A FEW CUSTOMERS AND ANY DECREASE
IN REVENUES FROM THESE FEW CUSTOMERS COULD SIGNIFICANTLY IMPACT OUR TOTAL
REVENUES
We are and will continue for the foreseeable future to be dependent on a
limited number of large customers for a substantial portion of our revenues. For
the fiscal year ended March 31, 1999, sales of semiconductor products to
Lite-On, Inc. accounted for 48.6% of our revenues. For the six months ended
September 30, 1999, NEC, a semiconductor customer, and Elo TouchSystems, Inc., a
circuit board customer, accounted for 29.3% and 19.9%, respectively, of
revenues. As a result of customer concentration any one of the following factors
could significantly impact our total revenues:
- a significant reduction, delay or cancellation of orders from one or more
of our key customers; or
- a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed solution,
for inclusion in future product generations.
The digital display manufacturing market is highly concentrated among
relatively few large manufacturers. We expect our operating results to continue
to depend on revenues from a relatively small number of display manufacturers
and their suppliers.
OUR RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS REDUCES OUR ABILITY TO
NEGOTIATE FAVORABLE PRICING TERMS WITH OUR CUSTOMERS
The digital display manufacturing market is highly concentrated among
relatively few large manufacturers. These manufacturers have significantly
greater financial and other resources than we do, therefore we may be unable to
negotiate favorable pricing terms with them. Any inability to negotiate
favorable pricing terms with our customers could impact our ability to generate
positive earnings.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, AND WE MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY
We incurred net losses of $4.0 million for the six months ended September
30, 1999, and $708,000, $2.8 million and $4.8 million for each of the respective
years ended March 31, 1997, 1998 and 1999, and had an accumulated deficit of
$12.7 million as of September 30, 1999. In the future we expect our research and
development and our selling, general and administration expenses to increase.
Accordingly, we expect to continue to incur additional operating losses for at
least the next 12 months. Although we have experienced revenue growth in recent
periods, this growth is not necessarily indicative of future operating results,
and we cannot assure you that we will be able to sustain the growth in our
revenues. If we do achieve profitability, we cannot be certain that we can
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sustain or increase profitability on a quarterly or annual basis in the future
or at all. This may in turn cause our stock price to decline. In addition, if we
do not achieve or sustain profitability in the future, we may be unable to
continue our operations. Please see "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detailed information on our historical results of
operations.
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND YOUR INVESTMENT
We commenced operations in January 1995, but we did not generate material
revenues from the sale of our semiconductor products until July 1998. Thus, we
have a limited operating history upon which to evaluate our current business and
prospects. Due to our limited history, it is difficult or impossible for us to
predict our future results of operations with any degree of accuracy. For
example, we cannot accurately forecast expenses based on our projections of
future revenues. Most of our expenses are relatively fixed in the short term,
and we may not be able to quickly reduce spending if our revenues are lower than
our projections. In addition, because substantially all of our present customers
order on a purchase order basis rather than long-term purchase commitments, we
have only a limited ability to project future revenues. Therefore, net losses in
a given quarter may be greater than expected. Moreover, due to our limited
operating history, any evaluation of our business and prospects must be made in
light of the risks and uncertainties often encountered by early stage companies
in technology markets. Many of these risks are discussed elsewhere in this
section. Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for more detailed information on our historical
results of operations.
FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK
Our quarterly operating results have fluctuated significantly in the past
and we expect our results to fluctuate significantly in the future based on a
number of factors. Some of these factors arise from decisions we have made with
respect to the timing and magnitude of expenditures and our ability to control
our revenues. Our operating expenses, which include research and development
expenses and selling, general and administration expenses, are relatively fixed
over the short-term. If our revenues are lower than we expect because we sell
fewer display processors, because we delay the release or the announcement of
new products or for other reasons, we may not be able to quickly reduce our
spending in response. In addition, our revenues could fall short of our
expectations if we experience delays or cancellations of even a small number of
orders.
Certain other factors have, in the past, caused fluctuations in our
quarterly operating. These factors are industry risks over which we have no
control, including:
- changes in the available supply of flat panel displays at reasonable
prices;
- changes in our customers' demand for our products;
- the deferral of customer orders in anticipation of new products or
enhancements by us or our competitors; and
- changes in the available production capacity at the semiconductor
fabrication foundries that manufacture our products and changes in the
costs of manufacturing.
- our ability to develop, introduce and market new products in time to meet
the product design cycles of our customers;
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<PAGE> 10
There are additional factors that could, but which have not, affected our
operating results including:
- the growth rate of the overall digital display market;
- incorrect forecasting of future revenues;
- changes in product mix, product costs or pricing; and
- general economic conditions and economic conditions specific to the
personal computer, display and semiconductor markets.
Any one or more of these factors are difficult to forecast and could result
in fluctuations in our future operating results. Any shortfall in our revenues
would have a direct impact on our business. In addition, fluctuations in our
quarterly results could adversely affect the market price of our common stock in
a manner unrelated to our long-term operating performance. Because our operating
results are volatile and difficult to predict, you should not rely on the
results of one quarter as an indication of our future performance. It is likely
that in some future quarter our operating results will fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may decline significantly.
ANY DELAY IN INTRODUCING NEW PRODUCTS OR ENHANCEMENTS TO EXISTING PRODUCTS COULD
REDUCE CUSTOMER ACCEPTANCE OF OUR PRODUCTS AND COULD DECREASE OUR MARKET SHARE
OR REVENUES
Our display manufacturing customers have regular design cycles for their
next display models. Our future success will depend to a substantial degree upon
our ability to develop and introduce new products and enhancements to our
existing products, and to do so on a schedule that makes our products and
enhancements available at the time our customers are making purchasing
decisions. Our products and product enhancements must incorporate technological
changes and innovations to meet evolving customer and industry standards.
Although we expect to continue to make significant investments in research and
development to enhance our current products and to develop products
incorporating new and existing technologies, we cannot assure you that new
products or product enhancements will be successfully developed. If developed,
we cannot assure you that any new products or product enhancements will be
developed in time to capture market opportunities or achieve a significant or
sustainable level of acceptance in new and existing markets.
FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY
TO INCREASE OUR REVENUES AND IMPROVE OUR EARNINGS
Our ability to successfully offer our products in a rapidly evolving market
requires effective planning and management processes. We continue to increase
the scope of our operations domestically and internationally and have increased
our headcount substantially. Between September 30, 1998 and September 30, 1999,
we expanded our headcount by over 45%. In addition, we plan to continue to hire
a significant number of employees this year. Our past growth, and our expected
future growth, places a significant strain on our management systems and
resources including our financial and managerial controls, reporting systems and
procedures. In addition, we will need to continue to expand, train and manage
our workforce worldwide.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY, AND IF WE ARE
UNABLE TO RETAIN OR HIRE ADDITIONAL PERSONNEL, OUR REVENUES AND PRODUCT
DEVELOPMENT EFFORTS COULD BE HARMED
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel, many
of whom would be difficult to replace. We do not have key person life insurance
policies covering any of our employees other than Arun Johary, our Vice
President of Engineering. We intend to hire a significant number of engineering,
sales,
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marketing and support personnel in the future, and we believe our success
depends, in large part, upon our ability to attract and retain our key
employees. Competition for these persons is intense, especially in the San
Francisco Bay Area, and we may not be able to retain our key personnel or
identify, attract or retain other highly qualified personnel in the future. We
have experienced, and may continue to experience, difficulty in hiring and
retaining candidates with appropriate qualifications. If we do not succeed in
hiring and retaining candidates with appropriate qualifications, our revenues
and product development efforts could be harmed.
OUR FOREIGN CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND IF
WE DO NOT SUCCESSFULLY ADDRESS THE RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS, OUR REVENUES COULD DECREASE AND OUR BUSINESS PROSPECTS COULD
DETERIORATE BECAUSE THE MAJORITY OF OUR CUSTOMERS COULD BE LOST AT A SUBSTANTIAL
COST TO OUR BUSINESS PROSPECTS AND OUR REVENUES COULD DECLINE
Sales outside of the U.S. accounted for 69.9% of our revenues in the fiscal
year ended March 31, 1999 and accounted for none of our revenues during the
fiscal years ended March 31, 1997 and 1998. A substantial portion of our OEM
customers are located in Japan, Taiwan and Korea, with aggregate sales from
those three countries accounting for 60.2% of our revenues during the fiscal
year ended March 31, 1999. We anticipate that sales outside of the U.S. could
increase in future periods and may account for an increasing portion of our
revenues. In addition, manufacturers who incorporate our processors into their
displays sell them outside of the U.S., thereby exposing us indirectly to
foreign risks. We are, therefore, subject to many international risks,
including:
- increased transaction costs related to sales transactions conducted
outside of the U.S.;
- difficulties in maintaining sales representatives outside of the U.S.
that are knowledgeable of the display processor industry and our display
processors products;
- changes in the regulatory environment in Japan, Korea and Taiwan that may
significantly impact purchases of our products by our customers;
- difficulties in collecting accounts receivable from our customers located
in Japan, Korea and Taiwan; and
- difficulties related to design piracy of display processing technology
that may exist outside the U.S.
To date, sales of our products have been denominated exclusively in U.S.
dollars. An increase in the value of the U.S. dollar will increase the price of
our products so that they become relatively more expensive to customers in the
local currency of a particular country, potentially leading to a reduction in
our revenues and profitability.
WE CURRENTLY DEPEND ON A LIMITED NUMBER OF CONTRACT MANUFACTURERS FOR OUR
SEMICONDUCTOR AND CIRCUIT BOARD PRODUCTS, AND WE MUST ORDER PRODUCTS FROM THEM
BASED ON FORECASTS FROM OUR CUSTOMERS FROM WHICH WE DO NOT HAVE FIRM PURCHASE
ORDERS
We do not own or operate a semiconductor fabrication facility and we do not
have the resources to manufacture our products internally. Currently, our
Cheetah2 and Cheetah4 chips are being manufactured, assembled and tested by
Kawasaki LSI U.S.A., Inc., and our Cheetah3 chips are being manufactured,
assembled and tested by Fujitsu Microelectronics Inc. Our circuit board products
are manufactured and tested by Topline Electronics, Inc. We do not have a
long-term supply contract with any of our contract manufacturers, and they are
not obligated to supply us with products for any specific period, in any
specific quantity or at any specific price, except as may be provided in a
particular purchase order. We try not to maintain substantial inventories of
products, but we must often place orders for products two to three months before
they are needed and before we have firm purchase orders for those products. None
of our products is currently manufactured by more than one supplier, and all of
our products are expected to be single-source manufactured for the
7
<PAGE> 12
foreseeable future. There are many risks associated with our dependence on
third-party manufacturing, assembling and product testing relationships,
including:
- delays in delivering products in response to purchase orders due to
increased demand, disruptions in operations or other factors;
- lack of control over pricing;
- reduced quality assurance;
- reduced manufacturing yields and costs;
- unavailability or interruption of access to process technologies
necessary to manufacture our products; and
- potential misappropriation of our intellectual property.
If we are unable to obtain our products from manufacturers on schedule,
revenues from the sale of those products may be delayed. If orders for our
products are cancelled, revenues will be lost.
IF WE HAVE TO QUALIFY A NEW CONTRACT MANUFACTURER FOR ANY OF OUR PRODUCTS, WE
MAY LOSE REVENUES AND DAMAGE OUR CUSTOMER RELATIONSHIPS
Our display processors require manufacturing with state-of-the-art
fabrication equipment and techniques. Because the lead time needed to establish
a strategic relationship with a new contract manufacturer is at least three
months, and the estimated time for us to adapt a product's design to a
particular contract manufacturer's processes is an additional three to four
months, there is no readily available alternative source of supply for any
specific product. A manufacturing disruption at any of our contract
manufacturers would impact the production of our display processors for a
substantial period of time, thereby reducing our revenues, and would harm our
customer relationships.
SHORTAGES OF MATERIALS INCLUDED IN OUR SEMICONDUCTOR AND CIRCUIT BOARD PRODUCTS
MAY INCREASE OUR COSTS OR LIMIT OUR REVENUES AND DELAY OUR ABILITY TO SHIP OUR
PRODUCTS ON TIME
From time to time, shortages of certain materials that are used in our
semiconductor and circuit board products may occur. In particular, we may
experience shortages of semiconductor wafers, video random access memory and
analog-to-digital converters. If materials shortages occur, we may incur
additional costs to procure the scarce components or be unable to ship our
products to our customers in a timely fashion, all of which could negatively
impact our earnings.
BY SUBCONTRACTING SEPARATELY FOR THE PRODUCTION OF WAFERS FOR OUR NEXT
GENERATION PROCESSORS, WE ARE ASSUMING RISKS THAT WE DO NOT CURRENTLY FACE
Currently, we purchase packaged, assembled and tested semiconductor
products from contract manufacturers. We expect that we will assume greater
responsibility for this process for our next generation of products by
subcontracting separately for the production of wafers and for their assembly
and testing. If we do so, we will become more responsible for losses arising
from wafer manufacturing yields and for coordination of the manufacturing,
assembly and testing process. Poor yields, or our failure to implement this
approach to manufacturing properly, would reduce our revenues and harm our gross
margin and results of operations.
FAILURE TO MAINTAIN OUR LICENSE WITH FAROUDJA COULD MATERIALLY HARM OUR BUSINESS
BY DELAYING OR PREVENTING NEW PRODUCT INTRODUCTIONS
We hold a license to develop semiconductors based on technology owned by
Faroudja under a joint license and development agreement with Faroudja. Under
the terms of the agreement, we may produce a family of video display processors
incorporating Faroudja technologies that are intended to expand our
semiconductor technology into emerging television and monitor markets. Under the
terms
8
<PAGE> 13
of license agreement, we are required to provide Faroudja with certain favorable
pricing terms in connection with Faroudja's purchase of products developed by us
incorporating their technology. Faroudja is restricted for a limited time to
license to others the technology it has licensed to us. During the term of the
agreement, we are prohibited from developing, for use in products licensed, sold
or distributed by us to third parties or for use in products licensed, sold or
distributed through a private label, any circuit board video display processor
that incorporates a licensed chip and is intended to be used as a standalone
video display processor similar to certain Faroudja products. We are also
required to pay royalties to Faroudja on sales of our semiconductors
incorporating their technology. Faroudja may terminate the agreement if we fail
to perform or violate the terms of the agreement and fail to cure such violation
within 30 days of Faroudja's written notice thereof. Failure to maintain our
license with Faroudja could delay or prevent the introduction of new products
which could limit our ability to compete for new business and negatively impact
our revenues. Even if we could identify and license or develop non-infringing
equivalent technology, which is far from certain, the cost and delays from such
a changeover in our base technology would likely cause material harm to our
business.
PORTIONS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE PERFORMED IN INDIA, AND
RISKS RELATED TO THOSE OPERATIONS COULD HARM OUR RESEARCH AND DEVELOPMENT
CAPABILITIES AND NEGATIVELY IMPACT OUR PRODUCT SALES
Any risks related to the political or economic conditions in India and the
surrounding region, including risks relating to India's national security
situation or labor market conditions, may adversely impact our ability to take
advantage of our operations in India. In addition, circumstances beyond our
control at our facilities, related to operating in a developing country, such as
unreliable power supplies, may have a material adverse effect on our research
and development capabilities. We cannot assure you that restrictive laws or
policies on either the part of India or the United States will not constrain our
ability to effectively operate in both countries. If we are required to relocate
our India facilities, we cannot assure you that a relocation will not disrupt
our business.
BECAUSE OUR DISPLAY PROCESSORS ARE COMPLEX, THEY MAY HAVE ERRORS OR DEFECTS THAT
ARE FOUND ONLY AFTER THE PROCESSORS HAVE BEEN INCORPORATED INTO OUR CUSTOMERS'
PRODUCTS, WHICH COULD RESULT IN WARRANTY CLAIMS AND A REDUCTION IN REVENUES
Our display processors are complex products and are designed to be
incorporated into digital display devices, which are themselves complex.
Although we thoroughly test our products, design and manufacturing defects may
not be discovered during the manufacturing and testing process and only be
discovered when the finished display products are connected to a signal source.
Consequently, our customers may discover errors or defects in our hardware or
software after large quantities of our products have been fully incorporated
into their digital display devices. To date, however, our customers have not, to
our knowledge, discovered errors or defects in our products, although a small
number of customers have returned products because the product design did not
meet those customers' needs. If our customers were to discover errors or defects
that may be identified after a display device is connected to a signal source,
we could experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to achieve market acceptance;
- diversion of development resources;
- increased warranty costs;
- legal actions by our customers; and
- increased insurance costs.
9
<PAGE> 14
In addition, in the event of a significant number of product returns due to a
defect or recall of our products, our revenues, gross margin and name brand
could be significantly harmed.
IF MONITORS INCORPORATING OUR SOLUTIONS ARE NOT COMPATIBLE WITH PCS AND OTHER
DEVICES FOR WHICH THEY ARE MARKETED, THE MARKET FOR OUR PRODUCTS WILL BE REDUCED
AND OUR BUSINESS PROSPECTS COULD BE SIGNIFICANTLY LIMITED
Our products are incorporated into our customers' display monitors which
have different parts and specifications and utilize multiple protocols that
allow them to be compatible with specific PCs and other devices. If our
customers' products are not compatible with the PCs and other devices for which
they have been marketed and sold, consumers will return those monitors, or
consumers will not purchase those monitors, and the market for our customers'
products could be significantly reduced. As a result, a portion of our market
would be eliminated, and our business would be harmed.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD HARM OUR COMPETITIVE POSITION BY ALLOWING OUR COMPETITORS TO ACCESS OUR
PROPRIETARY TECHNOLOGY AND TO INTRODUCE SIMILAR DISPLAY PROCESSOR PRODUCTS
Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technology. We
have four pending patent applications filed with the U.S. Patent and Trademark
Office for protection of certain of our significant technologies, but we cannot
assure you that the degree of protection offered by these patents will be
sufficient or that any of our pending patents will be issued. In addition,
competitors in both the U.S. and foreign countries, many of which have
substantially greater resources, may apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell our products.
We may from time to time receive notifications of claims that we may be
infringing patents or intellectual property rights owned by third parties. While
there is currently no intellectual property rights litigation pending against
us, litigation could result in significant expenses to us and could reduce sales
of our products. Any litigation could also divert the efforts of our technical
and management personnel, whether or not the litigation is determined in our
favor. In addition, we may not be able to develop, license or acquire
non-infringing technology under reasonable terms. These developments could
result in an inability to compete for customers or could adversely affect our
ability to increase our earnings. See "Business -- Intellectual Property."
ALTHOUGH WE ARE NOT PRIMARILY A SUPPLIER OF SOFTWARE, OUR SUPPLIERS COULD BE
ADVERSELY AFFECTED BY YEAR 2000 ISSUES WHICH COULD DISRUPT OUR ABILITY TO
DELIVER PRODUCTS TO OUR CUSTOMERS
The year 2000 problem is the potential for system and processing failure of
date-related data as a result of computer-controlled systems that use two digits
rather than four to define a year in the date field. Many computer hardware
systems and software applications could fail or create erroneous results unless
corrected so that they can correctly process data related to the year 2000 and
beyond. Although we are not primarily a supplier of software, we outsource all
of our semiconductor manufacturing to third party suppliers and, to the extent
such manufacturers may be affected by the year 2000 problem, our supply of
semiconductors could be delayed or eliminated. Any disruption in the supply of
semiconductors related to the year 2000 problem could directly affect our sales
and reduce our results of operations. We are currently seeking assurances from
our suppliers that their manufacturing of our semiconductors will be unaffected
by the year 2000 problem but have not received such assurances to date. We
expect to receive such assurances by December 1999, and, in the event certain
manufacturers fail to provide assurances, we plan to work with each such
manufacturer on an individual basis. The year 2000 problem could also affect our
internal systems, including our information technology systems. We have
initiated an assessment of our material
10
<PAGE> 15
internal information technology systems, which we expect to have completed by
December 1999. We are currently developing contingency plans to address those
year 2000 issues that may pose a significant risk to our ongoing operations. For
additional information concerning the year 2000 risk and our assessment of its
impact on our business, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Readiness."
RISKS RELATED TO THE DISPLAY PROCESSING INDUSTRY
FAILURE OF CONSUMER DEMAND FOR FLAT PANEL DISPLAYS AND OTHER DISPLAY
TECHNOLOGIES TO INCREASE AS WE EXPECT COULD IMPEDE OUR GROWTH PROSPECTS
Our product development strategies anticipate that consumer demand for flat
panel displays and other emerging display products will increase in the future.
The success of our products is dependent on increased demand for these products,
which are at early stages of development. The potential size of the flat panel
display market and the timing of its development are uncertain and will depend
upon a number of factors, all of which are beyond our control.
THERE IS CURRENTLY AN UNDERSUPPLY OF FLAT PANELS, AND IF THE MANUFACTURING
CAPACITY OF FLAT PANELS DOES NOT INCREASE, OUR MARKET GROWTH WILL BE LIMITED
Currently, there is a limited supply of flat panels, and increasing the
supply of flat panels is a costly and lengthy process requiring significant
capital investment. Accordingly, we do not expect the current shortage of flat
panels or their high prices to change in the near term. In the past, the supply
of flat panels has been cyclical. We expect this pattern to continue.
Undercapacity in the flat panel market may limit our ability to increase our
revenues because our customers may limit their purchases of our products if they
cannot obtain sufficient supplies of flat panels. In addition, flat panel
monitor prices may remain high because of limited supply, and consumer demand
may not grow if the supply of flat panels does not increase.
INTENSE COMPETITION MAY REDUCE THE DEMAND OR PRICES FOR OUR PRODUCTS, DECREASING
OUR GROSS MARGIN
The display signal processing industry is intensely competitive. Rapid
technological change, evolving industry standards and declining average selling
prices in these markets could have a material adverse effect on our business,
financial condition and results of operations. As the overall price of flat
panel display screens continues to fall, we may be required to offer solutions
to manufacturers at discounted prices due to increased price competition. At the
same time, new, alternative display processing technologies and industry
standards may emerge that directly compete with technologies that we offer. We
may be required to increase our investment in research and development at the
same time that product prices are falling. In addition, even after making this
investment, we cannot assure you that our technologies will be superior to those
of our competitors or that our products will achieve market acceptance, whether
for performance or price reasons. Failure to effectively respond to these trends
could reduce the demand for our products.
We compete with a range of diversified electronic and semiconductor
companies that offer display processors, some of which have substantially
greater resources than we do. In particular, we compete against Arithmos, Inc.,
Genesis Microchip, Inc., Pixelworks, Inc. and Silicon Image, Inc. We also
compete in some instances against in-house processing solutions designed by
large original equipment manufacturers, or OEMs. In the future, our current or
potential customers may also develop their own proprietary display processors
and become our competitors. In addition, start-up companies that are seeking to
capitalize on business opportunities as a result of the shift from analog to
digital technology may seek to compete in our markets. Our competitors may
develop advanced
11
<PAGE> 16
technologies enabling them to offer more cost-effective and higher quality
solutions to our OEM customers than those offered by us. Increased competition
could harm our business, financial condition and results of operations by, for
example, increasing pressure on our profit margin or causing us to lose sales
opportunities.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, WE MAY INCUR
SUBSTANTIAL EXPENSES BEFORE WE EARN ASSOCIATED REVENUES AND MAY NOT ULTIMATELY
SELL AS MANY UNITS OF OUR PRODUCTS AS WE FORECASTED
We develop products based on forecasts of demand and incur substantial
product development expenditures prior to generating associated revenues. Our
customers typically perform numerous tests and extensively evaluate our products
before incorporating them into their systems. The time required for testing,
evaluation and design of our products into a customer's equipment can take up to
six months or more. Because of our relatively limited history in selling our
products, we cannot assure you that the time required for the testing,
evaluation and design of our products by our customers will not exceed six
months. Because of this lengthy development cycle, we may experience a delay
between the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenues, if any, from such
expenditures.
Furthermore, achieving a design win with a customer does not necessarily
mean that this customer will order large volumes of our products. A design win
is not a binding commitment by a customer to purchase our products. Rather, it
is a decision by a customer to use our products in the design process of that
customer's products. In addition, our customers can choose at any time to
discontinue using our products in that customer's designs or product development
efforts. If our products are chosen to be incorporated into a customer's
products, we may still not realize significant revenues from that customer if
that customer's products are not commercially successful.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE MARKETS
IN WHICH WE COMPETE OR TO COMPLY WITH INDUSTRY STANDARDS IN THE FUTURE
The markets in which we compete or seek to compete are subject to rapid
technological change, frequent new product introductions, changing customer
requirements for new products and features, and evolving industry standards. The
introduction of new technologies and the emergence of new industry standards
could render our display processors less desirable or obsolete. If we fail to
produce technologically competitive products in a cost-effective manner and on a
timely basis, and if we are unable to comply with industry standards in the
future, our business and results of operations could be harmed.
IF WE DO NOT ACHIEVE DESIGN WINS WITH LEADING DISPLAY MANUFACTURERS, WE MAY BE
UNABLE TO SECURE ADDITIONAL DESIGN WINS IN THE FUTURE AND OUR ABILITY TO GROW
WOULD BE SERIOUSLY LIMITED
The development of new, technologically advanced products and product
enhancements is a complex and uncertain process requiring accurate anticipation
of technological and market trends, as well as skill in obtaining design wins.
Any failure on our part to obtain additional design wins with leading OEMs and
to successfully design, develop and introduce new products and product
enhancements could harm our business, financial condition and results of
operations. In addition, development and manufacturing schedules for our
products are difficult to predict, and we cannot assure you that we will achieve
timely customer shipments of new products. The timely introduction of these
products and their acceptance by customers are important to our future success.
Any delays in product development, whether due to manufacturing, product design
and development, lack of market acceptance or otherwise, could reduce future
customer acceptance of our products and harm our business, financial condition
and results of operations.
12
<PAGE> 17
RISKS RELATED TO THIS OFFERING
THE SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE
We will have 9,805,795 shares of common stock outstanding immediately after
the offering. The shares sold in the offering will be freely transferable.
Additional shares may be sold in the public market to the extent permitted by
Rule 144 or exemptions under the Securities Act. Lock-up agreements executed by
our stockholders limit the number of shares of common stock that may be sold in
the public markets. However, BancBoston Robertson Stephens Inc., may in its sole
discretion, release all or some portion of the securities subject to the lock-up
agreements. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the market after the
offering, or the perception that such sales could occur. These factors also
could make it more difficult for us to raise funds through future offerings of
common stock. See "Shares Eligible for Future Sale."
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR PROFITS OR MARKET VALUE
Our management will have considerable discretion in the application of the
proceeds, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately. The
proceeds may be used for corporate purposes that do not increase our
profitability or our market value. Pending application of the proceeds, they may
be placed in investments that do not produce income or that lose value. See "Use
of Proceeds."
NEW INVESTORS WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $9.00 per share, if you purchase our common stock in
this offering, you will incur substantial and immediate dilution of
approximately $6.11 per share. If additional shares are sold by the underwriters
following the exercise of their overallotment option, or if outstanding options
to purchase shares of common stock are exercised, there will be further dilution
of your investment.
THE ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION COULD ADVERSELY
AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK BY PREVENTING A SALE OR
TAKEOVER OF THE COMPANY AT A PRICE OR PRICES FAVORABLE TO THE HOLDERS OF OUR
COMMON STOCK
Certain anti-takeover provisions of Delaware law and our certificate of
incorporation may make a change in control of Sage more difficult, even if a
change in control would be beneficial to the stockholders. These provisions may
allow the board of directors to prevent changes in the management and control of
Sage. Under Delaware law, our board of directors may adopt additional
anti-takeover measures in the future. One anti-takeover provision that we have
is the ability of our board of directors to determine the terms of preferred
stock and issue such preferred stock without the approval of the holders of the
common stock. At the time of the offering, there are no shares of such preferred
stock outstanding. However, because the rights and preferences of any series of
preferred stock may be set by the board of directors in its sole discretion
without approval of the holders of the common stock, the rights and preferences
of this preferred stock may be superior to those of the common stock.
Accordingly, the rights of the holders of common stock may be adversely
affected.
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<PAGE> 18
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY MAKE IT MORE DIFFICULT TO SELL THE COMPANY AT A PREMIUM TO CERTAIN
TAKEOVER CANDIDATES
Immediately after the offering, our executive officers, directors and other
principal stockholders will, in the aggregate, beneficially own approximately
43.7% of our outstanding common stock. Although these stockholders will not have
majority control, they currently have, and likely will continue to have,
significant influence with respect to the election of our directors and approval
or disapproval of our significant corporate actions. This influence over our
affairs might be adverse to the interests of other stockholders. In addition,
the voting power of these stockholders, under certain circumstances, could have
the effect of delaying or preventing a change in control over our business.
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED, AND WE EXPECT THAT THE PRICE OF
OUR STOCK MAY FLUCTUATE SUBSTANTIALLY
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between the underwriters and us. You may not be able to sell your shares at or
above the initial public offering price due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance;
- changes in financial estimates of securities analysts;
- technological innovations by others; and
- the operating and stock price performance of other comparable companies.
In particular, the stock prices of technology companies like Sage have been
highly volatile recently. Therefore, the price of our stock may decline, and the
value of your investment may be reduced.
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<PAGE> 19
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
prospectus regarding markets for our products and trends in revenues, gross
margin and anticipated expense levels, and any statement that contains the words
"anticipate," "believe," "plan," "estimate," "expect," "intend," "seek" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks, including
those risks identified in "Risk Factors" and elsewhere in this prospectus and
our actual results of operations may differ significantly from those contained
in the forward-looking statements because of such risks. The cautionary
statements made in this prospectus apply to all forward-looking statements
wherever they appear in this prospectus.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,000,000 shares of
common stock that we are offering will be approximately $24.1 million
(approximately $27.9 million if the underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $9.00 per share
and after deducting estimated offering expenses and underwriting discounts and
commissions payable by us. We intend to use the net proceeds primarily for
working capital expenditures associated with the purchase of additional
inventory related to the expansion of our product line and increasing our sales
to international customers and for general corporate purposes. Although we may
use a portion of the net proceeds to acquire technology or businesses that are
complimentary to our business, we have no current plans in this regard. Pending
such uses, we plan to invest the net proceeds in short-term, interest-bearing,
investment grade securities. Another purpose of this offering is to create a
public market for our common stock and to facilitate our future access to public
capital markets.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock or other
securities and do not intend to pay dividends in the foreseeable future. We plan
to retain any earnings for use in the operation of our business and to fund
future growth.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis; and
- on an as adjusted basis to reflect the application of the estimated net
proceeds from the initial public offering and the conversion of all
outstanding shares of our preferred stock into common stock.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Stockholders' equity:
Convertible Preferred stock, $0.01 par value; 10,000,000
shares authorized; 3,062,697 shares issued and
outstanding, actual; no shares issued and outstanding,
as adjusted............................................ $ 31 --
Common stock, $0.01 par value; 50,000,000 shares
authorized, 3,622,553 shares issued and outstanding,
actual; 9,805,795 shares issued and outstanding, as
adjusted............................................... 36 98
Additional paid in capital................................ 17,640 41,719
Notes receivable from stockholders........................ (113) (113)
Deferred compensation related to stock options and
restricted stock....................................... (646) (646)
Accumulated deficit....................................... (12,696) (12,696)
--------
Total stockholders' equity................................ 4,252 28,362
-------- --------
Total capitalization................................... $ 4,252 $ 28,362
======== ========
</TABLE>
The information in the table above excludes:
- 1,016,095 shares subject to outstanding options as of September 30, 1999
at a weighted average exercise price of $3.00 per share;
- 578,782 additional shares available for grant under our 1997 Stock Plan
as of September 30, 1999; and
- 189,659 shares subject to outstanding warrants as of September 30, 1999
at a weighted average exercise price of $4.36 per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Management -- Employee Benefit Plans" and the consolidated financial statements
and the notes thereto included elsewhere in this prospectus.
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<PAGE> 21
DILUTION
Our pro forma net tangible book value at September 30, 1999 was
approximately $4,252,000, or $0.62 per share after giving effect to the
conversion of all outstanding shares of our preferred stock into shares of
common stock upon completion of this offering. Pro forma net tangible book value
per share is equal to our total tangible assets less our total liabilities,
divided by the total number of shares of our common stock outstanding. After
giving effect to the sale of the 3,000,000 shares of our common stock offered in
this offering at an assumed initial public offering price of $9.00 per share
(after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us) our pro forma as adjusted net tangible book
value at September 30, 1999 would have been approximately $28,362,000 or $2.89
per share. This represents an immediate increase in net tangible book value of
$2.27 per share to existing stockholders and an immediate dilution of $6.11 per
share to new investors purchasing shares of our common stock in this offering.
The following table illustrates the per share dilution to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 9,00
Pro forma net tangible book value per share at September
30, 1999............................................... $ 0.62
Increase in pro forma net tangible book value per share
attributable to this offering.......................... 2.27
------
Pro forma net tangible book value per share as adjusted
after the offering........................................ 2.89
------
Dilution per share to new investors in this offering........ $ 6.11
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the total number of stockholders and new investors with respect to the
number of shares our common stock purchased from Sage, the total consideration
paid and the average price per share paid by the existing stockholders and by
the new investors in this offering before deducting the underwriting discounts
and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 6,805,795 69% $17,887,000 40% $2.63
New investors.......................... 3,000,000 31 27,000,000 60% 9.00
--------- --- ----------- ---
Total................................ 9,805,795 100% $44,887,000 100%
========= === =========== ===
</TABLE>
The information in the table above excludes:
- 1,016,095 shares subject to outstanding options as of September 30, 1999
at a weighted average exercise price of $3.00 per share;
- 578,782 additional shares available for grant under our 1997 Stock Plan
as of September 30, 1999; and
- 189,659 shares subject to outstanding warrants as of September 30, 1999
at a weighted average exercise price of $4.36 per share.
This table should be read in conjunction with "Capitalization,"
"Management -- Employee Benefit Plans" and note 7 of the notes to consolidated
financial statements included elsewhere in this prospectus.
17
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements, the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended March 31, 1997, 1998 and 1999, and
consolidated balance sheet data at March 31, 1998 and 1999, are derived from our
audited consolidated financial statements included in this prospectus. The
consolidated statement of operations data for the six months ended September 30,
1998 and 1999 and the consolidated balance sheet data at September 30, 1999 are
derived from our unaudited consolidated financial statements included in this
prospectus. The consolidated balance sheet data at March 31, 1997 is derived
from our audited consolidated financial statements not included in this
prospectus. The consolidated statement of operations data for the years ended
March 31, 1995 and 1996, and consolidated balance sheet data at March 31, 1995
and 1996, are derived from our unaudited consolidated financial statements not
included in this prospectus. Our unaudited consolidated financial statements
have been prepared by us on a basis consistent with our audited financial
statements and, in management's opinion, include all adjustments necessary for a
fair presentation of such information. The operating results for the six months
ended September 30, 1999 are not necessarily indicative of results that may be
expected for the year ended March 31, 2000 or any other interim period or future
fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
------ ------ ------ ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ -- $ 251 $1,758 $ 1,495 $ 7,132 $ 1,346 $ 7,460
Cost of revenues................. -- 183 1,136 1,639 4,914 877 4,537
------ ------ ------ ------- -------- ------- -------
Gross profit (loss).............. 68 622 (144) 2,218 469 2,923
Operating expenses:
Research and development....... 47 380 994 1,597 2,270 1,039 1,805
Charge for in-process
technology................... -- -- -- -- -- -- 2,500
Selling, general and
administration............... 10 71 329 945 3,214 1,094 2,355
Stock compensation............. -- -- -- -- 1,596 1,005 367
------ ------ ------ ------- -------- ------- -------
Total operating expenses..... 57 451 1,323 2,542 7,080 3,138 7,027
------ ------ ------ ------- -------- ------- -------
Loss from operations............. (57) (383) (701) (2,686) (4,862) (2,669) (4,104)
Interest income (expense), net... -- (1) (7) (89) 111 53 83
------ ------ ------ ------- -------- ------- -------
Net loss......................... $ (57) $ (384) $ (708) $(2,775) $ (4,751) $(2,616) $(4,021)
====== ====== ====== ======= ======== ======= =======
Net loss per share: basic and
diluted........................ $(0.04) $(0.19) $(0.32) $ (1.08) $ (2.00) $ (1.07) $ (1.36)
====== ====== ====== ======= ======== ======= =======
Pro forma net loss per share..... $ (0.96) $ (0.67)
======== =======
Shares used in computing net loss
per
share: basic and diluted....... 1,400 1,995 2,246 2,578 2,381 2,444 2,953
Shares used in computing pro
forma net loss per share....... 4,965 5,994
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
-------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
---- ----- ------ ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ -- $ 9 $ 908 $ 380 $2,473 $4,033
Working capital............................ (15) (263) 357 (1,440) 1,471 3,332
Total assets............................... -- 126 1,692 1,309 4,293 7,563
Total current liabilities.................. 15 385 1,154 2,281 2,390 3,311
Total stockholders' equity................. (15) (259) 538 (972) 1,903 4,252
</TABLE>
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The results described below are not necessarily indicative of
the results to be expected in any future period. Certain statements in this
discussion and analysis are forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements are subject to certain
risk and uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Note Regarding Forward-Looking
Statements."
OVERVIEW
Sage was founded in 1994 and began operations in 1995. We design, develop
and market high performance digital display processors used in digital displays.
Flat panel displays and other emerging digital display devices have substantial
advantages over their traditional analog counterparts, and markets for these
products are beginning to grow rapidly. Display signals are characterized by
several important attributes: resolution, frame refresh rate, scanning format
and color depth. Combinations of these characteristics are called modes, and
there are over 100 different modes used today to display images on PCs and
televisions. These modes must be recognized and processed to produce a high
quality image on a display. Display manufacturers seek display processing
solutions that can function effectively with the large number of existing and
emerging signal modes, ensure the compatibility of new displays with the large
installed base of PCs and provide consumers with plug and play capability.
We offer state-of-the-art digital display processors that provide, highly
integrated analog-to-digital conversion, signal reformatting and color
processing capabilities. Our solutions are compatible with all commercially
available display signal modes and display types and are designed with a common
architecture, configurable software and modular components that can be easily
and rapidly incorporated into digital display devices. We sell our processing
solutions to leading display manufacturers, including Fujitsu, NEC and Sanyo.
Since our inception, we have focused primarily on the design and sale of
high performance display processors. In our early operations we developed
circuit boards assembled with off-the-shelf display processors and other
components. We secured limited sales of these circuit board products through
independent distributors to manufacturers of low volume, embedded display
products, such as medical or measuring equipment, and to systems integrators
developing their own flat panel display monitors.
In November 1996, we introduced our first display processor, Cheetah, as a
prototype based on 0.6 micron technology. In November 1997, we introduced
Cheetah1, based on the prototype Cheetah architecture, but manufactured using
0.35 micron technology. During the fiscal year ended March 31, 1998, we secured
limited orders to incorporate the Cheetah1 into display processing boards
designed by us. Throughout this period, we developed and perfected our core
display processing technology, built our firmware library and identified
qualified semiconductor manufacturing vendors.
In April 1998, we introduced our Cheetah2 display processor, with an
improved scaling engine, an AutoSet feature that automatically adjusts the image
position and quality, and a modular design that allows external memory to be
added as an option to support increased functionality. Cheetah2's features led
to significant design wins with large OEM flat panel display manufacturers. In
July 1998, we achieved our first significant revenues from sales of Cheetah2,
and in April 1999, we released our Cheetah3 and Cheetah4 semiconductor products.
These display processors are designed around the same core technologies as our
Cheetah2 semiconductor and provide advanced functionality for higher performance
and more specialized applications. We have achieved significant design wins for
19
<PAGE> 24
Cheetah3 and Cheetah4. We have commenced shipping of Cheetah3 and expect to
begin shipping Cheetah4 in commercial quantities in the immediate future.
Since July 1998, we have derived our revenues principally through sales of
our semiconductors to large OEM display manufacturers. We recognize revenues
when our products are shipped to our customers or, in cases of sales to
distributors made under agreements permitting the return of unsold products,
when our distributors ship the products to their customers. Generally, we ship
our products within a few weeks after order, and therefore we carry no
significant backlog. Because our semiconductors are purchased for installation
in our OEM customers' products, our ability to recognize revenues depends upon
our customers' product development cycles. Also, our customers may limit our
ability to announce significant design wins if they see competitive advantages
in not disclosing the technology built into their newest display devices.
Currently, we produce packaged, assembled and tested semiconductor
products. However, we expect that we will assume greater responsibility over
this process for our next generations of display processors by separately
subcontracting for the production of wafers, the assembly of the completed
semiconductor and their testing. While this transition to a new manufacturing
model will expose us to greater responsibilities for semiconductor yields and
the coordination of the assembly and testing process, we believe that our gross
margins will improve and that the transition will result in our having greater
control over the manufacturing process.
Historically, sales of display processing circuit boards have represented a
substantial portion of our revenues. In the future, we expect sales of circuit
boards to decline as a percentage of total revenues and sales of display
processors to increase as a percentage of total revenues. From time to time,
however, we may be asked to design and supply our circuit boards to low volume
manufacturers and other OEM manufacturers who are not equipped or prefer not to
design and develop their own circuit boards. Because we generate significantly
lower operating margins on circuit boards as compared to display processors,
fluctuations in our product mix will impact our overall operating margins.
In July 1999, we entered into a joint development agreement with Faroudja
under which we issued 375,000 shares of common stock to Faroudja in exchange for
an aggregate amount of $500,000 in cash and a limited exclusive license to
certain of Faroudja's decoding, deinterlacing and image enhancement technologies
that can only be used in products currently under development. Under the terms
of the agreement, we intend to produce a family of video display processors
incorporating Faroudja technology that are intended to expand our semiconductor
technology into emerging television and monitor markets. We intend to
incorporate Faroudja's technologies into our proprietary display processing
solutions to create a video solution for the mass television market by combining
Faroudja's decoding, deinterlacing and image algorithms with our technology. The
acquired in-process technology was valued at 375,000 shares, issued at $8.00 per
share, less the cash receipt of $500,000. As a result of that transaction, we
recorded an expense of $2.5 million relating to in-process research and
development during the three months ended September 30, 1999. We have completed
approximately five percent of the work involved to date and the project is
proceeding according to our expectations. Faroudja has delivered the licensed
technology, executed several design transfers and conducted meetings with us as
required by the agreement. In addition, we have also met with Faroudja to
discuss the architecture and specifications for our video display processor, and
we hope to complete the architecture and specifications in the fourth quarter of
fiscal year 1999. We estimate incurring costs within the range of $1.8 to $2.5
million to complete the product incorporating the in-process technology acquired
from Faroudja. We will expense the costs incurred prior to establishing
technological feasibility as those costs are incurred. Our successful
development of the product is uncertain due to the challenges of integrating our
technology with the Faroudja technology. If we fail to successfully develop the
product on a timely basis, the introduction of new products could be prevented
or delayed and ultimately decrease our ability to compete for new business. Such
failure would negatively impact our future revenues and net income. We have not
to
20
<PAGE> 25
date encountered any deviations from our cost projections, and we expect to
introduce the new semiconductor in November of 2000. For a more detailed
discussion, see the description provided under the headings "Risk Factors" and
the notes to our consolidated financial statements.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain
consolidated statement of operations data reflected as a percentage of revenues.
Our results of operations are reported as a single business segment.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------ -------------------
1997 1998 1999 1998 1999
----- ------ ----- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 64.6 110.6 68.9 65.2 60.8
----- ------ ----- ------ -----
Gross margin (loss).......................... 35.4 (9.6) 31.1 34.8 39.2
----- ------ ----- ------ -----
Operating expenses:
Research and development................... 56.6 106.8 31.8 77.2 24.2
Charge for in-process technology........... -- -- -- -- 33.5
Selling, general and administration........ 18.7 63.2 45.1 81.3 31.6
Stock compensation expense related to
options................................. -- -- 22.4 74.7 4.9
----- ------ ----- ------ -----
Total operating expenses................ 75.3 170.0 99.3 233.2 94.2
----- ------ ----- ------ -----
Loss from operations......................... (39.9) (179.7) (68.2) (198.4) (55.0)
Interest income (expense), net............... (0.4) (6.0) 1.6 3.9 1.1
----- ------ ----- ------ -----
Net loss..................................... (40.3)% (185.6)% (66.6)% (194.5)% (53.9)%
===== ====== ===== ====== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Our revenues were $7.5 million and $1.3 million in the six months
ended September 30, 1999 and 1998, respectively. Revenues increased due to the
commencement of commercial sales of our new Cheetah3 and Cheetah4 display
processors in September 1999 and to a significant increase in sales of circuit
board products. Revenues from two customers, NEC and Elo TouchSystems, accounted
for 29.3% and 19.9%, respectively, of total revenues for the six months ended
September 30, 1999. Revenues from sales of our display processors increased to
$3.5 million, compared to only $465,000 in the six months ended September 30,
1998. This increase was primarily due to additional sales to NEC, which
accounted for 46.3% of our total revenues in the six months ended September 30,
1999. Revenues from sales of our circuit board products increased to $3.4
million in the six months ended September 30, 1999, compared to $781,000 in the
six months ended September 30, 1998, primarily due to the addition of Elo
TouchSystems as a new circuit board customer. Our circuit board products
represented 45.8% and 58.0% of total revenues in the six months ended September
30, 1999 and September 30, 1998, respectively. For the six months ended
September 30, 1999, we purchased and shipped $343,000 of hard-to-find
components, including memory chips and high-speed analog-to-digital converters,
required as a condition of semiconductor sales, and we recognized $245,000 of
non-recurring engineering, or NRE, revenues following the achievement of certain
OEM board development milestones. No NRE revenues were recognized in the six
months ended September 30, 1998. In future quarters, we expect semiconductor
sales to increase and represent a majority of our revenues.
Gross margin. Our gross margin was 39.2% and 34.8% for the six months ended
September 30, 1999 and 1998, respectively. The increase in gross margin for the
six months ended September 30,
21
<PAGE> 26
1998 to the six months ended September 30, 1999 was due to changes in the mix of
products we sold and the benefit of fixed period costs being spread over a
larger sales volume. Due to the changes in the products we sold in fiscal 1999
as compared to fiscal 1998, there was a higher proportion of sales of higher
margin products for the six months ended September 30, 1999 than for the six
months ended September 30, 1998. For the six months ended September 30, 1999,
our gross margins from sales of semiconductor products, circuit boards and other
products were 56.8%, 32.5% and 5.8%, respectively. For the six months ended
September 30, 1998, our gross margin from sales of semiconductor products and
circuit boards were 42.2% and 59.3%, respectively. We did not sell other
products during the six months ended September 30, 1998.
Research and development. Our research and development expenses were
$1,805,000 and $1,039,000 for the six months ended September 30, 1999 and 1998,
respectively. Research and development expenses represented 24.2% and 77.2% of
revenues for the six months ended September 30, 1999 and 1998, respectively. Our
research and development expenses consist of compensation and personnel related
expenses and costs for purchased materials, designs and tooling, which can
fluctuate significantly from period to period as a result of our product
development cycles. The compensation and personnel related expenses were
approximately 32.8% and 30.9% of the research and development expenses for the
six months ended September 30, 1999 and 1998, respectively. During the six
months ended September 30, 1998, our current generation of semiconductors was in
development and started commercial shipments, and we increased our spending on
purchased materials, designs and tooling. We expect similar increases in future
quarterly research and development expenses as we increase product development
efforts in connection with our next generation of semiconductors.
Selling, general and administration. Selling, general and administration
expenses were $2.4 million and $1.1 million for the six months ended September
30, 1999 and 1998, respectively. Our selling, general and administration
expenses consist primarily of compensation and personnel related expenses and
commissions paid to independent sales representatives. The compensation and
personnel related expenses were 47.3% and 66.5% of selling, general and
administration expenses for the six months ended September 30, 1999 and 1998,
respectively. Commissions paid to independent sales representatives represented
15.6% and 5.1% of total selling, general and administration expenses for the six
months ended September 30, 1999 and 1998. As a percentage of revenues, our
selling, general and administration expenses decreased to 31.6% of revenues for
the six months ended September 30, 1999, from 81.3% of revenues for the six
months ended September 30, 1998. This decrease in selling, general and
administration expenses in proportion to revenues was largely the result of a
significant increase in sales volume partially offset by increased payroll.
Stock compensation. Stock compensation expenses amounted to $367,000 and
$1.0 million, for the six months ended September 30, 1999 and 1998,
respectively. Deferred compensation, representing the difference between the
deemed fair market value of our common stock on the date of grant and the
exercise price of stock options on the date of grant, is amortized on an
accelerated basis as the options vest. We expect deferred compensation expenses
of $646,000 as of September 30, 1999 to be amortized on an accelerated basis
over the vesting period of generally four years.
Provision for income taxes. We incurred operating losses for the six months
ended September 30, 1999 and 1998 and therefore had no provision for income tax
in either period. As of March 31, 1999, we had $5.1 million in net operating
losses, which are available to offset future taxable income. If not used, the
net operating losses will expire between 2010 and 2019.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Revenues. Revenues for the fiscal years ended March 31, 1999, 1998 and 1997
were $7.1 million, $1.5 million and $1.8 million, respectively. Revenues
increased $5.6 million from fiscal year 1998 to fiscal year 1999 as a result of
$4.9 million increase of sales of our newly introduced
22
<PAGE> 27
Cheetah2 processor and circuit boards built around the Cheetah2. The remaining
increase represented the increase in sales to our semiconductor customers of
hard-to-find components. Revenues from sales of our semiconductors represented
approximately 48.2% of total revenues for the fiscal year 1999. During fiscal
year 1998 and fiscal year 1997, revenues from the sale of semiconductors were
not significant. Revenues from sales of our circuit board products represented
28.2% for the fiscal year 1999 and almost all of sales for the fiscal year 1998
and fiscal year 1997. Revenues from sales of our circuit board products declined
from fiscal year 1997 to fiscal year 1998 due to a shift in the focus of our
business from circuit boards to semiconductors, resulting in a greater emphasis
on semiconductor product development as opposed to sales of circuit board
products.
Gross margin. Gross margin for the fiscal years ended March 31, 1999, 1998
and 1997 was 31.1%, (9.6)% and 35.4%, respectively. Our negative gross margin
for the fiscal year ended March 31, 1998 reflected the $600,000 write-off of
obsolete circuit board inventories. During fiscal year 1999, the increase in our
gross margin was the result of increased revenues from higher margin
semiconductor products.
Research and development. Research and development expenses increased to
$2.3 million, in the fiscal year ended March 31, 1999, from $1.6 million and
$994,000, in the fiscal years ended March 31, 1998 and 1997, respectively. As a
percentage of revenues, research and development expenses represented 31.8%,
106.8% and 56.6% of revenues during the fiscal years ended March 31, 1999, 1998,
and 1997, respectively. Our fiscal year 1998 research and development expenses
increased compared to the fiscal year 1997 primarily because of the engineering
research and prototype development of Cheetah2. As a result, the compensation
and personnel related expenses increased from 21.4% in 1997 to 37.6% in 1998 as
of the total research and development expenses. The costs for the purchased
materials, designs and tooling increased from 10.1% in fiscal year 1997 to 30.8%
in fiscal year 1998. Our fiscal year 1999 research and development expenses
increased compared to the fiscal year 1998 research and development expenses as
a result of an increase in engineers employed in our research and development
efforts. However, as revenues increased from fiscal year 1998 to fiscal year
1999, research and development expenses, as a percentage of revenues, declined.
Although we expect absolute expenses to increase, we expect research and
development expenses as a percentage of revenues to decrease.
Selling, general and administration. For the fiscal years ended March 31,
1999, 1998 and 1997, selling, general and administration expenses were $3.2
million, $945,000 and $329,000, respectively. Selling, general and
administration expenses represented 45.1%, 63.2% and 18.7% of revenues in the
years ended March 31, 1999, 1998 and 1997, respectively. The overall increase in
our selling, general and administration expenses was principally related to the
introduction of the Cheetah2 in 1998 and the related increase in salaries,
commissions to independent sales representatives, travel and promotional
expenses. In the future, we anticipate that our expenditures will decline as a
percentage of revenues increase from our semiconductor products.
Stock compensation. We incurred stock compensation expenses of $1.6 million
for fiscal year 1999. Stock compensation expenses were not incurred in fiscal
year 1998 and fiscal year 1997.
Interest income (expense), net. For the fiscal years ended March 31, 1999,
1998 and 1997, interest income and interest expense were minor. We have financed
our business operations primarily through a series of relatively small private
equity transactions.
Provision for income taxes. We incurred operating losses for each of the
fiscal years ended March 31, 1999, 1998, or 1997, and therefore made no
provision for income tax in these fiscal years. As of March 31, 1999, we had
$5.1 million in net operating losses which are available to offset future
taxable income earned until between 2010 and 2019.
23
<PAGE> 28
QUARTERLY RESULTS OF OPERATION
The following table sets forth certain unaudited selected quarterly results
of operations data for the eight quarters ended September 30, 1999, as well as
such data expressed as a percentage of revenues. This data has been derived from
our unaudited consolidated financial statements that, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of such information for the
periods presented. Such statements of operations data should be read in
conjunction with our annual consolidated financial statements, and the related
notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS AND AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues............................... $ 352 $ 249 $ 465 $ 881 $ 2,283 $ 3,503 $ 3,775 $ 3,685
Cost of revenues....................... 374 507 352 525 1,335 2,702 2,443 2,094
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss).................... (22) (258) 113 356 948 801 1,332 1,591
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............. 417 435 465 574 524 707 715 1,090
Charge for in-process technology..... -- -- -- -- -- -- -- 2,500
Selling, general and
administration..................... 272 250 511 583 868 1,252 1,058 1,297
Stock compensation expense related to
options............................ -- -- 610 395 333 258 202 165
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 689 685 1,586 1,552 1,725 2,217 1,975 5,052
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations................... (711) (943) (1,473) (1,196) (777) (1,416) (643) (3,461)
Interest income (expense), net......... (6) (91) 19 34 30 28 26 57
------- ------- ------- ------- ------- ------- ------- -------
Net loss............................... $ (717) $(1,034) $(1,454) $(1,162) $ (747) $(1,388) $ (617) $(3,404)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 106.3 203.6 75.7 59.6 58.5 77.1 64.7 56.8
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss).................... (6.3) (103.6) 24.3 40.4 41.5 22.9 35.3 43.2
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............. 118.4 174.7 100.0 65.2 23.0 20.2 19.0 29.6
Charge for in-process technology..... 67.8
Selling, general and
administration..................... 77.3 100.4 109.9 66.2 38.0 35.7 28.0 35.2
Stock compensation expense related to
options............................ -- -- 131.2 44.8 14.6 7.4 5.4 4.5
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 195.7 275.1 341.1 176.2 75.6 63.3 52.3 137.1
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations................... (202.0) (378.7) (316.8) (135.8) (34.0) (40.4) (17.0) (93.9)
Interest income (expense), net......... (1.7) (36.5) 4.1 3.9 1.3 0.8 0.7 1.6
------- ------- ------- ------- ------- ------- ------- -------
Net loss............................... (203.7)% (415.2)% (312.7)% (131.9)% (32.7)% (39.6)% (16.3)% (92.3)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our gross margin increased from 35.3% for the three months ended June 30,
1999 to 43.2% for the three months ended September 30, 1999. The increase in our
gross margin was a result of an increase in sales of display processors over our
lower margin circuit board products as a percentage of total revenues in the
three months ended September 30, 1999.
For the three months ended June 30, 1999, our gross margin was adversely
impacted by revenues from increased sales of low margin hard-to-find resale
components. Our gross margin for the three months ended March 31, 1999 was
adversely impacted by an inventory provision related to the transition from our
Cheetah2 to our Cheetah3 and Cheetah4 display processors. For the periods prior
to June 30, 1998, our gross margins were negatively impacted by low sales
volumes, relatively high fixed period costs and inventory write-downs associated
with modifications to the design of our circuit boards.
24
<PAGE> 29
Since the commencement in July 1998 of sales of our semiconductor products,
we have added sales and marketing and engineering personnel. This increase in
headcount resulted in increased payroll, travel, engineering, design and
materials costs in each of the three months ended September 30, 1999, June 30,
1999, March 31, 1999, December 31, 1998, and September 30, 1998.
We believe that period-to-period comparisons of our operating results
should not be relied upon as an indication of our future performance. In the
past, our results of operations have fluctuated significantly, and we expect
similar quarterly fluctuations in the future as a result of a number of factors
beyond our control. Among other things, these factors include the rate of growth
in the market for our products and changes in the demand for our products. In
addition, because a significant percentage of our revenues has been and is
expected to continue to be derived from a limited number of large customers, any
variation in the timing of orders from those large customer or design wins or
losses can result in significant fluctuations in our quarterly operating
results. Our anticipated research and development, selling and marketing, and
general and administrative expenses are based, in part, on future projections of
revenues. As a result of these and other factors, it is likely that in some
future period our operating results or business outlook will be below the
expectations of securities analysts or investors, which would likely result in a
significant reduction in the market price for our common stock. For a more
detailed discussion of these and other factors, see the description provided
under the headings "Risk Factors -- Fluctuations in our operating results make
it difficult to predict our future performance and may result in volatility in
the market price of our common stock" and "-- A significant amount of our
revenues come from a few customers and any decrease in revenues from these
customers could harm our business."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have satisfied our liquidity requirements principally
through the issuance and sale of equity securities, totaling approximately $17.7
million. For the six months ended September 30, 1999, we used $1.3 million in
cash from operating activities. During the fiscal years ended March 31, 1999 and
March 31, 1998, we used $3.2 million and $1.9 million, respectively, for
operating activities, primarily due to operating losses and increased working
capital requirements as sales increased. Net cash used from investing activities
was $680,000 and $214,000, for the six months ended September 30, 1999 and the
fiscal year ended March 31, 1999, respectively. As of September 30, 1999, we did
not have any significant capital expenditure commitments. Net cash provided from
financing activities was $6.0 million from the issuance and sale of Common Stock
Series E preferred stock during the six months ended September 30, 1999, and
$5.5 million, net of repayment of notes payable totalling $190,000, from the
issuance of Series D preferred stock in the fiscal year ended March 31, 1999. We
have received a commitment from General Bank to provide up to $2.0 million
pursuant to a revolving loan and security agreement secured by our property and
accounts. Under the terms of the revolving loan and security agreement, General
Bank will extend credit to our account at an interest rate equal to 0.5% above
the prime rate published in the money section of the New York edition of The
Wall Street Journal. The agreement terminates on June 30, 2000.
As of September 30, 1999, we had $4.0 million in cash and cash equivalents.
In addition, we had a $2.0 million credit facility under which no borrowings had
been made. We believe that the net proceeds of the sale of common stock offered
in this offering, together with our existing cash resources, will be sufficient
to meet our capital requirements through the next twelve months. On a short term
basis, we anticipate using approximately $1.0 million of cash during the three
months ended December 31, 1999 to fund operating losses and believe that our
existing cash resources together with the net proceeds of the sale of common
stock offered in this offering are sufficient to meet these needs. On a long
term basis, we anticipate using approximately $5.0 million during the twelve
months ended October 31, 2000 to fund general operating expenses and increases
in our inventory and receivables as sales of our display processors increase.
Based on our current forecasts,
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and assuming the successful completion of this offering, we believe that our
cash resources will be sufficient to meet these needs over the next twelve
months. However, we could be required or could choose to raise additional
capital during the next twelve months. Our future capital requirements will
depend on many factors, including the rate of revenue growth, profitability,
timing and extent of spending to support research and development programs,
expansion of selling and marketing and administrative activities, timing or
introductions of new products and product enhancements and market acceptance of
our products. We expect that we may need to raise additional equity or debt
financing in the future, although we are not currently negotiating for
additional financing nor do we have any plans to obtain additional financing
following our initial public offering. We cannot assure you that additional
equity or debt financing, if required, will be available on acceptable terms, or
at all. If we are unable to obtain additional capital, we may be required to
reduce the scope of our planned product development, selling and marketing
activities, which could harm our business, financial condition and results of
operations. In the event that we do raise additional equity financing, investors
in this offering will be further diluted.
From time to time, we may evaluate acquisitions of businesses, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of equity securities that may result in
further dilution to existing stockholders.
QUANTITATIVE AND QUALITATIVE DISCUSSION OF MARKET INTEREST RATE RISK
Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in certificates of deposit
issued by banks, the value of which does not change based on changes in interest
rates. As our cash balances increase, we anticipate investing in short-term
investment-grade government and corporate securities. These securities will be
highly liquid and generally mature within 12 months from our purchase date. Due
to the short maturities of our investments, the carrying value should
approximate the fair value. In addition, we do not use our investments for
trading or other speculative purposes. We have performed an analysis to assess
the potential effect of reasonably possible near-term changes in interest and
foreign currency exchange rates. The effect of any change in foreign currency
exchange rates is not expected to be material to our results of operations, cash
flows or financial condition. Due to the short duration of our investment
portfolio, an immediate 10% change in interest rates would not have a material
effect on the fair market value of our portfolio. Therefore, we would not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on our securities
portfolio.
FOREIGN CURRENCY EXCHANGE RISK
We are an international company, selling our products globally and, in
particular, in Japan, Taiwan and Korea. Although we transact our business in
U.S. dollars, we cannot assure you that future fluctuations in the value of the
U.S. dollar would not affect the competitiveness of our products, gross profits
realized, and results of operations. Further, we incur expenses in India, Japan,
Taiwan and other countries that are denominated in currencies other than U.S.
dollars. We cannot estimate the effect that an immediate 10% change in foreign
currency exchange rates would have on our future operating results or cash flows
as a direct result of changes in exchange rates. However, we do not believe that
we currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any other
derivative financial instruments.
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INFLATION
The impact of inflation on our business has not been material for the six
months ended September 30, 1999 or the fiscal years ended March 31, 1999, 1998
and 1997.
YEAR 2000 READINESS
We are aware of the widely publicized problems associated with computer
systems as they relate to the year 2000. Many existing computer hardware systems
and software applications, and embedded computer chips, software and firmware in
control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process leap year dates. As a result, system applications and
devices could fail or create erroneous results unless corrected so that they can
correctly process data related to the year 2000 and beyond. These problems are
expected to increase in frequency and severity as the year 2000 approaches. We
have commenced our business risk assessment of the impact that the year 2000
problem may have on our operations. As business conditions warrant, this
assessment may be revised as new information is made available to us. To date,
we have identified the following five key areas of our business that may be
affected:
Supplier relationships. We rely, directly and indirectly, on external
systems utilized by our suppliers for the management and control of fabrication,
assembly and test of our products. If our manufacturers are not year 2000
compliant, our products might not be manufactured on a timely basis or might
fail to be manufactured. Any disruption in our supply could seriously harm our
business, financial condition and results of operations. We have had discussions
with our manufacturers concerning their readiness for year 2000. We are
currently seeking assurances from our manufacturers that they are year 2000
compliant with respect to the manufacture of our products but have not received
such assurances to date. We expect to receive such assurances by December 1999,
and, in the event certain manufacturers fail to provide assurances, we plan to
work with each such manufacturer on an individual basis.
Internal infrastructure. Based upon our internal review to date, we do not
believe that our material internal information technology and non-information
technology systems will be affected by the year 2000 date change. We acquired
most of these systems after year 2000 compliance became an important issue for
third party systems vendors. Because most of the software applications used by
us are generally recent versions of vendor supported, commercially available
products, we have not incurred, and do not expect in the future to incur,
significant costs to upgrade these applications if the respective vendors
determine that a year 2000 compliant release is necessary. We will continue to
seek certifications that products installed are year 2000 ready, and are
targeting October 1, 1999 to complete this process.
Products. Our products do not contain two digit date codes and would
therefore be generally unaffected by the year 2000 date change. However, once
shipped, our products are incorporated into display devices and circuit board
products developed by others. The performance of our products could be affected
if a different component of these display devices is not year 2000 compliant. We
have not, and will not, assess the existence of these potential problems in our
customers' products.
Customers. We do not currently have any information concerning the year
2000 compliance status of our customers. Our current or future customers may
incur significant expenses to achieve year 2000 compliance. If our customers are
not year 2000 compliant, they may incur significant costs to remedy problems and
as a result of litigation. In either case, the year 2000 date change could
reduce or eliminate the budgets that current or potential customers could have
for purchases of our products. As a result, our business, financial condition
and results of operations could be harmed.
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Other third party relationships. We rely on outside vendors for utilities
and telecommunications services, in addition to climate control, building access
and other infrastructure services. We are not capable of independently
evaluating the year 2000 compliance of the systems utilized to supply these
services. We cannot assure you that these suppliers are or will become year 2000
compliant with respect to these systems and that our business will not be
materially disrupted as a result.
We presently estimate that the total cost of addressing our year 2000
issues will not exceed $25,000. This estimate was derived utilizing numerous
assumptions, including the assumption that we have not identified any additional
internal significant year 2000 issues and that the plans of our third party
suppliers, distributors and customers will be fulfilled in a timely manner
without cost to us. However, these assumptions may not be accurate, and actual
results could differ materially and adversely from those anticipated after
completion of required remediation and testing.
In the event that we discover year 2000 issues in our internal systems, we
will endeavor to resolve these problems on a timely basis. We have not yet
developed any contingency plans for year 2000. The responses we receive from
third-party vendors and service providers will be taken into account in
determining the nature and extent of contingency plans we develop, if any. As
our worst case scenario, we expect significant reductions in orders for our
processors as well as delays in the delivery of our processors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting For Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect the adoption of SFAS No. 133 to have a material impact on our financial
position or results of operations.
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BUSINESS
OVERVIEW
Sage designs, develops and markets high performance display processors used
in digital displays. Our integrated semiconductor solutions are compatible with
existing personal computers and display monitors, and emerging display devices,
including flat panel monitors, flat panel televisions, projection devices,
digital CRTs, Internet appliances and touch-screen displays in retail and
industrial settings. Flat panel displays and other emerging digital display
devices have substantial advantages over their traditional analog counterparts,
and markets for these products are beginning to grow rapidly. International Data
Corporation forecasts that worldwide shipments of desktop flat panel monitors
will increase at a 69.3% compounded annual growth rate from 1.4 million units in
1998 to 11.5 million units in 2002.
Display signals are characterized by several important attributes:
resolution, frame refresh rate, scanning format and color depth. Combinations of
these characteristics are called modes, and there are over 100 different modes
used today to display images on PCs and televisions. These modes must be
recognized and processed to produce a high quality image on a display. Display
manufacturers seek display processing solutions that can function effectively
with the large number of existing and emerging signal modes, ensure the
compatibility of new displays with the large installed base of PCs and provide
consumers with plug and play capability.
We offer a family of state-of-the-art digital display processors that
provide highly integrated analog-to-digital conversion, signal reformatting and
color processing capabilities. Our solutions are designed with a common
architecture, configurable software and modular components that can be easily
and rapidly incorporated into digital display devices. We sell our processing
solutions to leading display manufacturers, including Fujitsu and NEC.
INDUSTRY BACKGROUND
Electronic displays have become part of our daily lives as our computing,
communications and entertainment needs are increasingly being met by familiar
technologies, such as personal computers and televisions, and emerging
technologies, such as personal digital assistants, Internet appliances and
touch-screen displays used in retail and industrial settings. Historically, most
desktop PC monitors and all television screens displayed images on a cathode ray
vacuum tube, or CRT. A CRT displays images that are transmitted to it by an
analog signal. The display signal controls a beam of electrons that creates the
image by illuminating phosphorescent dots, or pixels, on the back of the CRT
screen. The quality of the image is a function of the mode of the input signal,
which consists of the following four principal parameters:
- Resolution: the number of horizontal and vertical lines on the display
screen into which the image is divided;
- Frame refresh rate: the number of times per second that the image is
displayed on the screen;
- Scanning format: the order in which the lines comprising the image are
displayed on the screen, either in sequence, known as progressive
scanning format, or alternating, known as interlaced scanning format; and
- Color depth: the number of colors used to display the image.
The emergence of digital displays
Digital flat panel display devices have been developed as an alternative to
traditional analog CRTs. Flat panel displays render images by digitally
switching pixels on or off on the surface of the
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display screen. Flat panel displays offer significant advantages over
traditional CRTs because they have a more compact form factor, generate less
heat, consume less power and produce less radiation. Flat panel displays also
produce images that do not flicker and that are more sharply defined than the
images displayed on CRT monitors. Flat panel displays were first incorporated
into laptop computers and, as panel sizes increased, they were incorporated into
desktop displays. Flat panel displays for PCs, originally deployed primarily in
situations where space was limited, are gaining widespread market acceptance as
prices decline, as manufacturing capacities increase and as manufacturing yields
improve.
The emergence of a significant digital flat panel display market has led PC
manufacturers to introduce PCs that produce both conventional analog as well as
digital display signals. Some PC manufacturers have begun to sell flat panel
displays incorporating the PC into its base, known as all-in-one PCs. The
introduction of digital display signal outputs has also provided manufacturers
of analog CRT monitors with an opportunity to develop new products that
incorporate digital signal processing capabilities into CRTs. These displays,
commonly referred to as digital CRTs, display images using the same technology
employed by traditional analog CRTs but by incorporating internal digital
processing they can have new display features, such as picture-in-picture
display and enhanced compatibility with multiple display signals. By adding
digital signal input features, manufacturers can differentiate digital CRTs from
the highly commoditized, price-sensitive analog CRT displays. Additionally, it
is expected that digital CRTs will be less expensive to manufacture than
traditional CRTs.
The digital television market
Television signals have traditionally been broadcast in analog form and
displayed in an interlaced scanning format on analog television CRTs. Recent
developments in the television industry have mirrored the changes that have
taken place in the PC display market. Traditional analog CRT televisions are
being manufactured in larger sizes, and displays with a progressive scanning
format are being introduced to improve the quality of images on larger screens.
Flat panel and plasma displays, which are digital, have been introduced to offer
the same form factor and image quality advantages as flat panel PC monitors. We
believe the worldwide trend toward broadcasting digital signals will lead to
increasing demand for HDTV sets that can produce higher quality images in
varying aspect ratios, such as the wider format, cinema-style aspect ratio of 16
x 9 in addition to the traditional television-style 4 x 3 aspect ratio.
International Data Corporation forecasts that annual shipments of digital
televisions in the U.S. will grow to 7.2 million units in 2002. Display
processing functionality, which is not currently included in traditional analog
televisions, will increasingly be needed to process HDTV signals as well as
analog signals for display on digital and progressive scanning televisions.
Display processing challenges
Display signals, which can be analog or digital, are generated in numerous
non-compatible modes for both personal computing and television applications.
The challenges of processing a signal to render a high quality image on a
digital display in this environment include:
- Recognizing and properly converting an analog or digital signal type. In
order for a display device to generate an image, the incoming display
signal must match the type accepted by the device. An analog display
device cannot display a digital signal and vice versa. Most PCs produced
today are configured to output analog signals because they are connected
to analog CRTs. The introduction of digital displays requires processors
that are capable of identifying whether the input type is analog or
digital and converting it, if necessary, in real time.
- Reformatting the mode of the input signal. The mode of each input signal,
whether analog or digital, must be reformatted to properly display the
image on the screen. The display processor
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must recognize the signal's mode and process it in real time in order to
match the particular resolution, scanning format, refresh rate and color
depth specifications of the display. If the signal is not correctly
processed, the screen will fail to display an image, or will produce an
image that is distorted, flickers or contains shadows or other flaws.
- Displaying true-to-life colors. Each display device displays colors
differently in response to the same signal. Display processors must
compensate for these different characteristics to ensure consistent
true-to-life color quality. In addition, certain digital display devices
can only display a limited number of colors. In such cases, the display
signal must be specially processed to simulate a full range of colors on
the display screen.
The challenge to display manufacturers
Display manufacturers face significant challenges and opportunities in
responding to developments in the PC and television display markets. The
emergence of new digital display devices and the proliferation of signal modes
increasingly require manufacturers to incorporate more powerful and flexible
display processors into their displays. Displays must be designed to function
with digital signals and remain compatible with the large installed base of
existing PCs and other appliances that transmit analog display signals. The
large number of different signal modes and types, the growing trend towards plug
and play devices in the PC market and the established easy-to-use
characteristics of the television market make it essential that displays operate
properly with minimal consumer configuration or adjustment in order to achieve
widespread market acceptance. At the same time, manufacturers are seeking ways
to take advantage of the capabilities of digital displays by developing
differentiating product features and associated brand recognition, all while
maintaining short design and manufacturing cycles and recognizing cost
constraints.
OUR SOLUTION
Sage is a leading global provider of high performance digital display
processors. Our advanced technology offers state-of-the-art display processing,
highly integrated analog-to-digital conversion, signal reformatting and color
processing capabilities. Our solutions are compatible with all commercially
available display signal modes and display types. We provide manufacturers with
a highly integrated and efficient display processing solution equipped with
custom design features. The principal benefits of our solution include:
Support for all commercially available signal modes and display types. We
provide display processors that enable any input display signal mode to be
displayed on all commercially available digital displays, including flat panel
monitors, flat panel televisions, projection devices, digital CRTs, Internet
appliances and touch-screen displays used in retail and industrial settings. Our
display processors, which incorporate our SureSync and SmartSet algorithm
features, produce high quality images by recognizing the characteristics of the
input signal and automatically reformatting an image as needed, in real time, to
match the type of signal accepted by the device. These features provide optimal
plug and play capabilities between the computing platform and the display
device.
Highly integrated and manufacturable display processing solution. Our
display processors are designed to perform analog-to-digital conversion, mode
detection, reformatting and color depth processing in a highly integrated
semiconductor with associated software. Our processors employ a common
architecture across our family of products. In addition, we provide
software-based design and test tools and offer manufacturers our extensive
system-level design and hardware experience and support. These features of our
products enable manufacturers to reduce the time required to design and
manufacture a wide range of display devices.
Highly customizable products. We support display manufacturers with a suite
of product and screen display configuration software design tools that allow
manufacturers to easily enhance their
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ability to brand their products by facilitating the creation of customized
on-screen interfaces for consumers. Our software tools accelerate display
manufacturers' product development cycles and their time to market. Our display
processors are modular, allowing display manufacturers to add or delete memory
as needed to reduce costs, while minimizing reengineering and redesign.
OUR STRATEGY
Our goal is to be the leading provider of display signal processing
solutions for display manufacturers. Our strategy consists of the following key
elements:
- Offer highly integrated semiconductor solutions compatible with all
signal modes and display types. We intend to provide increasingly
integrated, high performance semiconductor solutions that are fully
compatible with all PC display monitors, televisions, flat panel
monitors, flat panel televisions, projection devices, digital CRTs,
Internet appliances and touch-screen displays in retail and industrial
settings. We plan to develop our products to support digital CRTs and
other emerging digital displays and to design products that are
compatible with all developing industry display signal standards.
- Target leading OEM manufacturers. We will continue to focus our sales
efforts on the leading global display manufacturers. Working with these
customers will allow us to reach a wider number of consumers and helps us
to maintain and enhance our technological capabilities. Securing design
wins with leading manufacturers provides references for our products,
helping to secure future sales to these and other manufacturers.
Furthermore, achieving a broad number of design wins with leading OEMs
creates an opportunity to capitalize on the success of their products. In
addition, these manufacturers have more reliable product development
cycles, better forecasting and greater panel supply.
- Continue to offer OEM customers high quality products and superior levels
of engineering support. We aim to develop the strongest possible customer
relationships by providing OEM manufacturers with easy-to-use solutions
and superior engineering support. We will continue to offer our OEM
customers a range of easy-to-use, custom design tools to simplify their
product design and development processes and provide them with the
ability to differentiate their products through customized features. We
intend to deliver greater value to manufacturers by helping them design
new product features and to bring their products to market more rapidly.
- Maintain technology leadership. We intend to make significant investments
in research and development in order to further develop our display
processing technology. We were the first company to introduce a fully
effective automatic display adjustment feature and the first to integrate
mode detection, reformatting, color depth processing and customized
on-screen displays onto a single display processor. We will also seek to
enter into strategic relationships with companies whose technology is
complementary to ours. For example, we recently entered into a joint
license and development arrangement with Faroudja to develop a display
processor integrating Faroudja's video decoding, deinterlacing and image
enhancement technologies. We expect that the combinations of our
technology with Faroudja's technology will enable us to expand our
semiconductor technology into emerging television and monitor markets.
- Maintain a flexible engineering and manufacturing model. We intend to
maintain our established engineering and design operations in India and
in the U.S., allowing us to access a larger pool of highly educated and
motivated employees. We will continue to reduce our capital requirements
and increase our operating leverage by maintaining a fabless
manufacturing model, which gives us significant operating leverage
without the need for large capital expenditures.
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OUR PRODUCTS
We design and sell display processors for use by manufacturers of digital
display devices. We also sell circuit boards designed around our semiconductors
as turnkey display processing solutions for specific display applications. Our
customers include leading display manufacturers, such as Fujitsu, NEC and Sanyo.
Semiconductor products. We design and sell a family of display processors
to display manufacturers, PC manufacturers and third party subsystem
manufacturers who design and manufacture monitors and PCs on behalf of brand
name companies. Some of the world's leading display and PC manufacturers have
chosen our Cheetah2, Cheetah3 and Cheetah4 processors for use in their products.
Cheetah2, our first mass production product, supports resolutions up to
1,024 x 768 pixels, or XGA, and uses an external analog-to-digital converter, or
ADC. Our new products, Cheetah3 and Cheetah4, are based on the same core design,
and support higher performance resolutions up to 1,280 x 1,024 pixels, or SXGA.
Cheetah3 integrates a ADC and is designed for displays that will accept either
an analog or digital input signal. Cheetah4 is optimized for displays that
accept only digital signals. Cheetah3 and Cheetah4 operate on a common software
platform, enabling our customers to support both products with common
board-level software. All of our products can process television signals using
an external video decoder chip and are compliant with widely used standards,
such as VESA, and emerging display standards, such as DVI. All of our products
include our proprietary SureSync and SmartSet mode recognition and adjustment
technologies, our high
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performance scaling engine and our software-configurable on-screen display
features. The following table illustrates the key features of our display
processors.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PRODUCT NAME SUPPORTED
(DATE OF INTRODUCTION) SIGNAL INPUTS FEATURES AND TECHNOLOGY APPLICATIONS
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Cheetah2 - Analog PC - Maximum display - Analog input monitor
(April 1998) - Digital PC output: - Digital input monitor
- Television 100M pixels per second - Television display
- Computing speed: 800M - All-in-one PC
operations per second
- Technology: 0.35
micron,
3 layer metal
- ---------------------------------------------------------------------------------------------------
Cheetah3 - Analog PC - Internal ADC - Analog input monitor
(February 1999) - Digital PC - Image enhancement - Dual analog and
- Television - Color depth processing digital input
- Dual analog and - Maximum display monitor
digital input output: - Dual analog and
- Dual analog and 135M pixels per second television monitor
television input - Computing speed: 1600M
operations per second
- Technology: 0.35
micron,
4 layer metal
- ---------------------------------------------------------------------------------------------------
Cheetah4 - Digital PC - Image enhancement - Digital input monitor
(March 1999) - Television - Color depth processing - Television display
- Maximum display - All-in-one PC
output:
110M pixels per second
- Computing speed: 1300M
operations per second
- Technology: 0.35
micron,
3 layer metal
- ---------------------------------------------------------------------------------------------------
</TABLE>
Our Cheetah3 display processor provides maximum display output at faster
speeds and can be used in a wider ranger of display devices than most display
processors that are currently available. We believe that our display processors
also offer greater scaling and image enhancement features than those of our
competitors. In addition, we were the first company to develop and make widely
available a display processor that incorporated the auto adjust feature.
We are currently in the process of developing a new line of more integrated
digital display processors. We expect that this new line of processors will
offer enhanced display quality and support resolutions up to 1,600 x 1,200
pixels, or UXGA, and HDTV. We intend to develop a family of derivative
semiconductors and circuit boards built around this core technology. We cannot
assure you that we will successfully develop new products or product
enhancements based on our research and development activities. In addition, we
cannot assure you that, if new products or product enhancements are developed,
any such new product or product enhancements will be developed in time to
capture market opportunities or achieve a significant or substantial level of
acceptance in new and existing markets.
Circuit board products. We design and market both custom and standard
display processing circuit boards, built around our semiconductors, as turnkey
display processing solutions for specific display applications. Our custom
circuit boards address the unique needs of display manufacturers that want to
support several control and output capabilities on a single circuit board. These
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capabilities include video display, touch-screen controls and the ability to
support specialized forms of data input such as credit card or bar code readers.
Our custom circuit boards take advantage of our highly integrated display
processing solution to eliminate the need for multiple cable connections, reduce
physical system dimensions and improve system quality, while lowering overall
system cost. We offer these circuit boards to our OEM customers in optional kit
form. Our standard controller circuit boards provide an effective off-the-shelf
solution to our low volume display OEM customers.
TECHNOLOGY
Processing display signals requires large data streams to be recognized,
sampled, formatted and converted in real time. For example, operating a flat
panel SXGA digital display requires the digital processor to perform more than
1.5 billion operations per second.
The following diagram shows an example of the flow of data though our
Cheetah3 processor and some of the key steps required to generate a digital
display signal from an analog display signal input.
[FLOW CHART]
Our processors convert signals from a broad range of sources into a format
that can be displayed on different display devices with minimal need for
consumers to adjust operating device parameters. To accomplish this, our
processors must identify the input signal type and mode, convert it into a
digital form and then process it to match the display device. Our processors
respond and automatically adjust in real time to changes in the type and mode of
the incoming display signal. We have developed significant proprietary
architecture and design features to support the processes implemented by our
chips. These processes include:
Analog-to-digital conversion. Most PCs and televisions generate analog
display signals. In order to display this signal on a digital screen, the analog
data stream must be correctly identified, rapidly and accurately sampled and
converted to a digital signal with no measurable error in the timing of the
sampling. With our Cheetah3 processor, we have successfully addressed the
significant technical challenges of integrating analog-to-digital conversion
onto a single semiconductor. This enables us to lower costs and improve display
performance.
Mode detection. Our processors are designed to identify the resolution,
scanning format and frame refresh rate of the incoming display signal. Analog
display signals do not contain explicit information about these parameters. Our
SureSync technology measures the frequency of horizontal and vertical
synchronization signals contained within the incoming signal to deduce its mode.
The timing of these signals is not uniform and varies depending upon the
architecture and implementation of the PC graphics subsystem. We regularly
examine and incorporate information about these characteristics into the
software that supports our products, enabling them to detect and synchronize
with the PC graphics subsystems of virtually all manufacturers worldwide.
Spatial processing. Spatial processing, or scaling, is the process of
reformatting the resolution of an image to properly match the resolution of a
display. We have developed several generations of scaling technology that
increase and reduce the size of images as needed using efficient processing
algorithms.
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Temporal processing. Each type of digital display supports a single, fixed
frame refresh rate, requiring adjustment of the flow of data to be matched to
the display device. Typically, the adjustment is performed through the use of
external memory. Our Cheetah3 display processors provide maximum flexibility by
being the first product on the market to provide integrated support for external
frame memory on a single chip and to provide an option to exclude memory, if
desired, to reduce cost.
Color depth processing. Display devices often render the colors of the same
image differently because of variations in technologies and manufacturing
techniques used by different display manufacturers. Our processors incorporate
hardware and software that allows manufacturers to compensate for these
differences and to adjust the image being displayed. In addition, many digital
displays generate far fewer than the 16 million colors which traditional CRTs
are capable of displaying. In the case of certain older flat panel displays,
colors are limited to as few as eight. Our color processing technology simulates
additional colors so that the human eye perceives a far larger number of colors
than are supported by the display device. Our processors also include circuitry
that can enhance the details in the image, compensating for certain losses and
degradation of signal data resulting from the physical transmission of the
analog signals.
Display formatting. Digital displays have differences in their internal
architecture to which a signal must be adapted in order for the image to appear
on the screen. These differences can affect the characteristics of display
processing output signals that operate them. These variations include
differences in the number of bits or information that must be transmitted to the
display at one time and in the format and timing of signals that control certain
display functions. The format of these display signals from our processors is
programmable in software. Our processors can support all available types of
digital displays, including all types of plasma displays, projector devices and
liquid crystal displays, including active and passive matrix. This offers our
customers flexibility because they can change the manufacturing source of a
particular size of panel, or even change the size of the panel, without
redesigning a new display processing circuit board.
Software technology. The operation and internal configuration of our
processors is controlled by embedded software running on the display
manufacturer's circuit board. Our embedded software and easy-to-use software
utilities allow us to offer significant custom design features to display
manufacturers, including the design of the on-screen display user interface. In
addition, our SureSync and Smart-Set technologies enable consumers to optimize
image quality by clicking a single button or setting and are implemented using a
combination of hardware and software.
CUSTOMERS, MARKETING AND TECHNICAL SUPPORT
The digital display manufacturing market is dominated by a few
manufacturers and suppliers. We have achieved initial success in this
concentrated market. Our customers include Fujitsu, GES Singapore PTE. Ltd., Elo
TouchSystems, Korea Computer Incorporated, Lite-On, NEC, NewComm World Co.,
Ltd., Sanyo and Sony Corporation, which each accounted for at least 2.0% of our
revenues for the three months ended September 30, 1999. NEC and Elo TouchSystems
accounted for 29.3% and 19.9%, respectively, of our revenues for the six months
ended September 30, 1999. We do not have purchase contracts with any of our
customers that obligate them to continue to purchase our display processors, and
these customers could stop purchasing our display processors at any time.
As of September 30, 1999, we employed 31 individuals in sales and marketing
and as field applications engineers and maintained relationships with seven
independent regional sales representatives. Our sales and marketing strategy
focuses on achieving design wins from leading OEM display manufacturers. We
market and sell our semiconductor products in the U.S. through distributors and
independent regional sales representatives and in Asia through independent
regional sales representatives in Japan, Korea, Taiwan and elsewhere, with
direct support from our U.S. and Indian offices. We market and sell our circuit
board products in the U.S. through distributors and our
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<PAGE> 41
direct sales personnel, and in Asia through sales representatives, with direct
support from our U.S. and Indian offices. We believe that providing customers
with comprehensive product support is critical to remaining competitive in the
markets we serve. We provide technical support through our sales representatives
and from our office in San Jose, California. We currently provide full-time,
on-site field applications engineers to support major customers in Japan, Korea,
Singapore and Taiwan.
RESEARCH AND DEVELOPMENT
Our future success will depend to a large extent on our ability to rapidly
develop and introduce new products and enhancements to our existing products
that meet emerging industry standards and satisfy changing customer
requirements. We have made and expect to continue to make substantial
investments in research and development and to participate in the development of
new and existing industry standards.
Our research and development has been focused in high speed
analog-to-digital signal display processors and advanced display processing
algorithms. We also conduct research and development in custom semiconductor
design. The majority of our engineers are involved in high speed, mixed signal
integrated circuit design and verification, with the remaining engineers
involved in algorithm development and software and system design. Before
development of a new product commences, our marketing managers work closely with
research and development engineers and customers to develop comprehensive
requirement specifications. In addition, our marketing managers and engineers
review the applicable industry standards and incorporate desired changes into
new product specifications. After a product is designed and becomes commercially
available, our engineers continue to work with various customers on specific
design issues to understand emerging requirements that may be incorporated into
future product generations or product upgrades.
In July 1999, we entered into a joint license and development agreement
with Faroudja under which we obtained a license to develop semiconductors using
Faroudja's video decoding, deinterlacing and image enhancement technologies.
Under the terms of the agreement, we may develop display processors that are
intended to expand our semiconductor technology into emerging television and
monitor markets. Faroudja may not transfer the licensed technology to others
until October 27, 2000 or eight months after we have the technology or ten
months following the delivery of the technology (depending upon our achieving
certain development milestones). The agreement will continue perpetually until
terminated by a breach by either party. We are prohibited from developing, for
use in products licensed, sold or distributed by us to third parties or for use
in products licensed, sold or distributed through a private label, any circuit
board video display processor that incorporates a licensed chip and is intended
to be used as a standalone video display processor similar to certain Faroudja
products. Under the terms of the license agreement, we are required to provide
Faroudja with certain favorable pricing terms in connection with Faroudja's
purchase of products developed by us incorporating their technology. We are also
required to pay royalties to Faroudja on sales of our semiconductors
incorporating their technology. Faroudja may terminate the agreement if we fail
to perform or violate the terms of the agreement and fail to cure such violation
within 30 days of Faroudja's written notice thereof. We issued shares of our
common stock to Faroudja in connection with the grant of the license under the
agreement.
Our research and development expenditures totaled $2.3 million in the
fiscal year ended March 31, 1999 and $1.6 million in the fiscal year ended March
31, 1998. Research and development expenses consist primarily of salaries and
related costs of employees engaged in research, design, and development
activities. In addition, expenses for outside engineering consultants and NRE
are included in research and development expenses. As of September 30, 1999,
there were 34 employees engaged in research and development. We perform our
research and development activities at our headquarters in San Jose, California
and at our facility in Bangalore, India. As of September 30, 1999, 32 of our
employees were based at our facility in India.
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<PAGE> 42
MANUFACTURING
We have adopted a fabless semiconductor manufacturing model and outsource
all of our semiconductor manufacturing, assembly and testing. This approach
allows us to focus our resources on the design, development and marketing of our
products and significantly reduces our capital requirements. As of September 30,
1999, we had a staff of five operations personnel responsible for inventory
shipping, purchasing and quality control. We subcontract all of our
semiconductor manufacturing to Fujitsu Microelectronics and Kawasaki LSI U.S.A..
All of our products have been and are expected to continue to be single-source
manufactured for the foreseeable future. Currently, we must place orders three
to four months in advance of expected delivery. We maintain our inventory levels
based on current lead times from foundries plus safety stock to account for
fluctuations in demand that we anticipate on the basis of our customers'
forecasts.
If we lose or decide to change a key supplier or foundry, it could take
several months to qualify a new supplier or foundry. Changing or qualifying a
new supplier or foundry, would likely involve delay and expenses, resulting in
foregone revenues, reduced operating margins and possible detriment to customer
relationships. Since we place our orders on a purchase order basis and do not
have a long term volume purchase agreement with any of our existing suppliers,
any of these suppliers may allocate capacity to the production of other products
while reducing deliveries to us on short notice. While we believe that we
currently have good relationships with our foundries and adequate capacity to
support our current sales levels, there can be no assurance that adequate
foundry capacity will be available in the future on acceptable terms, if at all.
Our semiconductor products are currently fabricated using a range of
process technologies. We must continuously develop our products using new
sub-micron technologies to remain competitive on a cost and performance basis.
Migrating to new technologies is a challenging task requiring new design skills,
methods and tools. We believe that the transition of our products to smaller
geometries will be important for us to remain competitive. Our business could be
harmed if any transition is delayed or inefficiently implemented.
INTELLECTUAL PROPERTY
We rely on a combination of non-disclosure agreements and copyright,
trademark and trade secret laws to protect the algorithms, design and
architecture of our semiconductor technology. We currently have four pending
applications for patents filed with the U.S. Patent and Trademark Office for
protection of certain of our significant technologies, including our video
adapter circuit, on-screen user interface, dual spatial and temporal scaling
system, video signal processing and channel equalization technology. In the
future, we expect to seek patent protection for our technologies as necessary.
Any future patents may not be granted and if granted may be invalidated,
circumvented, challenged or licensed to others.
To supplement the technologies that we develop internally, we have licensed
rights to use certain patents held by third parties, and we may license
additional technology rights in the future. In July 1999, we licensed certain
patents and trade secrets from Faroudja relating to its video decoding,
deinterlacing and image enhancement technologies. If the agreement is terminated
due to a material breach by us, the license of technology under the agreement
will terminate. In this event, we would be required to exclude the licensed
technology from our existing and future product lines.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. We have certain
indemnification obligations with respect to the infringement of third-party
intellectual property rights. There is no intellectual property litigation
currently pending against us. However, we may from time to time receive
notifications of claims that we may be infringing patents or other intellectual
property rights owned by third parties. If it is necessary or desirable, we may
seek licenses under those patents or intellectual property rights.
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However, we cannot be sure that licenses will be offered or that the terms of
any offered licenses will be acceptable to us.
COMPETITION
The display signal processing industry is very competitive. The markets in
which we operate are characterized by rapid technological change, evolving
industry standards and declining average selling prices, and we expect them to
become increasingly competitive. We believe that the key competitive factors in
our markets are product design, performance, price, features, size, reliability,
time to market and customer support. Our ability to successfully compete in our
target markets also depends on our continued success in the development of high
performance display processors at optimal price points. In addition, our
competitiveness may be affected by the development of competing technologies,
the emergence of new industry standards and consumer demand for specific display
features on the display device. Failure to monitor and effectively respond to
these trends could reduce demand for our products.
Our competitors include a range of diversified electronic and semiconductor
companies that offer display processing products. In particular, we compete
against Arithmos, Genesis, Pixelworks and Silicon Image. In some instances, we
also compete with internally designed processing solutions, developed by OEM
display manufacturers. In the future, our current or potential customers may
also develop their own proprietary display processors and become our
competitors. In addition, start-up companies that are seeking to capitalize on
business opportunities as a result of the shift from analog to digital
technology may seek to compete in our markets. Our competitors may develop
advanced technologies enabling them to offer more cost-effective and higher
quality solutions to OEM customers than those offered by us. Increased
competition could harm our business, financial condition and results of
operations by, for example, increasing pressure on our profit margins or causing
us to lose sales opportunities.
EMPLOYEES
As of September 30, 1999, we employed 74 full-time employees, including 34
in research and development, five in operations, 31 in sales and marketing and
four in general and administration. Our employees are not represented by a
collective bargaining organization, and we believe that our relations with our
employees are good.
FACILITIES
We maintain a 9,300 square foot facility in San Jose, California, pursuant
to a sublease that expires in September 2000. This facility comprises our
headquarters and includes our research and development, sales and marketing and
administration departments. We also maintain a facility in Bangalore, India
pursuant to a lease that will expire in March 2000. We believe that our existing
facilities are adequate for our current needs and that additional space
sufficient to meet our needs for the foreseeable future will be available on
reasonable terms.
LEGAL PROCEEDINGS
As of September 30, 1999, we are not a party to any legal proceeding.
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<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Sage, and their ages as of August
23, 1999, are as follows:
<TABLE>
<CAPTION>
NAME(1) AGE POSITION
------- --- --------
<S> <C> <C>
Chandrashekar M. Reddy(2)(3).................... 39 President, Chief Executive Officer and
Director
Simon P. Westbrook.............................. 50 Chief Financial Officer, Secretary and
Treasurer
Arun Johary..................................... 41 Vice President of Engineering and
Chief Technical Officer
Vijay P. Desai.................................. 39 Vice President and General Manager,
Systems Business Unit
Pratap G. Reddy................................. 40 Vice President and General Manager, IC
Business Unit
Michael A. Gumport(3)........................... 47 Director
N. Damodar Reddy(2)............................. 61 Director
Kenneth Tai(2)(3)............................... 49 Director
</TABLE>
- -------------------------
(1) There is no familial relationship between Chandrashekar M. Reddy, N. Damodar
Reddy or Pratap G. Reddy.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Chandrashekar M. Reddy has served as President and Chief Executive Officer
since our inception. From January 1986 to January 1995, Mr. Reddy held several
design and program management positions at Intel Corporation. Mr. Reddy received
a BS in Electrical Engineering from the Indian Institute of Technology and an MS
in Electrical Engineering from the University of Wisconsin, Madison.
Simon P. Westbrook has served as Chief Financial Officer, Secretary and
Treasurer of Sage since April 1997. From March 1996 to January 1997, Mr.
Westbrook was Chief Financial Officer of Virtual I-O, Inc. From February 1992 to
March 1996, Mr. Westbrook was Controller at Creative Technology, Ltd. Mr.
Westbrook received an MA degree in Economics from Trinity College, Cambridge
University.
Arun Johary has served as Vice President of Engineering and Chief Technical
Officer of Sage since April 1997. From January 1995 to January 1997, Mr. Johary
was a Vice President for Technology at Armedia Inc., a company Mr. Johary
co-founded in 1995, that developed high-performance MPEG-2 decoder chips for a
large Japanese broadcast equipment company. From June 1986 to January 1995, Mr.
Johary served as a Senior Engineer of Graphics and Multimedia Architecture at
Chips & Technologies, Inc. From August 1982 to June 1986, Mr. Johary was an
Applications Engineer at Intel Corporation. Mr. Johary received a BS in
Electrical Engineering from the Indian Institute of Technology and an MS in
Electrical Engineering from the University of Southern California.
Vijay P. Desai has served as Vice President and General Manager, Systems
Business Unit, of Sage since August 1996. From October 1989 to August 1996, Mr.
Desai held a business development and management position at Sharp Electronics.
From September 1983 to October 1989, Mr. Desai held several technical sales and
marketing positions at Intel Corporation, AT&T Corporation and Siemens
Corporation. Mr. Desai received a BS in Electrical Engineering from the
University Baroda in India, a M.S. in Computer Science from Stevens Institute of
Technology and an MBA from the University of Phoenix.
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<PAGE> 45
Pratap G. Reddy has served as Vice President and General Manager, IC
Business Unit, of Sage since April 1998. From June 1983 to March 1988, Mr. Reddy
held a design and management position at Data General, Inc. From March 1988 to
March 1998, Mr. Reddy served as the Group Director for Management and Business
Development at Synopsys, Inc. Mr. Reddy received a BS degree in Electrical
Engineering from Kakatiya University and an MS degree in Engineering Management
from the University of Iowa.
Michael A. Gumport has served as a Director of Sage since October 1996.
Since September 1998, Mr. Gumport has been the Chief Financial Officer of FED
Corporation, an optoelectronics company. From February 1990 to September 1998,
Mr. Gumport served as a Senior Vice President for Semiconductor Equity Research
at Lehman Brothers. Mr. Gumport received a BA degree from Amherst College and an
MBA from Columbia University.
N. Damodar Reddy has served as a Director of Sage since October 1996. Since
April 1985, Mr. Reddy has served as the President of Alliance Semiconductor. Mr.
Reddy received an MS in Electrical Engineering from North Dakota State
University and an MBA from the University of Santa Clara.
Kenneth Tai has served as a Director of Sage since August 1999. Since April
1998 Mr. Tai has served as the Chairman of Digitimes Publications, Inc., and
since March 1996 Mr. Tai has also served as the Chairman of Investar Capital,
Inc. From April 1993 to December 1995, Mr. Tai served as the Vice Chairman of
UMAX (USA), Inc. Prior to joining UMAX, Mr. Tai was one of the co-founders of
Acer Group where he served as Vice President of Worldwide Sales and Marketing as
well as President of the Acer Group USA. Mr. Tai received a BS degree in
Electrical Engineering from National Chiao Tung University and an MBA from
Tamkang University.
BOARD OF DIRECTORS AND COMMITTEES
Our bylaws require that our board of directors be comprised of between
three and five members. There are currently four directors on our board.
Directors are elected at our annual meeting of stockholders by a vote of the
holders of a majority of the voting power represented at such meeting. A
director may be re-elected for subsequent terms. The board of directors has a
compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors is responsible for reviewing and recommending to the board regarding
our compensation policies and all forms of compensation to be provided to our
executive officers and directors, including annual salaries, bonuses, stock
option and other incentive compensation arrangements. The compensation committee
also administers our 1997 Stock Plan. The current members of the compensation
committee are Chandrashekar M. Reddy, Kenneth Tai and N. Damodar Reddy.
Audit Committee. The audit committee of the board of directors is
responsible for reviewing and monitoring our corporate financial reporting and
external audits, including our internal control functions, the results and scope
of the annual audit and other services provided by our independent auditors and
our compliance with legal matters that have a significant impact on our
financial reports. The audit committee also consults with our management and our
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiate inquiries into aspects of our
financial affairs. The current members of our audit committee are Chandrashekar
M. Reddy, Kenneth Tai and Michael A. Gumport.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Our non-employee directors do not receive cash compensation for their
service as directors. On appointment, each non-employee director received a
one-time grant of options to purchase shares of
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our common stock in amounts ranging from 30,333 to 31,666 shares. In each case,
the options vest over a four-year period. See "Stock Option Plans -- 1997 Stock
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of Chandrashekar M.
Reddy, Kenneth Tai and N. Damodar Reddy. Chandrashekar M. Reddy also serves as
our President and Chief Executive Officer. Prior to the establishment of the
compensation committee on March 18, 1999, the board of directors as a whole made
all decisions relating to executive compensation. For a description of the
transactions between us and members of the compensation committee, and entities
affiliated with such members, see the transactions described under the heading
"Certain Transactions" in this prospectus. None of our executive officers serves
as a member of the board of directors or the compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee. There is no familial relationship
between Chandrashekar M. Reddy, N. Damodar Reddy or Pratap G. Reddy.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal year
ended March 31, 1999 paid by us for the services provided by our President and
Chief Executive Officer and the other executive officers whose total salary and
bonus for such fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- -------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Chandrashekar M. Reddy
President and Chief Executive Officer... $140,000 $123,278 -- $107,211(1)
Simon P. Westbrook
Chief Financial Officer,
Secretary and Treasurer................. 125,000 96,325 -- --
Arun Johary
Vice President of Engineering and
Chief Technical Officer................. 135,000 153,227 48,333 --
Vijay P. Desai
Vice President and General Manager,
Systems Business Unit................... 125,000 -- 47,667 11,844(1)
Pratap G. Reddy(2)
Vice President and General Manager IC
Business Unit........................... 125,000 70,352 72,333 --
</TABLE>
- -------------------------
(1) Includes amounts paid in fiscal year 1999 as salary deferred in fiscal years
1996 and 1997.
(2) Pratap Reddy started employment with us in April 1998.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended March 31, 1999 to each of our executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(4)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ----------------------------
NAME GRANTED(1) FISCAL 1999(2) PRICE(3) DATE 5% 10%
---- ---------- --------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Chandrashekar M.
Reddy................ -- --% $ -- -- $ -- $ --
Simon P. Westbrook..... -- -- -- -- -- --
Aron Johary............ -- -- -- -- -- --
Vijay P. Desai......... -- -- -- -- -- --
Pratap G. Reddy........ 64,000 4.27% 0.564 04/01/08 22,656 65,280
</TABLE>
- -------------------------
(1) Each of the options vested as to 25% of the shares on April 1, 1999 and
2.08% shall vest monthly over the following three years thereafter.
(2) Based on a total of 306,181 option shares granted to our employees under our
1997 Stock Plan during fiscal year 1999.
(3) The exercise price was equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. The exercise price
may be paid in cash or through a cashless exercise procedure involving a
same-day sale of the purchased shares.
(4) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the depreciated price.
AGGREGATE OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding options that were
exercised by the executive officers during fiscal year 1999 and the number and
value of unexercised, in the money options, at June 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF
UNEXERCISED OPTIONS UNEXERCISED IN-THE-
HELD AT MONEY OPTIONS HELD AT
SHARES JUNE 30, 1999(1) JUNE 30, 1999(2)
ACQUIRED ON VALUE --------------------- ---------------------
NAME EXERCISED(1) REALIZED($) VESTED UNVESTED VESTED UNVESTED
---- ------------ ----------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chandrashekar M. Reddy....... 160,666 $ -- -- -- $ -- $ --
Simon P. Westbrook........... 149,000 -- -- -- -- --
Arun Johary.................. 200,000 -- -- 48,333 -- 552,451
Vijay P. Desai............... -- -- 16,881 30,785 192,957 351,873
Pratap G. Reddy.............. -- -- 25,784 46,548 294,719 532,051
</TABLE>
- -------------------------
(1) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options may be repurchased by us at the
original exercise price paid per share, if the optionee ceases service with
us before vesting in such shares. The heading Vested refers to
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<PAGE> 48
shares that are no longer subject to repurchase. The heading Unvested refers
to shares subject to repurchase as of June 30, 1999.
(2) Based on the fair market value of our common stock as determined by our
board of directors as of July 31, 1999 of $12.00 per share as estimated at
the time, less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
Stock Option Plans
Our 1997 Stock Plan was approved our board of directors and our
stockholders on November 4, 1997. The 1997 Stock Plan permits the grant of
securities of Sage, including options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1984, as amended, or
the Code, and nonqualified stock options to employees, officers, directors,
independent contractors and consultants; provided, however that incentive stock
options may be granted only to our employees. As of September 30, 1999, options
to purchase 643,454 shares of common stock granted under the 1997 Stock Plan had
been exercised, option to purchase 1,016,095 shares of common stock were
outstanding and options to purchase 578,782 shares of common stock remained
available for grant.
The board of directors or a committee designated by the board or the
administrator is authorized to administer the 1997 Stock Plan, including the
selection of persons to whom options may be granted and the interpretation and
implementation of the 1997 Stock Plan. Options granted under the 1997 Stock Plan
will vest and become exercisable as determined by the administrator at the time
of the option grant. The term of each option will be as determined by the
administrator; provided, however, that the maximum term of an option granted
under the 1997 Stock Plan is ten years (five years in the case of an incentive
stock option granted to a 10% stockholder). The aggregate fair market value, on
the date of grant, of our common stock for which incentive stock options are
exercisable for the first time by an employee during any calendar year may not
exceed $100,000 and such excess shall be treated as nonstatutory stock options.
The exercise price of each option granted under the 1997 Stock Plan shall be as
set forth in the applicable agreement, but shall not, in the case of an
incentive stock option that is granted to an employee who owns stock
representing more than 10% of the voting power, be less than 110% of the fair
market value, or granted to any other employee, be less than 85% of the fair
market value, in the case of a nonqualified stock option that is granted to a
person who owns stock representing more than 10% of the voting power, be less
than the 110% of the fair market value, or granted to any other person, be less
than 100% of the fair market value. In the event of a sale of all our assets or
merger with or into another corporation, all of the options granted under the
1997 Stock Plan will terminate unless assumed or substituted. The 1997 Stock
Plan may be amended at any time by the board of directors, although certain
amendments require stockholder approval. The 1997 Stock Plan will terminate in
November 2007 unless earlier terminated by the Board.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan, which is expected to be approved by
our board of directors and by our stockholders in October 1999, is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Code and
to provide our employees with an opportunity to purchase common stock through
payroll deductions.
Our board of directors or a committee designated by the board from time to
time shall grant to eligible employees the right to participate in an offering
of common stock under the plan during certain offering periods. We expect that
on the first day of each offer period, a participating employee will be granted
purchase rights which are a form of option to be automatically exercised on the
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<PAGE> 49
forthcoming exercise dates within the offer period during which deductions will
be made from the pay of the participants. When a purchase right is exercised,
the participant's withheld salary will be used to purchase shares of our common
stock. The price per share at which our shares of common stock are to be
purchased under our employee stock purchase plan during any offering period will
be the lesser of:
- 85% of the fair market value of our common stock on the date of the grant
of the option (the commencement of the offer period); or
- 85% of the fair market value of our common stock on the exercise date.
All our employees whose customary employment is for more than five months in any
calendar year and more than 20 hours per week are eligible to participate.
Employees subject to the rules or laws of a foreign jurisdiction that prohibit
or make impractical the participation of such individuals in the plan will not
be eligible to participate. Certain additional limitations on the amount of
common stock which may be purchased during any calendar year are imposed by the
Code.
Our employee stock purchase plan will be administered by our board of
directors or a committee designated by our board, which will have the authority
to administer our employee stock purchase plan and to resolve all questions
relating to its administration.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of such individual's fiduciary duties as a director except for liability:
- for any breach of such director's duty of loyalty to us or to you, our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases as
provided in Section 174 of the Delaware General Corporation Law; or
- for any transaction from which a director derives an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our officers, employees and other agents to the full
extent permitted by law and in excess of that expressly permitted by Section 145
of the DGCL, as authorized in our certificate of incorporation.
We believe that indemnification under our bylaws covers at least negligence
and gross negligence on the part of an indemnified party. Our bylaws also permit
us to advance expenses incurred by an indemnified party in connection with the
defenses of any action or proceeding arising out of such party's status or
service for us as a director, officer or employee or other agent upon an
undertaking by such party to repay such advances if it is ultimately determined
that such party is not entitled to indemnification except that any agent with
respect to such expenses shall be authorized by the board of directors.
In addition to indemnification provided for in our charter documents, upon
the closing of this offering, we will have entered into agreements to indemnify
our directors and officers. To the fullest extent permitted by the DGCL, these
agreements, among other things, provide for the indemnification of our directors
and officers for some of the expenses, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding, including any action by us or in the right of the company, arising
out of person's services as one of
45
<PAGE> 50
our directors or officers, any of our subsidiaries or any other company or
enterprise to which such person provides services at our request. Furthermore,
we plan to purchase and maintain insurance on behalf of our directors and
officers to insure them against liabilities that they may incur in their
capacities as or arising out of their status as directors and officers. We
believe that these provisions and agreements will assist us in attracting and
retaining qualified persons to serve as directors and officers.
At present we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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<PAGE> 51
CERTAIN TRANSACTIONS
Since April 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we or any of our
subsidiaries was or is to be party in which the amount involved exceeded or will
exceed $60,000 and in which any director, executive officer, holder of more than
5% of our capital stock or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest, other
than compensation agreements and other arrangements described below or under the
heading "Management" in this prospectus.
RELATIONSHIP WITH OTHER INVESTORS
Private Placement Transactions
Since our inception, we have issued certain shares of our preferred stock
to directors, executive officers and 5% stockholders in the private placement
transactions described below:
- an aggregate of 886,666 shares of Series A preferred stock at $0.564 per
share on September 20, 1996 to investors including 366,916 shares to N.
Damodar Reddy and 129,500 shares to Michael A. Gumport; and
- an aggregate of 1,534,962 shares of Series D preferred stock at $3.861
per share from May 1, 1998 to August 31, 1998 to investors, including
647,500 shares to entities affiliated with the Investar Group.
We also issued an aggregate of 312,333 shares of common stock for $3.00 per
share in a private placement of shares in 1997, including 28,666 shares of
common stock to Chandrashekar M. Reddy on June 30, 1997.
From May 1, 1998 to May 15, 1998 we issued warrants to purchase an
aggregate of 166,192 shares of Series D preferred stock at an exercise price of
$3.861 to investors, including entities affiliated with the Investar Group.
These warrants will terminate upon the closing of the sale of common stock
offered in this offering, if not exercised on or before the time of closing.
Investors' Rights Agreements
Each of the Series D and Series E investors and Faroudja Laboratories, Inc.
acquired the following registration rights:
- two demands for registration at any time after six months following the
consummation of this offering. This demand registration right may be made
by the holders that own at least 20% of the registrable securities. If
our board of directors determines in good faith that the demand
registration would be seriously detrimental to us, we are entitled to
postpone the filing of the registration statement for a period not to
exceed 120 days, provided that we may not utilize this right more than
once in any twelve-month period;
- piggyback registration rights, if we propose to register any securities
under the Securities Act in connection with any public offering of our
securities other than a registration relating solely to the sale of
securities to participants in our stock plan or transaction covered by
Rule 145 under the Securities Act, a registration in which the stock
being registered is common stock issuable upon conversion of debt
securities which are also being registered, or any registration on any
form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale
of the registrable securities, subject to quantity limitations determined
by underwriters if the offering involves an underwriting; and
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<PAGE> 52
- demand registration rights at any time after we become eligible to
register our securities on Form S-3, provided, among other limitations,
that the proposed aggregate price to the public is at least $500,000 and
that we have not effected two of these registrations in any twelve-month
period preceding the date of such request. This demand registration right
may be made by the holders of Series D and Series E preferred stock, as
the case may be, that own at least 10% of the shares of common stock into
which such preferred stock converts, or by Faroudja Laboratories, Inc.
Except for expenses incurred in connection with a registration of common
stock on Form S-3, which will be borne pro rata by the participants in the Form
S-3 registration, we have agreed to bear all fees, costs and expenses of these
registrations, other than underwriting discounts and commissions. We have also
agreed, to the extent permitted by law, to indemnify each of the Series D and
Series E investors and Faroudja Laboratories, Inc. against some liabilities in
connection with the offering of the shares, including liabilities arising under
the Securities Act.
The registration rights of each of the Series D and Series E investors and
Faroudja Laboratories, Inc. terminate on the earlier of;
- the fourth anniversary of the date of this offering; or
- the date when the shares held by them may be sold under Rule 144 or
another similar exemption under the Securities Act during any three-month
period without registration.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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<PAGE> 53
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of August 19, 1999, by the following individuals or
groups:
- each person or entity who is known by us to own beneficially more than 5%
of the outstanding shares of our common stock;
- each of our executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o Sage, Inc., 2460 North First Street, Suite 100, San Jose,
California 95131. Except as otherwise indicated, and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown held by
them.
To the extent that any shares of common stock are issued upon exercise of
options, warrants or other rights that are presently outstanding or granted in
the future or reserved for future issuance under our stock plans, there will be
further dilution to new public investors. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of our common stock
subject to options that are presently exercisable or exercisable within 60 days
of August 19, 1999 are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the percentage of
ownership of such persons but are not treated as outstanding for the purpose of
computing the percentage of any other person.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF SHARES OF COMMON STOCK BENEFICIALLY OWNED AS OF AUGUST 19, 1999
---------------------------------------------------------------------------------------------
PERCENT OF
SHARES SUBJECT TO SHARES ISSUABLE OUTSTANDING SHARES
A RIGHT OF PURSUANT TO OPTIONS ----------------------
OUTSTANDING SHARES REPURCHASE AS OF EXERCISABLE WITHIN 60 DAYS BEFORE THE AFTER THE
OF COMMON STOCK AUGUST 19, 1999(2) OF AUGUST 19, 1999 OFFERING OFFERING
------------------ ------------------ -------------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Entities affiliated with
Investar Group(1)........ 848,968 -- -- 12.9% 8.5%
DIRECTORS AND EXECUTIVE
OFFICERS:
Chandrashekar M. Reddy..... 905,304 -- -- 13.8% 9.2%
Simon P. Westbrook......... 157,236 70,565 -- 2.4% 1.6%
Arun Johary................ 204,836 107,205 -- 3.1% 2.1%
Vijay P. Desai............. 353,194 54,028 19,861 5.4% 3.6%
Pratap G. Reddy............ 362,965 54,028 32,565 5.5% 3.7%
N. Damodar Reddy........... 412,863 -- 29,280 6.3% 4.2%
Michael A. Gumport......... 274,641 -- 30,587 4.1% 2.8%
Kenneth Tai(1)............. 848,968 -- -- 12.9% 8.5%
All executive officers and
directors as a group (8
persons)................. 2,671,039 -- -- 53.7% 27.2%
</TABLE>
- -------------------------
(1) Includes 1,388,500 shares and 28,321 shares subject to warrants exercisable
within 60 days of August 19, 1999 held by Investar Semiconductor Development
Fund, Inc., 129,500 shares and 9,442 shares subject to warrants within 60
days of August 19, 1999 held by Investar Excelsus Venture Capital
(International) Inc., 129,500 shares and 9,442 shares subject to warrants
within 60 days of August 19, 1999 held by Forefront Venture Partners, L.P.
and 129,500 shares and 9,440 shares subject to warrants within 60 days of
August 19, 1999 held by Investar Dayspring
49
<PAGE> 54
Venture Capital, Inc. The address of Investar Group is Room 1201, TWTC
International Trade Building, 12F, 333 Keelung Rd., Sec. 1, Taipei, Taiwan,
Republic of China. Investar Capital, Inc. retains voting and management
control of Investar Group. Kenneth Tai and Herbert Chang retain voting and
management control of Investar Capital, Inc.
(2) Shares of common stock issued under a stock repurchase agreement under which
we retained the right to repurchase those shares at a per share purchase
price equal to the original per share purchase price if the holder's
employment is terminated.
50
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. Upon consummation of this offering, no shares of preferred
stock and 9,805,795 shares of common stock (10,255,795 shares if the
underwriters' over-allotment option is exercised in full) will be outstanding.
The following summary is qualified in its entirety by reference to our
certificate of incorporation and Bylaws, copies of which are filed as exhibits
to the registration statement of which this prospectus is a part.
Under our 1997 Stock Plan, 578,782 shares of common stock have been
reserved for issuance and options to purchase 1,016,095 shares were outstanding
as of September 30, 1999.
COMMON STOCK
As of September 30, 1999, there were 3,622,553 shares of our common stock
outstanding held of record by approximately 57 stockholders, not including
3,183,242 shares that will be issued upon the automatic conversion of the
outstanding shares of our preferred stock into common stock upon the closing of
the offering. As of September 30, 1999, 578,782 shares of our common stock were
reserved for issuance pursuant to the 1997 Stock Plan. Upon completion of the
offering, there will be 9,805,795 shares of common stock outstanding.
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any of our outstanding preferred stock, the holders of our common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefor. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of Sage, the holders of our common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. Our common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to our common stock. All
outstanding shares of our common stock are fully paid and nonassessable, and the
shares of our common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Effective at such time and pursuant to our certificate of
incorporation, the board of directors will have the authority, without further
action by the stockholders, to issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of Sage
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of our common stock. The issuance of preferred
stock with voting and conversion rights may have the effect of decreasing the
market price of our common stock, and may adversely affect the voting power of
the holders of our common stock, including the loss of voting control to others.
At present, we have no plans to issue any shares of preferred stock.
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<PAGE> 56
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS; SECTION
203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law, as
amended ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include:
- any merger or consolidation involving the corporation or any
majority-owned subsidiary of the corporation and any other person or
entity;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder;
- any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any
stock of the corporation to the interested stockholder;
- any transaction involving the corporation or any majority-owned
subsidiary of the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the
corporation or any majority-owned subsidiary of the corporation
beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any majority-owned subsidiary of the
corporation. In general, Section 203 defines an interested stockholder as
any entity or person beneficially owning 15% or more or the outstanding
voting stock of the corporation and any entity or person affiliated with
or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Chase Mellon
Shareholder Services. The transfer agent's address is 400 South Hope Street, 4th
Floor, Los Angeles, California and its telephone number is (213) 553-9730.
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurance that a significant public market for our
common shares will develop or be sustained after this offering has been
completed. The sale of substantial numbers of common shares in the public
market, or the possibility of such a sale, could adversely affect prevailing
market prices for our common shares. Upon completion of this offering, there
will be 9,805,795 shares of our common stock outstanding. This assumes
conversion of all outstanding shares of our preferred stock, the surrender for
shares of our common stock of all outstanding warranties to purchase common
stock, no exercise of the underwriters' over-allotment option and no exercise of
outstanding compensatory stock options under our option plans. Of such shares,
the 3,000,000 shares sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares held by our "affiliates", as that term is defined by the Securities Act,
which shares will be subject to the resale limitations of Rule 144 adopted under
the Securities Act.
All of our officers, directors and all other stockholders have agreed not
to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the common stock until 180 days after the offering. BancBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
BancBoston Robertson Stephens Inc. currently has no plans to release any portion
of the securities subject to lock-up agreements. As a result of these
contractual restrictions and the provisions of Rules 144(k), 144 and 701, the
restricted shares will be available for sale in the public market as follows:
- no shares will be eligible for immediate sale on the date of this
Prospectus;
- no shares will be eligible for sale 90 days after the date of this
Prospectus; and
- approximately 8,620,844 shares will be eligible for sale 180 days after
the date of the offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person or persons whose shares are aggregated, who owns shares
that were purchased from us or any affiliate at least one year previously
(including a person who may be deemed an affiliate) is entitled to sell within
any three-month period that a number of shares that does not exceed the greater
of (a) 1% of the then outstanding shares of our common stock (93,940 shares
immediately after the offering) or (b) the average weekly trading volume of our
common stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about us. Any person (or persons whose shares are aggregated) who is
not deemed to have been our affiliate at any time during the 90 days preceding a
sale, and who owns shares within the definition of "restricted securities" under
Rule 144 under the Securities Act that were purchased from us (or any affiliate)
at least two years previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisers prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934 pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to typical
compensatory stock options granted by an issuer before the issuer becomes
subject to the
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<PAGE> 58
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options, including exercises after the date of this prospectus.
Securities issued in reliance on Rule 701 are restricted securities and
beginning 90 days after the date of this prospectus, may be sold:
- by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144; and
- by affiliates under Rule 144 without compliance with its one-year holding
period requirement.
After the offering, the holders of 2,029,295 shares of our common stock or
their respective transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates)
immediately upon the effectiveness of such registration.
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<PAGE> 59
UNDERWRITING
The underwriters name below, acting through their representatives,
BancBoston Robertson Stephens Inc., Prudential Securities Incorporated and
Needham & Company, Inc. have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Prudential Securities Incorporated..........................
Needham & Company, Inc. ....................................
---------
Total............................................. 3,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession not in
excess of per share, of which may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
Over-Allotment Option. We have granted to the underwriters an option
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock at the same price per
share as we will receive for the 3,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 3,000,000 shares offered by this prospectus. If purchased, the additional
shares will be sold by the underwriters on the same terms as those on which the
3,000,000 shares are being sold. We will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of
3,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise of full exercise by the underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
PER WITHOUT WITH
SHARE OPTION OPTION
-------- -------- --------
<S> <C> <C> <C>
Public offering price.................. $ $ $
Underwriting discounts and
commissions.......................... $ $ $
Proceeds, before expenses, to us....... $ $ $
</TABLE>
The expenses of the offering are estimated at $1,000,000 and are payable
entirely by us. BancBoston Robertson Stephens Inc. expects to deliver the shares
of common stock to purchasers on November , 1999.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of representation
and warranties contained in the underwriting agreement.
Future Sales. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with
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<PAGE> 60
respect to any shares of common stock, any options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period. In addition, we have generally agreed that, during the 180-day
lock-up period, we will not, without the prior written consent of BancBoston
Robertson Stephens, Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the 180-day lock-up period or (b) issue,
sell, contract to sell or otherwise dispose of, any shares of common stock, any
options or warrants to purchase any shares of common stock, or any securities
convertible into, exercisable for or exchangeable for shares of common stock,
other than our sale of shares in the offering, our issuance of common stock upon
the exercise of currently outstanding options and warrants, and our issuance of
incentive awards under our stock incentive plans. See "Shares Eligible for
Future Sale."
Directed Shares. At our request, the underwriters will reserve up to
150,000 shares of common stock to be issued by us and offered hereby for sale,
at the initial public offering price, to directors, officers, employees,
business associates and related persons of Sage. The number of shares of common
stock available for sale to the general public will be reduced to the extent
that such individuals purchase all or a portion of these reserved shares. Any
reserved shares which are not purchased will be offered by the underwriters to
the general public on the same basis as the shares of common stock offered
hereby.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. Among the factors to be
considered in these negotiations were prevailing market conditions, our
financial information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Stabilization. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A stabilizing bid is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A syndicate covering
transaction is the bid for or purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A penalty bid is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction and has therefore not been
effectively placed by the underwriter or syndicate member. The representatives
have advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
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<PAGE> 61
LEGAL MATTERS
The validity of the shares of our common stock being offered hereby will be
passed upon for us by Morrison & Foerster LLP, San Francisco, California.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Brobeck Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements as of March 31, 1998 and 1999, and
for each of the three years in the period ended March 31, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of our common stock being offered hereby. This prospectus
does not contain all of the information set forth in that registration statement
or the exhibits and schedules to that registration statement. For further
information with respect to Sage and the common stock offered hereby, reference
is made to the registration statement and the exhibits and schedules filed as a
part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract or any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by such reference to
such exhibit.
You may inspect a copy of the registration statement without charge at the
Securities and Exchange Commission's principal office in Washington, D.C. and
obtain copies of all or any part thereof upon payment of certain fees from the
Public Reference Room of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
in New York, located at 7 World Trade Center, 13th Floor, New York, New York
10048, or in Chicago, located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at after payment of fees prescribed by the Commission. You
may obtain information on the operation of the Public Reference Room by calling
1-800-SEC-0300. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish our stockholders with such other reports as we may
determine or as may be required by law.
57
<PAGE> 62
SAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sage, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Sage, Inc. and its subsidiary at March 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 30, 1999, except for Note 13,
as to which the date is October 5, 1999
F-2
<PAGE> 64
SAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
MARCH 31, SEPTEMBER 30,
------------------ SEPTEMBER 30, 1999
1998 1999 1999 (NOTE 1)
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 380 $ 2,473 $ 4,033
Accounts receivable, net.............. 230 804 2,221
Inventories........................... 68 412 62
Prepaid expenses and other assets..... 163 172 327
------- ------- --------
Total current assets.......... 841 3,861 6,643
Property and equipment, net............. 468 432 920
------- ------- --------
Total assets.................. $ 1,309 $ 4,293 $ 7,563
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 324 $ 638 $ 1,607
Accrued expenses and other
liabilities........................ 1,457 1,752 1,704
Notes payable......................... 500 -- --
------- ------- --------
Total current liabilities..... 2,281 2,390 3,311
------- ------- --------
Commitments (Note 11)
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par
value; 10,000 shares authorized;
1,029, 2,564 and 3,063 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma.............................. 11 26 31 $ --
Common stock, $0.01 par value; 23,000,
23,000 and 50,000 shares
authorized; 2,602, 3,176 and 3,623
shares issued and outstanding
actual; 6,806 shares issued and
outstanding pro forma.............. 26 32 36 68
Additional paid-in capital............ 2,915 11,646 17,640 17,639
Notes receivable from stockholders.... -- (113) (113) (113)
Deferred compensation related to stock
options and restricted stock....... -- (1,013) (646) (646)
Accumulated deficit................... (3,924) (8,675) (12,696) (12,696)
------- ------- -------- --------
Total stockholders' equity.... (972) 1,903 4,252 $ 4,252
------- ------- -------- ========
Total liabilities and
stockholders' equity....... $ 1,309 $ 4,293 $ 7,563
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 65
SAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $1,758 $ 1,495 $ 7,132 $ 1,346 $ 7,460
Cost of revenues...................... 1,136 1,639 4,914 877 4,537
------ ------- ------- ------- -------
Gross profit (loss)................... 622 (144) 2,218 469 2,923
------ ------- ------- ------- -------
Operating expenses:
Research and development............ 994 1,597 2,270 1,039 1,805
Charge for in-process technology.... -- -- -- -- 2,500
Selling, general and
administration................... 329 945 3,214 1,094 2,355
Stock compensation.................. -- -- 1,596 1,005 367
------ ------- ------- ------- -------
Total operating expenses......... 1,323 2,542 7,080 3,138 7,027
------ ------- ------- ------- -------
Loss from operations.................. (701) (2,686) (4,862) (2,669) (4,104)
Interest income (expense), net........ (7) (89) 111 53 83
------ ------- ------- ------- -------
Net loss.............................. $ (708) $(2,775) $(4,751) $(2,616) $(4,021)
====== ======= ======= ======= =======
Net loss per share:
Basic and diluted................... $(0.32) $ (1.08) $ (2.00) $ (1.07) $ (1.36)
====== ======= ======= ======= =======
Pro forma net loss per share
(unaudited)......................... $ (0.96) $ (0.67)
======= =======
Shares used in computing net loss per
share:
Basic and diluted................... 2,246 2,578 2,381 2,444 2,953
====== ======= ======= ======= =======
Shares used in computing pro forma net
loss per share (unaudited).......... 4,965 5,994
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
SAGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE COMPENSATION
--------------- --------------- PAID-IN FROM RELATED TO ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS STOCK OPTIONS DEFICIT TOTAL
------ ------ ------ ------ ---------- ------------ ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1996.................... -- $-- 2,160 $22 $ 160 $ -- $ -- $ (441) $ (259)
Issuance of Series A
preferred stock......... 887 9 -- -- 491 -- -- -- 500
Issuance of common stock
for cash, net of
repurchases............. -- -- 317 3 1,002 -- -- -- 1,005
Net loss.................. -- -- -- -- -- -- -- (708) (708)
----- --- ----- --- ------- ----- ------- ------- -------
Balance at March 31,
1997.................... 887 9 2,477 25 1,653 -- -- (1,149) 538
Issuance of common stock
for cash, net of
repurchases............. -- -- 125 1 314 -- -- -- 315
Issuance of Series B
preferred stock......... 83 1 -- -- 499 -- -- -- 500
Issuance of Series C
preferred stock......... 59 1 -- -- 399 -- -- -- 400
Issuance of warrants of
Series D preferred stock
in connection with notes
payable................. -- -- -- -- 50 -- -- -- 50
Net loss.................. -- -- -- -- -- -- -- (2,775) (2,775)
----- --- ----- --- ------- ----- ------- ------- -------
Balance at March 31,
1998.................... 1,029 11 2,602 26 2,915 -- -- (3,924) (972)
Issuance of common stock
upon exercise of stock
options................. -- -- 571 6 323 (113) -- -- 216
Issuance of common stock
for consulting services,
net..................... -- -- 3 -- 8 -- -- -- 8
Issuance of Series D
preferred stock, net of
issuance cost of $150... 1,453 14 -- -- 5,444 -- -- -- 5,458
Issuance of Series D
preferred stock for
settlement of notes
payable................. 82 1 -- -- 317 -- -- -- 318
Issuance of Series D
preferred stock warrants
in connection with line
of credit............... -- -- -- -- 30 -- -- -- 30
Deferred compensation
related to restrictions
placed in common
stock................... -- -- -- -- 393 -- (393) -- --
Deferred compensation
related to stock option
grants.................. -- -- -- -- 2,216 -- (2,216) -- --
Amortization of deferred
compensation related to
stock options and
restricted stock........ -- -- -- -- -- -- 1,596 -- 1,596
Net loss.................. -- -- -- -- -- -- -- (4,751) (4,751)
----- --- ----- --- ------- ----- ------- ------- -------
Balance at March 31,
1999.................... 2,564 26 3,176 32 11,646 (113) (1,013) (8,675) 1,903
Exercise of preferred
stock
warrants (unaudited).... 6 -- -- -- 35 -- -- -- 35
Issuance of Series E
preferred stock, net of
issuance cost of $30
(unaudited)............. 493 5 -- -- 2,919 -- -- -- 2,924
Issuance of Series E
preferred stock warrants
(unaudited)............. -- -- -- -- 4 -- -- -- 4
Issuance of common stock
upon exercise of stock
options (unaudited)..... -- -- 72 -- 40 -- -- -- 40
Issuance of common stock
in connection with
license agreement
(unaudited)............. -- -- 375 4 2,996 -- -- -- 3,000
Amortization of deferred
compensation related to
stock options and
restricted stock
(unaudited)............. -- -- -- -- -- -- 367 -- 367
Net loss (unaudited)...... -- -- -- -- -- -- -- (4,021) (4,021)
----- --- ----- --- ------- ----- ------- ------- -------
Balance at September 30,
1999 (unaudited)........ 3,063 $31 3,623 $36 $17,640 $(113) $ (646) $12,696 $ 4,252
===== === ===== === ======= ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 67
SAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $ (708) $(2,775) $(4,751) $(2,616) $(4,021)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Charge for in-process
technology..................... -- -- -- -- 2,500
Depreciation and amortization.... 27 137 250 112 192
Stock compensation............... -- -- 1,596 1,005 367
Warrant expense.................. -- 50 4 -- 4
Changes in assets and
liabilities:
Accounts receivable............ (352) 209 (574) (140) (1,417)
Inventories.................... (72) 26 (344) (171) 350
Prepaid expenses and other
assets...................... (66) (93) 17 (11) (155)
Accounts payable............... 442 (130) 314 122 969
Accrued expenses and other
liabilities................. 327 649 303 (271) (48)
------ ------- ------- ------- -------
Net cash used in operating
activities............... (402) (1,927) (3,185) (1,970) (1,259)
------ ------- ------- ------- -------
Cash flows from investing activities:
Acquisition of property and
equipment........................ (204) (316) (214) (134) (680)
------ ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance (repayments)
of notes payable................. -- 500 (190) (190) --
Net proceeds from issuance of common
stock............................ 1,005 315 224 133 540
Net proceeds from issuance of
preferred stock.................. 500 900 5,458 5,458 2,959
------ ------- ------- ------- -------
Net cash provided by financing
activities....................... 1,505 1,715 5,492 5,401 3,499
------ ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................... 899 (528) 2,093 3,297 1,560
Cash and cash equivalents at beginning
of year............................. 9 908 380 380 2,473
------ ------- ------- ------- -------
Cash and cash equivalents at end of
year................................ $ 908 $ 380 $ 2,473 $ 3,677 $ 4,033
====== ======= ======= ======= =======
Supplemental disclosures of cash flow
information:
Interest paid.................... $ 7 $ 27 $ 17 $ 17 $ 8
====== ======= ======= ======= =======
Noncash investing and financing
activities:
Issuance of convertible preferred
stock in lieu of debt
repayments....................... $ -- $ -- $ 318 $ 318 $ --
====== ======= ======= ======= =======
Issuance of common and preferred
stock in exchange for notes
receivable....................... $ -- $ -- $ 113 $ 113 $ 30
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 68
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SAGE AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
Sage, Inc. ("Sage") was established in California in May 1994 and
re-incorporated in Delaware in May 1999. Sage designs, develops and markets
digital display processors. Sage offers a family of display signal processing
solutions that provide display processing, highly integrated analog-to-digital
conversion, signal reformatting and color processing and that are compatible
with all commercially available display signal modes and display types. Sage has
established a wholly owned subsidiary located in Bangalore, India.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ from
those estimates.
CONSOLIDATION
The financial statements herein presented include the results and financial
position of Sage and its wholly owned subsidiary. All intercompany transactions
and balances have been eliminated in consolidation.
FOREIGN EXCHANGE
The functional currency of Sage is the U.S. dollar and the functional
currency of its subsidiary is the Indian rupee.
Transactions in currencies other than the functional currency are measured
and recorded in the functional currency using the exchange rate in effect at the
date of the transaction. At the balance sheet date, monetary assets and
liabilities that are denominated in currencies other than the functional
currency are remeasured using the exchange rate at the balance sheet date. All
gains and losses arising from foreign currency transactions and remeasurement of
foreign currency denominated accounts are included in the determination of net
income in the year in which they occur and were not material for the years ended
March 31, 1997, 1998 and 1999.
The financial statements of the subsidiary company are translated into U.S.
dollars for consolidation as follows: assets and liabilities at the exchange
rate as of the balance sheet date, shareholders' equity at the historical rates
of exchange, and income and expense amounts at the average monthly exchange rate
during the year. The translation differences were not material for the three
years ended March 31, 1997, 1998 and 1999.
REVENUE RECOGNITION
Revenue is recognized upon product shipment except for shipments to
distributors with right of return, in which case revenues are deferred until the
distributor resells the inventories.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
F-7
<PAGE> 69
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
Sage considers all highly liquid debt instruments purchased with a maturity
of three months or less at the date of purchase to be cash equivalents.
Currently all deposits are in short-term deposit and money market accounts with
various banks.
INVENTORIES
Inventories are stated at the lower of cost, determined on first-in,
first-out ("FIFO") basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally of three years.
IMPAIRMENT OF LONG-LIVED ASSETS
Sage reviews long-lived assets based upon a gross cash flow basis and will
reserve for impairment whenever events or changes in circumstances indicate the
carrying amount of the assets may not be fully recoverable. Based on its most
recent analysis, the Company believes that there was no impairment of its
property and equipment as of March 31, 1999.
INCOME TAXES
Sage accounts for income taxes under the asset and liability approach
whereby the expected future tax consequences of temporary differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities. A valuation allowance is established for any deferred
tax assets for which realization is uncertain.
STOCK-BASED COMPENSATION
Sage accounts for stock-based compensation arrangements in accordance with
the provisions of Accounting Principles Board's Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." Under APB 25 and subject to certain
conditions, deferred compensation is recognized based on the excess, if any, of
the estimated fair market value of Sage's stock on the date of grant and the
amount an employee must pay to acquire the stock. Deferred compensation is
amortized over the vesting period on an accelerated basic using the model
presented in paragraph 24 of FASB Interpretation No. 28. Accordingly, the
percentages of the deferred compensation amortized in the first, second, third
and fourth years following the option grant date are 52%, 27%, 15% and 6%,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Sage's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
F-8
<PAGE> 70
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
In the fiscal year ended March 31, 1999, Sage adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
130"). Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners. For
the years ended March 31, 1997, 1998 and 1999, the comprehensive loss did not
differ significantly from the net loss.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and is
effective for all fiscal years beginning after June 15, 2000. Sage anticipates
that, due to its limited use of derivative instruments, the adoption of SFAS 133
will not have a significant effect on Sage's results of operations or its
financial position.
BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is calculated using
the weighted average number of outstanding shares of common stock plus dilutive
common stock equivalents. Shares of common stock that are subject to Sage's
right to repurchase are excluded from the basic and diluted net loss per share
computations. Options and warrants to purchase shares, and convertible preferred
stock outstanding were not included in the computation of diluted net loss per
share, as their effect was antidilutive for the periods presented. Therefore,
both the basic and diluted net loss per share computations resulted in the same
number and there were no reconciling items.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
The pro forma net loss per share is calculated assuming that all
outstanding shares of convertible preferred stock are converted into common
stock at the beginning of the periods presented, or on the date of issuance of
the Preferred Stock, whichever is later.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
If the offering is consummated, all shares of convertible preferred stock
outstanding will automatically convert into an aggregate of 3,183,242 shares of
common stock. The pro forma effect of this conversion has been reflected in the
accompanying financial statements as of September 30, 1999.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of September 30, 1999, the
consolidated statements of operations and of cash flows for the six months ended
September 30, 1998 and 1999 and the consolidated statement of stockholders'
equity for the six months ended September 30, 1999 are unaudited. In the opinion
of management, these statements have been prepared on the same basis
F-9
<PAGE> 71
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as the audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results for the interim periods. The data disclosed in the
notes to the consolidated financial statements as of such dates and for such
periods are unaudited.
NOTE 2 -- BALANCE SHEET ACCOUNTS (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
---------------- SEPTEMBER 30,
1998 1999 1999
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable.................................... $ 248 $ 893 $2,310
Less: allowance for doubtful accounts.................. (18) (89) (89)
------ ------ ------
$ 230 $ 804 $2,221
====== ====== ======
Inventories:
Raw materials.......................................... $ 12 $ 71 $ 29
Finished goods......................................... 56 341 33
------ ------ ------
$ 68 $ 412 $ 62
====== ====== ======
Property and equipment:
Equipment, computers and software...................... $ 504 $ 725 $1,425
Furniture and fixtures................................. 128 121 121
------ ------ ------
632 846 1,546
Less: accumulated depreciation and amortization........ (164) (414) (626)
------ ------ ------
$ 468 $ 432 $ 920
====== ====== ======
Accrued expenses and other liabilities:
Margin on deferred sales to distributors............... $ 323 $ 171 $ 171
Other deferred revenue................................. 350 169 --
Accrued compensation costs............................. 309 512 138
Reserve for adverse purchases commitment............... 146 33 40
Accrued warranty....................................... 61 61 60
Advances from shareholders............................. 31 -- --
Payable on development projects........................ -- 192 380
Commission payable to sales agents..................... -- 62 99
Deferred payment for software purchased................ -- -- 299
Other accruals......................................... 237 552 517
------ ------ ------
$1,457 $1,752 $1,704
====== ====== ======
</TABLE>
NOTE 3 -- LINE OF CREDIT:
As of March 31, 1999, Sage had a credit facility with a bank which allowed
Sage to borrow up to $2,000,000 or $600,000 plus 85% of eligible accounts
receivable, whichever is less, at an interest rate of 0.5% plus prime rate (8.5%
per annum on March 31, 1999). The credit facility expires on June 30, 2000 and
is secured by all of Sage's assets. As of March 31, 1999, Sage did not have any
borrowings outstanding under the credit facility. The line of credit requires
Sage to achieve certain financial ratios and operating results. At September 30,
1999, Sage was in compliance with the covenants.
F-10
<PAGE> 72
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sage issued six year warrants to subscribe for 25,000 shares of Series D
preferred stock at an exercise price of $3.861 per share to the bank in
connection with the credit facility received. The warrants were valued at
$30,000 which was included as interest expense.
NOTE 4 -- NOTES PAYABLE:
In August 1997, Sage issued $500,000 of unsecured redeemable notes bearing
interest at 8% per annum, payable quarterly. The Notes carried three year
warrants to subscribe for 100,000 shares of Series D preferred stock at $4.80
per share, expiring May 15, 2001. In May 1998, in conjunction with the closing
of the Series D round of financing, $310,000 of the Notes, together with $8,000
of accrued interest thereon, were converted into Series D preferred stock, and
the remaining notes, together with accrued interest of $6,000, were repaid.
Warrants were valued at $50,000, which was included as interest expense.
NOTE 5 -- INCOME TAXES:
There was no income tax provision for the years ended March 31, 1997, 1998
and 1999 because operations resulted in pre-tax losses. As of March 31, 1999,
Sage had net operating loss carryforwards of approximately $5,125,000 for
federal income tax purposes. These losses are available to reduce taxable income
and expire from 2010 through 2019. Because of certain changes in the ownership
of Sage, there is a limitation on the use of the net operating loss
carryforwards of approximately $800,000 per year pursuant to Section 382 of the
Internal Revenue Code.
Deferred tax assets at March 31, 1997, 1998 and 1999 relate primarily to
net operating losses, inventory reserves and accruals. A valuation allowance has
been provided in an amount equal to these assets due to the uncertainty of their
realization.
The following is an analysis of Sage's deferred tax assets:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforward................... $ 71 $ 700 $ 1,895
Inventory reserve................................. 195 258 360
Accrued liabilities not currently deductible...... 159 512 665
------- ------- -------
425 1,470 2,920
Deferred tax assets valuation allowance........... (425) (1,470) (2,920)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-11
<PAGE> 73
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- NET LOSS PER SHARE:
The following table sets forth the computations of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
---------------------------- ----------------------
1997 1998 1999 1998 1999
------ ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss........................... $ (708) $(2,775) $(4,751) $(2,616) $(4,021)
Denominator:
Weighted average common stock
shares outstanding............... 2,246 2,578 2,841 2,716 3,290
Less weighted average restricted
common stock shares subject to
the company's repurchase
option........................... (461) (272) (337)
------ ------- ------- ------- -------
Shares used in computing basic and
diluted net loss per share....... 2,246 2,578 2,380 2,444 2,953
====== ======= ======= ======= =======
Basic and diluted net loss per
share............................ $(0.32) $ (1.08) $ (2.00) $ (1.07) $ (1.36)
====== ======= ======= ======= =======
</TABLE>
NOTE 7 -- SHAREHOLDERS' EQUITY:
COMMON STOCK
As of September 30, 1999 Sage is authorized to issue up to 23,000,000
shares of common stock. Of the shares authorized, 1,666,666 shares of common
stock have been reserved for issuance under the Sage's employee stock option
plans.
RESTRICTED COMMON STOCK
Certain shares of common stock were sold to the founders and other
investors under the term of a restricted stock purchase agreement in May 1998.
These agreements contain provisions for the repurchase of unvested shares by
Sage for individuals who terminate employment prior to full vesting. The common
stock subject to repurchase will vest over four years.
As a condition to the issuance of Series D preferred stock in May 1998,
certain founders entered into stock restriction agreements with Sage pursuant to
which 1.37 million of the outstanding common shares were restricted and were
made subject to monthly vesting (over a 4 year period beginning when the shares
were originally issued and ending in April 2000) based on the founders continued
employment with Sage. Under the terms of the restricted stock agreement, Sage
has the right to repurchase the unvested shares at the original issuance price
in the event the founder ceases to be an employee of Sage. Sage recorded
deferred stock compensation amounting to $393,000 for the shares covered under
the restricted stock agreement. The deferred amount is recognized as
compensation expense over the vesting period on an accelerated basis. During the
fiscal year ended March 31, 1999 and the six months ended September 30, 1999,
such compensation expense included in stock compensation in the statement of
operations amounted to $274,000 and $58,000 (unaudited), respectively.
F-12
<PAGE> 74
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 1999, Sage had a total of 397,145 shares of common stock
subject to repurchase rights.
CONVERTIBLE PREFERRED STOCK
Sage is authorized to issue 10,000,000 shares of convertible preferred
stock without par value, of which 886,666, 83,333, 266,666 and 2,000,000 shares
were designated Series A, B, C and D preferred stock, respectively. At March 31,
1999, Sage had issued 886,666, 83,333, 59,233 and 1,534,962 shares of Series A,
B, C and D preferred stock, respectively.
Of the preferred stock shares authorized, 100,000, 62,859 and 25,000 shares
have been reserved for issuance of Series D preferred shares for the warrants
issued in connection with the issuance of the 8% unsecured redeemable notes, the
Series D preferred stock and a credit facility, respectively. The outstanding
warrants have a weighted average remaining contractual life of 2.23 years, and a
weighted average exercise price of $4.35 per share.
All warrants are issued with exercise price equal to fair value of
respective preferred stock at issuance dates and are exercisable upon issuance.
The weighted average fair value of warrant issued during fiscal year 1999 was
$1.04. The fair value of each warrant was determined using the Black-Scholes
model with the following assumptions: dividend yield of 0%, risk-free interest
rate of 5% to 6%, a term equal to the period of the warrant and a volatility
factor of 65%.
In connection with the sale of Series D preferred stock, Sage issued three
year warrants to subscribe for 62,859 shares of Series D preferred stock at
$3.861 per share.
The rights, preferences and privileges of Sage's preferred stock are as
follows:
Dividends. Holders of Series A, B, C and D preferred stock are entitled to
receive noncumulative annual dividends of $0.06, $0.48, $0.54 and $0.30 per
share, respectively, when and if declared by the board of directors. Sage may
not distribute to common shareholders until the dividends for preferred stock
have been paid. No dividends on preferred stock or common stock have been
declared by the board of directors since inception.
Conversion. Each share of Series A, B, C and D preferred stock outstanding
is convertible at the option of the holder into common stock, subject to
adjustment for dilution. Such conversion is automatic upon the completion of a
public offering with aggregate proceeds of not less than $7,500,000.
The conversion ratio of preferred stock into shares of common stock is:
<TABLE>
<S> <C>
Series A........................... 1.000 = 1.000
Series B........................... 1.000 = 1.580
Series C........................... 1.000 = 1.778
Series D........................... 1.000 = 1.017
Series E........................... 1.000 = 1.000
</TABLE>
Voting. Each share of Series A, B, C and D preferred stock entitles its
holder to one vote for each common share into which the shares would convert.
Liquidation. In the event of a liquidation, dissolution or winding up of
Sage, the holders of A, B, C and D preferred stock are entitled to be paid, in
preference to common shareholders, a per share distribution of $0.57, $6.00,
$6.75 and $3.87, respectively, plus all declared but unpaid
F-13
<PAGE> 75
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
dividends. After payment to the holders of preferred stock, the remaining assets
and funds of Sage shall be distributed ratably to the holders of common stock
and preferred stock on an as if converted basis until the holders of the Series
A, B, C and D preferred stock shall have received an aggregate of $1.092,
$18.00, $20.25 and $11.613 per share, respectively (in each case, including the
aforesaid liquidation preference). Thereafter, any remaining assets shall be
distributed ratably to the holders of common stock.
NOTE 8 -- STOCK OPTIONS:
In September 1995 the stockholders of Sage approved the 1995 Stock Plan. In
November 1997 the shareholders of Sage approved the 1997 Stock Plan, terminating
the 1995 Plan and transferring the balance of the option pool from the 1995
Stock Plan to the 1997 Stock Plan. In the fiscal year ended March 31, 1999, Sage
cancelled all options outstanding under the 1995 Stock Plan and reissued them
under the 1997 Stock Plan.
Under the 1997 Stock Plan, nonqualified and incentive stock options may be
granted at prices not less than 85% and 100%, respectively, of the fair market
value at the date of grant, as determined by the board of directors. However,
the option price granted to a person who owns stock greater than 10% of the
total combined voting power of all classes of stock of Sage shall not be less
than 110% of the fair market value on the date of grant. Options granted under
the 1997 Stock Plan vest over five years or at such rate as may be determined by
the board of directors. The options are exercisable during the period the
participant has the same relationship with Sage as an employee, consultant or
outside director as the participant had when the option was granted and within
90 days after the termination of the relationship, but not longer than ten years
after the date the option is granted.
In May 1998 the board of directors repriced all outstanding option grants
with an exercise price in excess of $0.57 per share. The number of repriced
stock options was 966,320.
During the fiscal year ended March 31, 1999, Sage granted options for the
purchase of 306,181 shares of common stock to employees at a weighted average
exercise price of $0.69 per share. Management recognized deferred compensation
of $2,216,000 related to options repriced or granted during the year ended March
31, 1999. The estimates of the fair value of common stock used to calculate
deferred compensation increased from $2.40 per share in April 1998 to $4.26 per
share in March 1999. These estimates were based on several factors including the
per share price of the Series D and E preferred stock issuances, discounts to
reflect the value of the preferences and improved operating results of the
Company over that period. In addition, the Company recorded deferred
compensation of $393,000 related to restrictions placed on common shares of
founders as described in Note 6 above. Such deferred compensation is being
amortized on an accelerated basis over the vesting period, generally four years.
The amortization of deferred compensation for the year ended March 31, 1999 and
the six months ended September 30, 1999 amounted to $1,596,000 and $367,000
(unaudited).
Had compensation cost for the Sage's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed by SFAS 123, the effect on fiscal
1997, 1998, and 1999 net losses would have been immaterial. The fair value of
each option grant during the fiscal years ended March 31, 1997, 1998 and 1999 is
estimated on the date of grant using the Black-Scholes method with the following
assumptions: dividend yield of 0%, risk-free interest rate of 6.40%, 5.95% and
4.96%, respectively, a weighted average expected option term of five years, and
a volatility factor of 0. The weighted average value per share under SFAS 123 of
options granted during the fiscal years 1997, 1998 and 1999 were $0.24, $0.37
and $1.71, respectively.
F-14
<PAGE> 76
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The plans' activities for the years ended March 31, 1997, 1998 and 1999 and
the six months ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
--------- ------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 31, 1996.................... 633 34 $ 0.57 $ 0.57
Options granted.............................. (341) 341 $0.57-$ 3.00 $ 1.02
------ -----
Balance at March 31, 1997.................... 292 375 $0.57-$ 3.00 $ 1.02
Increase in option pool, net................. 691 -- -- --
Options granted.............................. (953) 953 $0.57-$ 3.00 $ 2.61
Options canceled............................. 218 (218) $0.57-$ 3.00 $ 3.00
------ -----
Balance at March 31, 1998.................... 248 1,110 $0.57-$ 3.00 $ 1.98
Increase in option pool, net................. 166 -- -- --
Options granted.............................. (1,272) 1,272 $0.57-$ 9.00 $ 0.69
Options exercised............................ -- (571) $0.57-$ 3.60 $ 0.57
Options canceled............................. 966 (966) $0.57-$ 9.00 $ 1.11
------ -----
Balance at March 31, 1999.................... 108 845 $0.57-$ 9.00 $ 0.75
Increase in option pool...................... 713 -- -- --
Options granted (unaudited).................. (336) 336 $5.10-$12.00 $ 8.08
Options exercised (unaudited)................ -- (71) $ 0.57 $ 0.57
Options cancelled (unaudited)................ 94 (94) $0.57-$12.00 $ 2.81
------ -----
Balance at September 30, 1999 (unaudited).... 579 1,016 $0.57-$ 9.00 $ 3.00
====== ===== ============ ======
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- -------------- ----------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.57 710 9.22 $0.57 259 $0.57
$1.05 36 9.55 $1.05 -- --
$1.50 70 9.79 $1.50 -- --
$1.95 24 9.88 $1.95 -- --
$9.00 5 9.96 $9.00 -- --
--- ---
$0.57-$9.00 845 9.30 $0.75 259 $0.57
=== ===
</TABLE>
NOTE 9 -- EMPLOYEE BENEFITS PLAN:
Sage has a salary savings plan, which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
15% of their pretax salary, but not more than statutory limits. There were no
matching contributions for the years ended March 31, 1997, 1998 and 1999.
F-15
<PAGE> 77
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Two customers represented 37% and 17% of revenues for the year ended March
31, 1997. Three customers represented 44%, 20% and 17% of revenues for the year
ended March 31, 1998. One customer represented 49% of revenues for the year
ended March 31, 1999. Three customers represented 32%, 18% and 15% of the
accounts receivable balance at March 31, 1998. Three customers represented 25%,
15% and 13% of the accounts receivable balance at March 31, 1999.
Financial instruments that potentially subject Sage to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Ongoing credit evaluations are performed and reserves for
potential credit losses are maintained. Certain sales were made under letters of
credit, which further reduces Sage's overall credit risk.
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION:
Sage operates in one reportable segment which is the development and sales
of display processors and accompanying software to support the display industry.
Sage has operations in the United States and India. The India operation was
established in January 1996. The results of the India operation for the years
ended March 31, 1997, 1998 and 1999 and its total assets as of the respective
dates were not material to Sage's consolidated financial statements.
Sage sells its products primarily in the United States and to the Asia
Pacific region. Revenues by geographic location based on the country of the
customer were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
United States........................................ $1,758 $1,495 $2,131
Taiwan............................................... -- -- 3,535
Other Asia Pacific countries......................... -- -- 1,365
Europe............................................... -- -- 101
------ ------ ------
$1,758 $1,495 $7,132
====== ====== ======
</TABLE>
NOTE 12 -- COMMITMENTS:
Sage leases its facilities under noncancelable operating leases which
expire on various dates through September 2000. Future minimum lease payments as
of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
----------- --------------
(IN THOUSANDS)
<S> <C>
2000................................ $218
2001................................ 106
----
Total minimum lease payments........ $324
====
</TABLE>
Total rent expenses under operating leases for fiscal years 1997, 1998 and
1999 were $48,000, $84,000 and $150,000, respectively.
F-16
<PAGE> 78
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- SUBSEQUENT EVENT:
In May 1999 Sage sold 492,333 shares of Series E preferred stock for an
aggregate of $2.9 million.
On July 24, 1999, Sage entered into a joint license and development
agreement with Faroudja under which Sage issued 375,000 shares of common stock
to Faroudja in exchange for $500,000 cash and a limited exclusive license to
certain of Faroudja's video processing and image enhancement technologies. Under
the terms of the agreement, the licensed technologies can only be used to
develop new chip solutions that incorporate both Faroudja's and Sage's
technologies. The in-process technology was valued at 375,000 shares, issued at
$8.00 per share, less the cash receipt of $500,000. As a result of that
transaction, Sage recorded an expense of $2.5 million relating to in-process
research and development during the six months ended September 30, 1999.
On October 1, 1999, Sage implemented a three-for-one reverse stock split.
Shares and per share amounts have been retroactively restated for all periods
presented.
F-17
<PAGE> 79
[SAGE LOGO]
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Filing Fee............... $ 9,591
NASD Filing Fee............................................. 3,950
Nasdaq National Market Listing Fee.......................... 95,000
Accounting Fees and Expenses................................ 230,000
Blue Sky Fees and Expenses.................................. 3,000
Legal Fees and Expenses..................................... 300,000
Transfer Agent and Registrar Fees and Expenses.............. 10,000
Printing Expenses........................................... 330,000
Miscellaneous Expenses...................................... 18,459
----------
Total.................................................. $1,000,000
==========
</TABLE>
- -------------------------
* All amounts are estimates except the Commission filing fee, the NASD filing
fee and the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware,
the Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws (Exhibit 3.2 hereto) also provide for indemnification of its directors,
executive officers, employees and agents, to the fullest extent permissible
under Delaware law.
The Registrant's certificate of incorporation (Exhibit 3.1 hereto) provides
that the liability of its directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law. Pursuant to Delaware law,
this includes elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to the Registrant and its stockholders. These
provisions do not eliminate the directors' duty of care and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Prior to the effective date of the registration statement, the Registrant
will have entered into agreements with its directors and certain of its
executive officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The
II-1
<PAGE> 81
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Registrant intends to obtain in conjunction with the effectiveness of
the registration statement a policy of directors' and officers' liability
insurance that insures the Company's directors and officers against the cost of
defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the period from August 19, 1996 to August 19, 1999, the Registrant
has issued and sold the following unregistered securities:
(1) On September 30, 1996, Registrant issued an aggregate of 886,666
shares in a private placement of its Series A Preferred Stock at a purchase
price of $0.564 per share, for cash in the aggregate amount of $500,080, to
investors.
(2) On February 10, 1997, Registrant issued an aggregate of 382,978
shares in a private placement of its common stock, at a purchase price of
$0.564 per share, for cash in the aggregate amount of $216,000, to
investors.
(3) On March 11, 1997, Registrant issued an aggregate of 270,333
shares in a private placement of its common stock for an aggregate purchase
price of $811,000 to officers, directors and consultants and investors.
(4) On July 30, 1997, Registrant issued an aggregate of 125,000 shares
in a private placement of its common stock for an aggregate purchase price
of $271,564 to officers, directors and consultants.
(5) On September 4, 1997, Registrant issued 1,461,454 shares of
warrants to purchase up to 100,000 shares of our common stock for a price
of $1.60 to employees, directors and consultants.
(6) On January 29, 1998, Registrant issued 83,333 shares in a private
placement of its Series B Preferred Stock at a purchase price of $6.00 per
share, for cash in the aggregate amount of $500,000, to Krishnan Shah
Limited Family Partnership and 59,233 shares of its Series C Preferred
Stock at a purchase price of $6.75, for cash in the aggregate amount of
$399,825 to Grand Wide Technology Ltd. and Richview Ltd.
(7) On May 1 and May 15, 1998, Registrant issued 1,245,537 shares in a
private placement of its Series D Preferred Stock at a purchase price of
$3.86, for cash in the aggregate amount of $4,809,021 to 28 investors.
(8) On May 1, 1999, Registrant issued 487,333 shares in a private
placement of its Series E Preferred Stock at a purchase price of $6.00 per
share, for cash in the aggregate amount of $2,924,000 to 47 accredited
investors pursuant to Rule 506 of Regulation D.
(9) On July 27, 1999, Registrant issued 375,000 shares in a private
placement of its common shares to Faroudja Laboratories, Inc. in a
transaction valued at $12.00 per share in exchange for an aggregate amount
of $500,000 and certain licensed technology from Faroudja.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b)
II-2
<PAGE> 82
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The exhibits are as set forth in the Exhibit Index.
(b) FINANCIAL STATEMENT SCHEDULES
None.
Schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused Amendment No. 3 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California on the 28th day of October, 1999.
SAGE, INC.
By: /s/ CHANDRASHEKAR M. REDDY
------------------------------------
Chandrashekar M. Reddy
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
Amendment No. 3 to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHANDRASHEKAR M. REDDY President, Chief Executive October 28, 1999
- --------------------------------------------------- Officer and Director
Chandrashekar M. Reddy (Principal Executive Officer)
/s/ SIMON P. WESTBROOK* Chief Financial Officer October 28, 1999
- --------------------------------------------------- (Principal Financial and
Simon P. Westbrook Accounting Officer)
/s/ MICHAEL A. GUMPORT* Director October 28, 1999
- ---------------------------------------------------
Michael A. Gumport
/s/ N. DAMODAR REDDY* Director October 28, 1999
- ---------------------------------------------------
N. Damodar Reddy
/s/ KENNETH TAI* Director October 28, 1999
- ---------------------------------------------------
Kenneth Tai
* By: /s/ CHANDRASHEKAR M. REDDY
-------------------------------------------
Chandrashekar M. Reddy
Attorney-in-fact
</TABLE>
II-4
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
<S> <C>
1.1 Form of Underwriting Agreement+
3.1* Certificate of Incorporation of the Registrant
3.2* Registrant's Bylaws
4.1 Reference is made to Exhibit 3.1
4.2 Series D Investors' Rights Agreement dated May 1, 1998 with
certain Investors+
4.3 Series E Investors' Rights Agreement dated May 1, 1999 with
certain Investors+
4.4 Faroudja Laboratories, Inc. Investors' Rights Agreement
dated July 27, 1999+
4.5* Specimen Stock Certificate of Registrant
5.1* Opinion of Morrison & Foerster LLP as to the legality of the
Common Stock being registered.
10.1 Form of Indemnification Agreement between the Company and
each of its Officers and Directors+
10.2 Registrant's 1997 Stock Option Plan+
10.3** Faroudja Laboratories, Inc. Joint Development and License
Agreement dated July 27, 1997
10.4 Master Distributor Agreement with Avnet, Inc.+
10.5 Authorized Reseller Agreement with Reptron Electronics,
Inc.+
10.6 Authorized Reseller Agreement with Jaco Electronics, Inc.+
10.7 Hardware Distribution Agreement with Bell Microproducts,
Inc.+
10.8 Form of Representative Agreement+
10.9 Credit Agreement with General Bank+
21.1 List of Subsidiaries+
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1.
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney. Reference is made to the signature page
hereof.
27.1 Financial Data Schedule+
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment of certain portions of the exhibit has been requested.
+ Exhibit previously filed.
<PAGE> 85
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
SAGE, INC.
------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.03
JOINT DEVELOPMENT AND LICENSE AGREEMENT
This Joint Development and License Agreement ("Agreement"), is entered into
on July 23,1999 (the "Effective Date"), between Sage, Inc. ("Sage"), a Delaware
corporation with a principal place of business at 2460 North First Street, #100,
San Jose, California 95131, and Faroudja Laboratories, Inc. ("Faroudja"), a
California corporation with a principal place of business at 750 Palomar Avenue,
Sunnyvale, California 94086 (hereinafter referred to collectively as the
"Parties" and individually as a "Party").
RECITALS
WHEREAS, Sage designs, develops, manufactures and markets application
specific integrated circuits ("ASIC") primarily for the flat panel display
market;
WHEREAS, Faroudja is recognized as a leader in developing video processing
and image enhancement technologies and designs, develops and manufactures
products, including integrated circuits, for video applications.
WHEREAS, Sage and Faroudja are interested in working together to combine
Faroudja video processing and image enhancement technologies and expertise with
Sage's ASIC design and fabrication and display controller technologies and
expertise, to provide reasonably priced, high-quality chip solutions for
manufacturers of flat panel displays and other display devices.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, and other terms and conditions contained herein, Sage and Faroudja
agree as follows:
AGREEMENT
1. Definitions.
1.1 "Affiliate" means, with respect to a Party, an entity controlling,
controlled by, or under common control with, such Party, such control being
exercised through the ownership or control, directly or indirectly, of at least
a majority of the capital stock (or, in the case of a noncorporate entity,
equivalent interests) representing the right to vote for the election of
directors or another managing authority, as of the Effective Date or thereafter
during the term of this Agreement, but such entity shall be deemed to be an
Affiliate only so long as such ownership or control exists.
1.2 "Contractor" means a person or entity, other than a Party or an
employee of a Party, that is engaged by a Party to perform any work related to
the subject matter of this Agreement.
1.3 "Deliverable Items" means the specific package of information and
materials relating to the Licensed Technology (defined below) necessary for Sage
to implement the Licensed Technology in Sage ASICs as set forth in Exhibit B.
<PAGE> 2
1.4 "Enhancement" means any modification, variation, revision or
adaptation to the Licensed Technology (defined below) that improves its
performance or reduces the cost of materials or production.
1.5 "Gross Margin" means, with respect to a Licensed Chip (defined below),
the Net Revenues (defined below) for such Licensed Chip less the Standard Cost
(defined below) of such Licensed Chip.
1.6 "Improvement" means any design, development, enhancement, modification
or improvement (whether or not patentable) relating to or arising from the
Licensed Technology and conceived or developed by either Party during the Term
of this Agreement.
1.7 "Joint Chip" means the first Licensed Chip (defined below) developed
by Sage in cooperation with Faroudja for use in connection with a universal
display controller.
1.8 "Joint Invention" means an Improvement (i) categorized by the Parties
as a Joint Invention prior to the commencement of any development of such
Improvement, (ii) made jointly by employees or Contractors of Faroudja and Sage
during the term of this Agreement or (iii) made solely by the employees or
Contractors of Sage during the term of this Agreement.
1.9 "Licensed Chip" means an ASIC that incorporates all or a portion of
the Licensed Technology (defined below) and that incorporates content provided
by Sage constituting [*] of the circuitry (measured by core die area) of such
integrated circuit device.
1.10 "Licensed Know-How" means the video decoding, enhancement and
deinterlacing technologies which are owned by Faroudja, on and after the
Effective Date, and incorporated in the technology transfer described on Exhibit
B annexed hereto, and any other information related thereto disclosed to Sage by
Faroudja through technical training sessions and ongoing technical support
described on Exhibit B.
1.11 "Licensed Patents" means those United States patents and patent
applications of Faroudja listed on Exhibit A; all corresponding patents or
patent applications issued by, or filed in, any other country; and all
continuations, continuations in part, substitutions, divisions, extensions,
reissues, reexaminations or renewals thereof.
1.12 "Licensed Technology" means Licensed Patents, Licensed Know-How and
Updates (defined below).
1.13 "Net Revenues" means the gross revenues from Sage's sale or other
distribution of Licensed Chips, but not including (i) sales and use taxes,
excise taxes, customs duties and other similar taxes levied in respect to such
sale or other disposition, (ii) shipping, handling, service, insurance and other
charges for delivery of Licensed Chips, and (iii) the amount of any bad debts,
refunds, returns, discounts and credits. In no event shall any taxes on Sage's
income be considered in a calculation of Net Revenues.
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 3
1.14 "Standard Cost" means, with respect to a Licensed Chip, Sage's current
net per-unit costs for the fabrication, packaging and testing of units of such
Licensed Chip, together with all product-related costs necessary to bring such
Licensed Chip to the point of sale, including but not limited to shipping,
handling, insurance and storage charges.
1.15 "Subsidiary" means, with respect to a Party, an entity as to which
such Party owns and controls a majority of the capital stock (or, in the case of
a noncorporate entity, equivalent interests) representing the right to vote for
the election of directors or another managing authority, but such entity shall
be deemed to be a Subsidiary only so long as such ownership and control exist.
1.16 "Trademarks" means Faroudja's logos and other trademarks set forth on
Exhibit C, as such marks vary in appearance and/or style from time to time.
1.17 "Updates" means technology updates to fix bugs and/or correct errors
to the Licensed Technology developed by Faroudja for its own use or in response
to a report of a bug or error from Sage pertaining to the Licensed Technology,
regardless of whether such updates are licensed to any third party.
2. Technology License Grant.
2.1 License. Subject to the terms and conditions of this Agreement,
Faroudja hereby grants to Sage, a non-exclusive (except as provided in Section
5), non-transferable (except as provided in Sections 2.3 and 18.3), worldwide,
royalty-bearing right and license under all of Faroudja's copyright, patent,
trade secret, mask work, know how and other intellectual property rights in the
Licensed Technology:
(i) to design and develop, and engage Contractors to design and
develop, modifications to and derivatives of the Licensed Technology for the
purpose of creating Licensed Chips;
(ii) to use and engage third-party contractors to use the Licensed
Technology, including such modifications and derivatives, in the design and
development of Licensed Chips; and
(iii) to manufacture, have manufactured, sell and otherwise distribute
Licensed Chips.
The license granted in this Section 2.1 will be deemed to include a
license to Sage under all Joint Inventions.
2.2 Trademark License. Faroudja hereby grants to Sage a non-exclusive,
non-transferable (except as provided in Sections 2.3 and 18.3), worldwide right
and license to use Trademarks in Sage's marketing, sale and distribution of
Licensed Chips, subject to the terms and conditions of Section 16.
2.3 Sublicense Rights. Sage shall not have the right to sublicense any of
the rights or licenses granted to Sage under this Agreement, except that Sage
may grant sublicenses to Sage Subsidiaries that agree in writing that they are
subject to the terms and conditions of this Agreement and that Faroudja has all
rights of action against the Subsidiaries that it would have against Sage.
<PAGE> 4
2.4 Disclosure. Sage shall not disclose Faroudja Confidential Information
to its Subsidiaries or Contractors except in connection with the design,
manufacture or provision of products or services relating to the manufacture or
provision of Licensed Chips for Sage and/or its Subsidiaries. Disclosure shall
be limited to such portions of the Licensed Technology as are necessary to the
provision of such products or services. Any such disclosure shall be pursuant to
written confidentiality agreements that contain provisions at least as
restrictive as those which apply to Sage under this Agreement, providing for the
limited and secure use and storage of the Licensed Technology. Faroudja shall
not disclose Sage Confidential Information to its Subsidiaries or Contractors
except in connection with the provision of products or services relating to the
sale and distribution of Licensed Chips for Faroudja and/or its Subsidiaries.
Disclosure shall be limited to such portions of Sage Confidential Information as
are necessary to the provision of such products or services. Any such disclosure
shall be pursuant to written confidentiality agreements that contain provisions
at least as restrictive as those which apply to Faroudja under this Agreement.
3. Faroudja's Delivery and Technical Support Obligations.
3.1 Deliverable Items. Faroudja shall deliver to Sage the Deliverable
Items set forth in Exhibit B relating to each element of the Licensed Technology
in the manner and at the times set forth therein and, pursuant to Exhibit B,
according to the delivery schedule established by mutual agreement of the
Parties and attached to this Agreement. Upon receipt of such Deliverable Items,
if Sage determines that the Deliverable Items are insufficient for Sage to
implement the Licensed Technology in Licensed Chips, the Parties shall confer in
good faith and Faroudja shall promptly provide Sage with any information and
materials that the Parties deem necessary for Sage to implement the Licensed
Technology in Licensed Chips. Faroudja's failure to complete delivery of the
Deliverable Items will constitute a material breach by Faroudja of this
Agreement.
3.2 Updates. Faroudja shall deliver Updates to Sage at no charge, not
later than seven (7) days after the availability thereof.
3.3 Enhancements. If Faroudja licenses or otherwise makes available
Enhancements to any third party, other than an Affiliate of Faroudja or as a
result of a change of control as permitted by Section 18.3, for inclusion in
integrated circuits, Sage shall be entitled to obtain delivery of and a license
to such Enhancements on terms and conditions at least as favorable to Sage as
the terms and conditions offered by Faroudja to such third party; provided,
however, Faroudja shall, within seven (7) days after Faroudja enters into such
license with such third party, notify Sage in writing of the availability and
content of such license and, if it intends to accept such license, Sage must
inform Faroudja of its intent to accept such license within sixty (60) days from
the receipt of notification from Faroudja of the availability thereof.
3.4 Technical Support. During the term of this Agreement, Faroudja will
provide Sage with the technical support and training regarding the Licensed
Technology and Deliverable Items described on Exhibit B.
<PAGE> 5
4. Payments.
4.1 Fees.
(i) License Fee. In consideration of Faroudja's agreement to pay to Sage
the sum of five hundred thousand dollars ($500,000), Faroudja's agreement to
provide Sage with the Deliverable Items, Faroudja's license to Sage of the
Licensed Technology, Faroudja's agreement regarding transfer of the Licensed
Technology in Section 5.2, and the other terms and conditions of this Agreement,
on the Effective Date Sage shall pay Faroudja one million one hundred
twenty-five thousand (1,125,000) shares of Sage common stock as a license fee
(the "License Fee") pursuant to the transactions contemplated by that certain
Stock Purchase Agreement, Voting Agreement and Investors' Rights Agreement,
dated as of the date hereof and incorporated in their entirety herein by
reference. Faroudja shall not sell or otherwise alienate the License Fee until
the earlier to occur of (i) the end of the Exclusivity Period (as defined in
Section 5.2) and (ii) the availability of first samples of the Joint Chip.
(ii) Payment by Faroudja. Faroudja shall pay to Sage the sum of five
hundred thousand dollars ($500,000) on the Effective Date.
4.2 Royalties. For each unit of a Licensed Chip sold by Sage, Sage will
pay to Faroudja a royalty ("Royalty") equal to a percentage of Net Revenues on
such unit, as follows:
<TABLE>
<CAPTION>
Units of Licensed Chips Sold Royalty
- ---------------------------- -------
<S> <C>
1 unit to [*] units [*]% of Net Revenue
[*] to [*] units [*]% of Net Revenue
[*] to [*] units [*]% of Net Revenue
Over [*] units [*]% of Net Revenue
</TABLE>
All Royalties due Faroudja shall accrue upon the sale by Sage or a licensed
Sage Subsidiary of such Licensed Chips. Notwithstanding the foregoing, neither
Sage nor its licensed Subsidiaries shall pay Royalties on units of the Licensed
Chip that (i) are sold to Faroudja or its Subsidiaries, or (ii) are used for
internal purposes to facilitate the production and marketing of the Licensed
Chip, including but not limited to such purposes as testing, demonstrating,
end-user evaluation and sampling.
4.3 Discretion in Pricing. Sage and its licensed Subsidiaries shall be
free to determine their own list price for the Licensed Chips (and any discount
applied thereto) and no representative of Faroudja has any authority to dictate
Sage's or its licensed Subsidiaries' price for, or in any way inhibit Sage's or
its licensed Subsidiaries' pricing discretion with respect to, the Licensed
Chips.
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 6
4.4 Minimum Per Unit Royalty Payment. Sage and its licensed Subsidiaries
will pay to Faroudja at least a minimum Royalty payment of $[*] per unit of
Licensed Chip sold.
4.5 Royalty Payments for Combinations. Sage and its licensed Subsidiaries
may, at their discretion, incorporate the Licensed Chip in a board (a
"Combination"), and may offer such Combination at a single price.
Notwithstanding Section 4.2, Royalty payments for each sale of a Combination
shall be calculated based on the amount charged by Sage or its licensed
Subsidiaries for Sage's or its licensed Subsidiaries' sale of the Licensed Chip
component of such Combination, and shall not be calculated based on the amount
charged for the sale of the Licensed Chip component of a Combination shall be
deemed to be the [*]; provided, however, the [*] and the amount charged for any
Licensed Chips that are sold in excess [*] will be calculated based on the [*].
For the purpose of this Section 4.5, [*] means the value at which the Licensed
Chip [*] by Sage, or its Subsidiaries, as the case may be, [*], in similar
quantities. In no event shall the per-unit Royalty for Licensed Chips sold as
part of Combinations be less than $[*].
4.6 Most Favored Royalty Rate. If Faroudja licenses or otherwise makes
available the Licensed Technology to any third party on royalty terms that are
more favorable to such third party than the Royalty terms in Section 4.2, Sage
and its licensed Subsidiaries shall be entitled to rely on the same royalty
terms offered by Faroudja to such third party. Faroudja shall promptly notify
Sage in writing of any royalty terms that Faroudja offers to any third party
that are more favorable to such third party than the Royalty terms in Section
4.2. If Sage chooses to substitute the royalty terms in this Agreement for the
royalty terms offered to a third party, it shall notify Faroudja of its decision
within sixty (60) days upon receipt of notification from Faroudja of the
availability thereof. The operation of this Section 4.6 shall not require the
recalculation or refund of any payments previously made to Faroudja by Sage.
4.7 Payments; Royalty Reports. Royalties shall be payable within
forty-five (45) days after the end of each fiscal quarter, based on Net Revenues
during the preceding calendar quarter. With respect to Net Revenues generated in
a currency other than U.S. dollars, for purposes of calculating Net Revenues,
Sage will convert the selling currency to U.S. dollars based on the average
exchange rate for each month of such fiscal quarter for such currency set forth
in the final edition of The Wall Street Journal (version distributed in Northern
California). All payments required to be made under this Agreement shall be made
in U.S. dollars and be made payable to the order of "Faroudja Laboratories,
Inc." Payment may be made by check, direct deposit to Faroudja's bank or wire
transfer.
4.8 Royalty Reports. Concurrently with each Royalty payment, Sage shall
provide Faroudja with a written Royalty report specifying: (i) the gross number
of units of the Licensed Chip sold by Sage and its Subsidiaries, by type of
Licensed Chip, during the reporting period, (ii) Net Revenues by type of
Licensed Chip, (iii) the Royalty rate applied, and (iv) the total Royalties
determined to be due in the reporting period. The report will be accompanied by
a good faith, non-binding projection of the Royalties that Sage forecasts will
be payable to Faroudja with respect to the next calendar quarter.
4.9 Verification. Not more than once per year, following fifteen (15)
days' notice and at mutually acceptable times during Sage's regular business
hours, Sage will make available for audit by an independent public accountant,
at Sage's offices, such books and records as may reasonably be required to
verify Sage's compliance with this Agreement; provided, however,
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 7
such independent public accountant shall agree in writing to bound by
confidentiality obligations substantially similar to those that are binding on
Faroudja under this Agreement. Faroudja agrees to pay the cost of such audits
unless the amounts paid to Faroudja are found to be less than ninety-five
percent (95%) of the amounts due to Faroudja for the audited period, in which
event Sage shall reimburse Faroudja for the cost of such audit. Audits shall not
unreasonably interfere with Sage's business activities.
4.10 Maintenance of Records. Sage shall maintain, on a rolling thirty-six
(36) month basis, while this Agreement is in effect and for a period of at least
three (3) years thereafter, such accurate books and records as shall be
necessary to confirm Sage's compliance with this Agreement. Such records shall
include, without limitation, information necessary to compute payments due to
Faroudja hereunder.
4.11 Late Payment. If Sage fails to pay any payment due under this
Agreement on or before the due date thereof, then the delinquent amount shall be
subject to a late charge equal to one and one-half percent (1.5%) per month from
the due date until paid. If this late charge exceeds the maximum rate allowed by
law, then the late charge shall accrue at the maximum allowable rate.
4.12 Disputed Payments. Acceptance by Faroudja of any payments under this
Agreement shall not prevent Faroudja, at a later date, from disputing the amount
owed or from demanding more information from Sage regarding payments finally
due, and such acceptance of any payment by Faroudja shall not constitute a
waiver of any breach of any term or provision of this Agreement by Sage if any
breach shall have occurred.
4.13 Taxes. In addition to any other payments due under this Agreement,
Sage shall pay, and hereby agrees to indemnify and hold Faroudja harmless from,
any sales, use, excise, import or export, value-added or similar tax or duty not
based on Faroudja's income, including any penalties and interest, as well as any
costs associated with the collection or withholding thereof, and all government
fees, license fees and customs and similar fees levied on the delivery of any
services or the Licensed Technology to Sage (collectively, "Taxes"). All
payments due under this Agreement shall be made without any deduction or
withholding for any Taxes, unless such deduction or withholding is required by
any applicable law of any relevant government authority then in effect. If Sage
is required to deduct or withhold any Taxes other than in connection with any
failure by Faroudja to make payment of any Taxes, Sage will promptly notify
Faroudja of the requirement, pay the required amount to the relevant
governmental authority, provide Faroudja with an official receipt or certified
copy or other documentation acceptable to Faroudja evidencing the payment, and
gross-up the payments subject to any such deduction or withholding, and pay to
Faroudja, in addition to the payment to which Faroudja is otherwise entitled
under this Agreement, such additional amount as is necessary to insure that the
net amount actually received by Faroudja after any such deduction or withholding
equals the full amount Faroudja would have received had no such deduction or
withholding been imposed. In the event that Faroudja receives any allowable or
actual financial benefit from any Taxes so paid by Sage such that, together with
the grossed-up payment amount paid by Sage, Faroudja receives, or is entitled to
receive, more than the full amount Faroudja would have received had no such
deduction or withholding been imposed, then Faroudja shall promptly refund to
Sage any such excess, or at Sage's option, apply such excess to future
Royalties.
<PAGE> 8
5. Exclusivity.
5.1 During the term of this Agreement, Sage shall not develop, for use in
products licensed, sold or distributed by Sage to third parties or for use in
products licensed, sold or distributed through a private label, any board-level
video processor product that incorporates a Licensed Chip and is intended to be
used as a standalone video processor similar to the following Faroudja [*]
products: [*]
5.2 Faroudja will not license the Licensed Know-How or engage in a
transfer of the Licensed Technology similar to that described in Exhibit B to
[*] until the earliest of the following dates: (i) fifteen (15) months after the
Effective Date; (ii) eight (8) months after the delivery of the last of the
Deliverable Items if Sage has not taped out the Joint Chip prior to such date;
or (iii) ten (10) months after the delivery of the last of the Deliverable Items
if Sage has not produced first samples of the Joint Chip prior to such date (the
"Exclusivity Period").
6. Joint Chip.
6.1 Joint Chip. Sage will use commercially reasonable efforts to commit
the resources necessary to develop the Joint Chip as the first Licensed Chip at
the earliest possible date.
6.2 Marketing of Joint Chip. Sage shall use commercially reasonable
efforts to market the Joint Chip. Subject to the foregoing, Sage shall have sole
discretion in determining when and how to market the Joint Chip.
7. Faroudja's Rights To Purchase Licensed Chips.
7.1 Prices to Faroudja. Faroudja shall be entitled to purchase (a)
Licensed Chips for testing, demonstrating, end-user evaluation and sampling as
soon as reasonably practicable after they are available to Sage for those
purposes, and (b) production units of Licensed Chips from Sage at the earliest
time that Sage makes a Licensed Chip available to its customers, both of which
will be available to Faroudja for purchase from Sage at the following prices:
(i) for Licensed Chips to be used in liquid crystal display monitors, at
[*] at which such Licensed Chips are offered or sold by Sage to any third party
for similar quantities, less a percentage equal to the percentage Royalty which
would be due on such Licensed Chips pursuant to Section 4.2, above if they were
sold to a third party other than Faroudja;
(ii) for Licensed Chips to be used in projection applications and for
Licensed Chips to be used in the headset applications of Colorado MicroDisplay
and Sony, at a price that is [*] less than [*] at which such Licensed Chips are
offered or sold by Sage to any third party for similar quantities;
(iii) for Licensed Chips to be used in other applications, at a price that
is [*] less than [*] at which such Licensed Chips are offered or sold by Sage to
any third party for similar quantities.
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 9
7.2 Minimum Price. In no event will Sage be required to sell Licensed
Chips to Faroudja at a price that provides Sage with less than [*] Gross Margin.
If application of the pricing provisions of Section 7.1 to any proposed Licensed
Chip purchase by Faroudja would provide Sage with less than [*] Gross Margin,
the price to Faroudja of such Licensed Chips will be increased to a level which
will provide Sage with [*] Gross Margin.
7.3 Allocation of Licensed Chips. Within fifteen (15) days of the end of
each calendar quarter, Faroudja will provide to Sage a good faith, non-binding
projection of the quantities of Licensed Chips that Faroudja forecasts it will
purchase with respect to the next calendar quarter. If demand for the Licensed
Chips necessitates allocation, Licensed Chips will be allocated equitably among
Faroudja and other customers in proportion to quantities ordered.
7.4 Additional Sage Support. If Faroudja purchases Licensed Chips from
Sage,
(i) Sage will provide to Faroudja, at no charge to Faroudja, the same
firmware or software necessary to fully utilize such Licensed Chips as Sage
provides to other customers purchasing the same Licensed Chips, and Sage will
grant to Faroudja the same standard license (with the right to grant sublicenses
if such rights are granted to other customers) to use such firmware or software
as Sage provides to other customers purchasing the same Licensed Chips as
necessary to fully utilize such Licensed Chips;
(ii) if any license rights to Sage firmware or software are granted by
Sage to purchasers of Licensed Chips from Sage, Faroudja's license rights to
Sage firmware or software under Section 7.4(i) will include the right to grant
sublicenses to Faroudja customers to the extent necessary for Faroudja to grant
the same rights to purchasers of Licensed Chips from Faroudja as Sage grants to
purchasers of Licensed Chips from Sage;
(iii) Sage will provide Faroudja with a reasonable amount of technical
support regarding the firmware or software provided with such Licensed Chips;
(iv) Sage will disclose the firmware or software provided with such
Licensed Chips to Faroudja in the same form (source code or object code) and
under the same standard terms and conditions as Sage discloses such firmware or
software to other customers purchasing the same Licensed Chips; and
(v) Sage will customize any software provided by Sage with such Licensed
Chips, at Faroudja's reasonable request, on terms to be negotiated by the
Parties in good faith. If Sage is unwilling or unable to provide such
customization services on a timely basis and under commercially reasonable terms
and conditions, Sage will provide to Faroudja source code reasonably necessary
for Faroudja to make or have made the necessary modifications for Faroudja's or
Faroudja's customers' use with Licensed Chips purchased from Sage.
7.5 Discontinued Products. Sage shall notify Faroudja of its intention to
discontinue the production of any Licensed Chips at least ninety (90) days prior
to the date of the last scheduled production run. Faroudja shall have the right,
exercisable during the thirty (30)
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 10
day period following such notice, to submit a final purchase order for the
Licensed Chips being discontinued.
8. Ownership of Intellectual Property Rights
8.1 Agreements with Employees. Each of the Parties hereto represents to
the other Party that it has, or will have, prior to commencement of the
activities called for under this Agreement, valid and sufficient arrangements
and agreements with its respective employees and Contractors, such that the
ownership of any and all inventions that can be deemed Joint Inventions made by
an employee or Contractor vests in the Party hereto employing said employee or
Contractor, subject to the provisions of the applicable law governing ownership
of such inventions.
8.2 Licensed Technology. Faroudja shall retain all ownership, right, title
and interest in and to the Licensed Technology and proprietary rights related
thereto. No license is granted to Sage under any such rights other than the
license granted in this Agreement.
8.3 Faroudja Inventions and Improvements. Faroudja shall own all
ownership, right, title and interest in and to inventions made exclusively by
Faroudja employees or Contractors during the term of this Agreement. The license
granted in Section 2.1 will be deemed to include a license to Sage under Joint
Inventions. No other license is granted to Sage under any such rights other than
the license granted in this Agreement.
8.4 Sage Inventions and Improvements. Sage shall own all ownership, right,
title and interest in and to inventions made exclusively by Sage employees or
Contractors during the term of this Agreement, except to the extent that such
inventions are Joint Inventions.
8.5 Joint Inventions. Joint Inventions shall be jointly owned by Faroudja
and Sage, with each holding an undivided fifty percent (50%) ownership interest
in such Joint Invention. With respect to such Joint Inventions, (i) the Parties
shall agree on a case-by-case basis which Party will file United States and
foreign patent applications and other filings, recordation or registrations, if
any, (ii) the Parties shall share equally the reasonable cost of all mutually
agreed upon patent applications and other filings, recordation or registrations,
and (iii) each Party shall enjoy all rights of ownership of such Joint
Inventions, including the right to license and otherwise freely exploit such
Joint Inventions, without a right or duty of accounting; provided, however, with
respect to Joint Inventions created solely by Sage or its employees or
Contractors, during the term of this Agreement Faroudja will not license such
Joint Inventions to [*].
8.6 Registration. Except as expressly set forth herein, Sage shall not
seek or obtain any registration of any of the Licensed Technology in any name
other than that of Faroudja or participate directly or indirectly in such
registration anywhere in the world without Faroudja's prior written consent. If
Sage has obtained or obtains in the future, in any country, any registered,
filed, recorded or other right, title or interest in any of the Licensed
Technology, or in any other intellectual property right of Faroudja, Sage has so
acted or will act as an agent and for the benefit of Faroudja for the limited
purpose of obtaining such registrations and assigning the same to Faroudja. Sage
shall execute any and all instruments deemed by Faroudja, or its
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[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 11
respective attorneys or representatives, to be necessary to transfer such right,
title or interest to Faroudja.
8.7 Power of Attorney. During the term of this Agreement and for a period
of two (2) years thereafter, each Party agrees to execute such documents, render
such assistance and take such other actions as the other Party may reasonably
request, to assist the requesting Party to apply for, register, perfect, confirm
and protect the requesting Party's rights in the Licensed Technology, inventions
and Improvements in accordance with the ownership rights set forth in this
Agreement. Each Party will assist the other in obtaining and enforcing patents
and other protection with respect to the Licensed Technology, inventions and
Improvements in accordance with the ownership rights set forth in this Agreement
in any and all countries during and after the term of this Agreement. Neither
Party shall incur any expense with respect to any such assistance provided to
the other Party. If a requesting Party is unable to secure the other Party's
signature to any lawful and necessary document that accurately reflects the
ownership rights established under this Agreement, where such document is
required to apply for, execute, perfect, enforce or protect any patent or other
rights with respect to any Licensed Technology, invention or Improvement that is
the subject of this Agreement, then the non-requesting Party hereby designates
and appoints the requesting Party as its agent and attorney in fact to act for
and on behalf of and instead of the non-requesting Party to execute any such
documents and to take any such action in the name of the non-requesting Party.
9. Faroudja's Representations and Warranties.
9.1 Faroudja represents and warrants to Sage as follows:
(a) Title. Faroudja owns all right and title to the Licensed Patents
or otherwise has the right and authority to grant licenses of the Licensed
Patents to Sage.
(b) No Misappropriation. The Licensed Technology does not constitute
or contain any trade secrets of anyone other than Faroudja or one from whom
Faroudja has received rights to use and disclose such trade secrets under
license to Sage.
(c) No Trademark Infringement. The Trademarks do not infringe the
trademark rights of any person or entity.
(d) No Copyright Infringement. The Licensed Technology does not
infringe any copyright rights, including but not limited to the mask work
rights, of any person or entity.
(e) Non-Infringement of Known Patents. Faroudja has not received and
is not aware of any notice or allegation nor is it aware of any facts that would
suggest that the Licensed Technology infringes any valid patents or other
intellectual property rights owned by any person.
(f) Notices of Infringement. Faroudja has not received and is not
aware of any notice or allegation that any of the Licensed Technology infringes
any third-party intellectual property rights.
<PAGE> 12
9.2 Disclaimer of Warranty. In addition to the disclaimer of warranties
contained in Section 13.3 hereof, Faroudja specifically disclaims any warranty
that the Licensed Technology is error-free, complete or sufficient for the
manufacture and sale of the Licensed Chips.
10. Mutual Representations and Warranties.
Each Party hereby represents and warrants to the other Party as follows:
10.1 Corporate Existence and Power. Such Party (i) is a corporation duly
organized, validly existing and in good standing under the laws of the state in
which it is incorporated, (ii) has the corporate power and authority and the
legal right to own and operate its property and assets and to carry on its
business as it is now being conducted, and (iii) is in compliance with all
requirements of applicable law, except to the extent that any noncompliance
would not have a material adverse effect on its properties, business, financial
or other condition and would not materially adversely affect its ability to
perform its obligations under this Agreement.
10.2 Authorization and Enforcement of Obligations. Such Party (i) has the
corporate power and authority and the legal right to enter into this Agreement
and to perform its obligations hereunder, and (ii) has taken all necessary
corporate action on its part to authorize the execution and delivery of this
Agreement and the performance of its obligations hereunder. This Agreement has
been duly executed and delivered on behalf of such Party, and constitutes a
legal, valid, binding obligation, enforceable against such Party in accordance
with its terms.
10.3 No Conflict. The execution and delivery of this Agreement and the
performance of such Party's obligations hereunder (i) do not conflict with or
violate any requirement of applicable law or regulation, and (ii) do not
conflict with, or constitute a default under, any of its contractual
obligations.
10.4 No Warranties to Other Party's Customers. To the extent that either
Party makes any warranty to its customers with respect to the Licensed Chips,
such warranty shall be made solely for such Party's account and shall not bind
the other Party.
11. Faroudja's Indemnity.
11.1 Faroudja shall defend and hold harmless Sage against any legal action
to the extent based on a third-party claim that (i) Faroudja does not have the
right to grant the license granted by Faroudja to Sage under this Agreement,
(ii) the Licensed Technology, a modification or addition to the Licensed
Technology made by or for Faroudja or a Deliverable Item infringes a copyright,
trade secret, mask work, patent or other intellectual property rights of the
third party; or (iii) the Trademarks infringe the trademark rights of the third
party. Sage agrees to provide Faroudja with prompt notice of the claim, provided
that failure to provide such notice does not relieve Faroudja of the obligations
imposed by this section unless the failure to provide notice materially
prejudices Faroudja's rights. Sage further agrees to provide all reasonable
cooperation to Faroudja in defending a claim and agrees that Faroudja shall
control the defense and any settlement of the claim, provided, that any
settlement shall not impose any liability on Sage. Faroudja's obligations under
this Section 11.1 will not apply to (a) any use or combination of the Licensed
Technology or Deliverable Items by Sage with any software, hardware, component
or other technology not supplied by Faroudja, (b) any modifications or additions
to
<PAGE> 13
the Licensed Technology made by or for Sage (unless such modifications or
additions were made at Faroudja's request or instruction); (c) Faroudja's
compliance with Sage's instructions, drawings, designs or functional
specifications, or (d) any alteration or modification of the Licensed Technology
other than an alteration or modification made by Faroudja or a Faroudja
Contractor or agent.
11.2 If there is a claim relating to the Licensed Technology or a
Deliverable Item covered by Section 11.1, Faroudja may, at its option and
expense, (i) procure for Sage the past and future rights granted to Sage
hereunder with respect to the allegedly infringing portion of the Licensed
Technology or Deliverable Item; (ii) replace or modify the allegedly infringing
portion to make such portion non-infringing, provided that the replacement or
modified portion provides substantially the same functionality as the replaced
or original portion; or (iii) terminate this Agreement and reimburse Sage for
the total amount of the License Fee and Royalties paid hereunder.
11.3 THIS SECTION 11 STATES FAROUDJA'S ENTIRE OBLIGATION AND LIABILITY TO
SAGE WITH RESPECT TO ANY CLAIM REGARDING ACTUAL OR ALLEGED INFRINGEMENT OR
MISAPPROPRIATION OF THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.
12. Sage's Indemnity.
12.1 Sage shall defend and hold harmless Faroudja against any legal action
to the extent based on a third-party claim that any modification or addition to
the Licensed Technology made by or for Sage or any Licensed Chip purchased by
Faroudja from Sage (except to the extent Faroudja is required to indemnify Sage
pursuant to Section 11.1), infringes a copyright, trade secret, mask work,
patent or other intellectual property rights of the third party. Faroudja agrees
to provide Sage with prompt notice of the claim, provided that failure to
provide such notice does not relieve Sage of the obligations imposed by this
section unless the failure to provide notice materially prejudices Sage's
rights. Faroudja further agrees to provide all reasonable cooperation to Sage in
defending a claim and agrees that Sage shall control the defense and any
settlement of the claim, provided, that any settlement shall not impose any
liability on Faroudja. Sage's obligations under this Section 12.1 will not apply
(i) to any claim for which Faroudja is obligated to indemnify Sage pursuant to
Section 11; (ii) to any modifications or additions to the Licensed Technology
made for Faroudja; (iii) to Sage's compliance with Faroudja's instructions,
drawings, designs or functional specifications; (iv) to any use or combination
of the modifications or additions to Licensed Technology with any software,
hardware, component or other technology not supplied by Sage.
<PAGE> 14
12.2 If there is a claim relating to Licensed Chips covered by Section
12.1, Sage may, at its option and expense, (i) procure for Faroudja the right to
use the Licensed Chips with respect to the allegedly infringing portion of the
Licensed Chips; (ii) replace or modify the allegedly infringing portion to make
such portion non-infringing, provided that the replacement or modified portion
provides substantially the same functionality as the replaced or original
portion; or (iii) cease developing, manufacturing, selling or distributing
Licensed Chips, including the Joint Chip.
12.3 THIS SECTION 12 STATES SAGE'S ENTIRE OBLIGATION AND LIABILITY TO
FAROUDJA WITH RESPECT TO ANY CLAIM REGARDING ALLEGED INFRINGEMENT OR
MISAPPROPRIATION OF THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.
13. Limitation of Liability.
13.1. Neither Party shall be liable to the other Party for any incidental,
consequential, special or punitive damages arising out of or relating to this
Agreement, whether liability is based on breach of contract, breach of warranty
(express, implied or otherwise), indemnity or otherwise, and whether asserted in
contract, tort (including negligence and strict product liability) or otherwise,
and irrespective of whether such Party has been advised of the possibility of
any such damages. In no event shall either Party's aggregate liability in
connection with this Agreement exceed $100,000.
13.2 NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES (EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE), OTHER THAN AS EXPRESSLY SET FORTH IN SECTIONS
9 AND 10, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT OF
THIRD-PARTY RIGHTS, OR THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION.
EACH PARTY DISCLAIMS, AND IRREVOCABLY WAIVES, THE BENEFIT OF ANY REPRESENTATIONS
AND WARRANTIES NOT EXPRESSLY SET FORTH IN SECTIONS 9 AND 10, RESPECTIVELY.
14. Term; Termination.
14.1 Term. This Agreement, and the rights and licenses granted by Faroudja
to Sage pursuant to this Agreement shall commence on the Effective Date and
continue in perpetuity, unless earlier terminated as provided in this Section
14.
14.2 Termination for Breach. If either Party materially breaches any
material provision of this Agreement, then the other Party may elect to
terminate this Agreement if the defaulting Party fails to cure the breach within
thirty (30) days of receipt of written notice describing such breach.
14.3 Termination for Convenience. Sage shall have the right to terminate
this Agreement for convenience after completion of the fifth year of the term of
this Agreement upon sixty (60) days notice to Faroudja; provided, however,
Faroudja shall have the right, exercisable
- --------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
<PAGE> 15
during the thirty (30) day period following such notice, to submit a final
purchase order for Licensed Chips.
14.4 Insolvency. Either Party shall have the right to suspend its
performance under this Agreement by written notice to the other Party, if such
other Party shall: (1) become insolvent or bankrupt or cease to do business, be
unable or admit in writing its inability to pay all debts as they mature or make
a general assignment for the benefit of or enter into any composition or
arrangement with creditors; (2) authorize, apply for, or consent to the
appointment of a receiver or trustee, or liquidate all or a substantial part of
its assets or have proceedings seeking such appointment commenced against it
which are not terminated within sixty (60) days of such commencement; or (3)
file a voluntary petition under any bankruptcy or insolvency law, or file a
voluntary petition under the reorganization or arrangement provisions of the
United States Bankruptcy Act or any similar laws of any jurisdiction or have
proceedings under such laws instituted against it which are not terminated
within thirty (30) days of such commencement. Such suspension of performance
shall remain in effect until such other Party (a) assumes this Agreement and
provides adequate assurances of its future performance under this Agreement, or
(b) rejects this Agreement.
14.5 Additional Bankruptcy Provisions. If Faroudja ceases to conduct
business through liquidation or forced dissolution, voluntary or involuntary
liquidation or reorganization under the United States Bankruptcy Code or
otherwise ceases to do business, or rejects this Agreement under Section 365 of
the Bankruptcy Code, the provision of 11 U.S.C. ss. 101(56) and 365(n) shall
apply and Sage may elect to (i) treat this Agreement as immediately terminated,
or (ii) retain Sage's rights under this Agreement. All rights and licenses
granted to Sage pursuant to this Agreement are, and shall be deemed to be, for
purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to
"intellectual property" as defined under Section 101 of the U.S. Bankruptcy
Code. In a bankruptcy or insolvency proceeding involving Faroudja, the Parties
agree that Sage, as licensee of such rights, shall retain and fully exercise all
of its rights and elections under the U.S. Bankruptcy Code, and the provisions
thereof shall apply notwithstanding conflict of law principles. If, in a
bankruptcy or insolvency proceeding involving Faroudja, the provisions of the
U.S. Bankruptcy Code referenced above are determined not to apply, Sage shall
nevertheless be entitled to no less than the protection offered by the
provisions of the U.S. Bankruptcy Code with respect to its entitlement to and
rights to the use and possession of all intellectual property to which Sage has
been granted rights under this Agreement notwithstanding the bankruptcy or
insolvency of Faroudja.
14.6 Effect of Termination. Upon termination of this Agreement, all rights
and licenses granted hereunder will terminate, and each Party will be released
from all obligations and liabilities to the other occurring or arising after the
date of such termination. Upon termination by Sage pursuant to Section 14.2, (a)
Sage will receive a non-exclusive, perpetual right and license to: (i) design
and develop, and engage third-party contractors to design and develop,
modifications to and derivatives of the Licensed Technology, (ii) use and engage
third-party contractors to use the Licensed Technology, including such
modifications and derivatives, in the design and development of Licensed Chips,
and (iii) manufacture, have manufactured, sell and otherwise distribute such
Licensed Chips; provided, however, such right and license is contingent on Sage
continuing to pay to Faroudja a Royalty at rates that are equal to fifty percent
(50%) of the Royalty rates set forth in Sections 4.2 and 4.5 of this Agreement
and fifty percent
<PAGE> 16
(50%) of the minimum Royalty payment set forth in Section 4.4. Notwithstanding
anything to the contrary in this Section 14.6 and provided Sage complies with
its payment obligations pursuant to Sections 4.2 and 4.4, Sage may dispose of
any Licensed Chips that it has manufactured prior to termination of the
Agreement for a period of one hundred twenty (120) days after the effective date
of such termination and shall have the right to fulfill any obligations to
deliver Licensed Chips pursuant to binding orders entered into before the
termination of the Agreement.
14.7 Survival. Notwithstanding anything in Section 14.6 to the contrary,
the Parties' rights and obligations under Sections 4 (to the extent payment
obligations have accrued prior to termination or continue to accrue in
accordance with Section 14.6), 8.2, 8.3 (first sentence only), 8.4, 8.5, 11, 12,
13, 14, 15, 16.1, 16.4 and 18 shall survive termination of this Agreement.
15. Confidentiality.
The exchange of confidential information between the Parties pursuant to
this Agreement shall be governed by the terms of the Mutual Confidential
Disclosure Agreement signed between the Parties on April 27, 1999 (the
"Confidentiality Agreement"). The Confidentiality Agreement is hereby amended as
follows:
(i) Section 1 of the Confidentiality Agreement will be replaced with the
following:
"Purpose. The parties have entered into a Joint Development and
License Agreement (the "License Agreement") and Stock Purchase
Agreement, Voting Agreement and Investor Rights Agreement, both dated
as of the date hereof, relating to advanced video technologies and
the purchase of certain securities, under which each party may
disclose Confidential Information (as hereinafter defined) to the
other for the purposes set forth in such agreements."
(ii) Section 9 of the Confidentiality Agreement will be replaced with the
following:
"Term. This Agreement shall become effective as of the date written
above. This Agreement shall remain in effect as long as the License
Agreement or Stock Agreement remains in effect, whichever is longer.
The provisions of this Agreement shall apply to all Confidential
Information disclosed under this Agreement prior to termination and,
notwithstanding termination, shall survive for a period of three (3)
years from the date of each disclosure."
(iii) The following sentence shall be added at the end of Section 10 of the
Confidentiality Agreement:
"In the event of any conflict between the provisions of this
Confidentiality Agreement and the License Agreement and/or the Stock Agreement,
the License Agreement shall control."
16. Trademarks and Proprietary Notices.
16.1. Use of Faroudja Name and Trademarks. Sage acknowledges that Faroudja
has made a substantial investment in developing and maintaining an image and
reputation for high
<PAGE> 17
quality design, prestige and performance and that the Licensed Technology is
associated with products of consistently high quality and performance. The
Faroudja name and Trademarks may be used by Sage on Licensed Chips only with the
prior written notice, opportunity to review and consent of Faroudja.
16.2. Samples of Licensed Chips. Sage agrees that in order to use
Trademarks on Licensed Chips, the performance of Licensed Chips must adhere to
Faroudja standards of quality and performance. Faroudja will have the right to
test and evaluate all Licensed Chips with respect to which Sage seeks to use a
Trademark to confirm that the performance of such products is consistent with
the Faroudja image and reputation. The parties acknowledge their mutual interest
in the broad use of Trademarks. Faroudja will not unreasonably withhold its
consent to the use of such marks on Licensed Chips that adhere to Faroudja
quality and performance standards. To facilitate this process, (a) Sage will
provide to Faroudja samples of the Licensed Chips that will be sold under
Faroudja's Trademarks (which samples of the Licensed Chips shall be provided as
early in the design process as reasonably possible) together with a board and
firmware or software necessary for testing; and (b) Faroudja will evaluate
Licensed Chips within ten (10) business days of receipt of the samples or any
additional period of time as the Parties mutually agree upon (the "Review
Period"). If Faroudja notifies in writing Sage within the Review Period that the
sample Licensed Chip does not meet commercially reasonable standards of quality
and set forth the reasons for Faroudja's objections in reasonable detail, the
Parties shall confer in good faith to identify the changes that Sage must make
to the subject chip and, in the absence of agreement, Sage shall make
commercially reasonable efforts to remedy any of Faroudja's commercially
reasonable objections before making such chip generally available to the public.
If Faroudja fails to notify Sage in writing of its objections to a chip within
the Review Period, or if Faroudja does not approve the use of Trademarks with a
Licensed Chip, Sage shall have the right to make such Licensed Chips generally
available under Sage's trademarks or a private label, in Sage's sole discretion.
16.3. Samples of Marketing Material. Sage will provide to Faroudja samples
of any advertisement, brochure or other publicly distributed material that it
intends to use in connection with Licensed Chips and which contains a Faroudja
name or bears a Faroudja Trademark. Faroudja will notify Sage in writing within
seven (7) business days of receipt of such samples of any objections it has to
the usage of the Faroudja name or Trademark, and set forth the reasons for
Faroudja's objections in reasonable detail. Sage shall remedy the identified
objections and will provide revised samples to Faroudja. Faroudja will notify
Sage in writing within three (3) business days of receipt of such revised
samples of any objections it has to the usage of the Faroudja name or Trademark,
seting forth the reasons for Faroudja's objections in reasonable detail, and
Sage shall make commercially reasonable efforts to remedy the identified
objections. Faroudja will not unreasonably withhold its approval of any samples
provided pursuant to this Section 16.3.
16.4. Proprietary Rights Notices; Obligation to Use Appropriate Markings.
Sage shall use commercially reasonable efforts to affix the Trademark to each
Licensed Chip approved by Faroudja. Further, Sage agrees to use the appropriate
trademark, product descriptor and trademark symbol (either "TM" or circled "R"),
and clearly indicate Faroudja's ownership of its trademark(s) whenever any of
the Trademarks is first mentioned in any advertisement, brochure or
documentation. Sage shall use commercially reasonable efforts to affix to the
<PAGE> 18
documentation associated with each Licensed Chip approved by Faroudja the
patent, copyright, or other proprietary notices reasonably specified by
Faroudja. Sage will determine the size and placement of such notices given the
overall size and design and other markings on such Sage documentation.
17. Confidentiality of Agreement; Public Announcement.
17.1 Confidentiality of Agreement. The Parties agree that the terms and
conditions of this Agreement shall be deemed to be Confidential Information
under the Parties' Confidentiality Agreement and neither Party shall advertise,
issue any press release or otherwise publish the fact that the Parties have
entered into this Agreement without the prior written consent of the other
Party, except as may be required by law.
17.2 Initial Release. Notwithstanding the foregoing, within seven (7) days
of the Effective Date, Sage and Faroudja will issue a joint press release, the
terms and details of which both Parties shall agree upon.
17.3 Future Releases. After the press release announcing the signing of
this Agreement is issued, each Party may include the information included in
such press release in subsequent press releases and other publications without
the other Party's prior written consent, provided that such Party includes
proper attribution of the other Party's name.
18. Miscellaneous Provisions.
18.1 Notices. All notices required hereunder shall be in writing and shall
be sent by U.S. mail (first class) or nationally-recognized courier service
(e.g., DHL, Federal Express), with all postage or delivery charges prepaid, or
may be sent via facsimile, subject to confirmation via U.S. mail or
nationally-recognized courier service, and shall be addressed to the Parties at
their addresses set forth below or to such other address(es) as may be furnished
by written notice in the manner set forth herein. Notices shall be deemed to
have been served when delivered or, if delivery is not performed as a result of
the addressee's fault, when tendered.
<TABLE>
<S> <C>
Notices to Faroudja: Notices to Sage:
Faroudja Laboratories, Inc. Sage, Inc.
750 Palomar Avenue 2460 North First Street, #100
Sunnyvale, California 94086 San Jose, California 95131
Attn: Chief Executive Officer Attn: Company Secretary
Facsimile No.: 408.735.8571 Facsimile No.: 408.383.5310
With a copy to: With a copy to:
Faroudja Laboratories, Inc. John W. Campbell, III
750 Palomar Avenue Morrison & Foerster, LLP
Sunnyvale, California 94086 425 Market Street
Attn: General Counsel San Francisco, California 94105
Facsimile No.: 408.735.0142 Facsimile No.: 415.268.7522
</TABLE>
<PAGE> 19
18.2 Relationship. The relationship between the parties shall be that of
independent contractors. This Agreement shall not be construed as creating an
agency, partnership, joint venture or any other form of legal association
between the Parties other than as expressly set forth herein. Neither Party
shall have any right or authority to assume or create any obligation of any kind
or to make any representation or warranty on behalf of the other Party, whether
express or implied, or to bind the other Party in any respect whatsoever, except
as expressly set forth in this Agreement.
18.3 Limitation on Assignment. Neither Party shall be entitled to assign,
transfer or otherwise convey this Agreement or any of its rights hereunder to
any third party unless the written consent of the other Party shall first have
been obtained. Any attempted or purported assignment, sublicense, transfer,
conveyance or delegation without such prior consent (where required hereunder)
having been obtained shall be void and a breach of this Agreement.
Notwithstanding the foregoing, either Party can assign this Agreement in the
event of a transfer of all or substantially all of such Party's assets or the
merger or consolidation of such Party. Subject to the foregoing, this Agreement
shall bind and inure to the benefit of the Parties and their respective
successors and permitted assigns.
18.4 Non-Solicitation. Neither Party shall, during the first two (2) years
of this Agreement, either directly or indirectly, on its own behalf or in the
service of or on behalf of others, divert, solicit or hire away, or attempt to
divert, solicit or hire away, any person employed by the other Party, except
with the prior written consent of the other Party.
18.5 Force Majeure. Except for the obligation to pay money, neither Party
shall be deemed to be in breach or default of this Agreement as the result of
any delay or nonperformance which is caused by flood, fire, storm, earthquake,
or other Act of God, war acts of the public enemy, riot, civil disturbance,
strike, lockout or labor dispute.
18.6 Choice of Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, U.S.A., without reference
to conflicts of law principles except to the extent that United States federal
law preempts California law, in which case United States federal law (including,
without limitation, copyright, patent and federal trademark law) shall apply,
without reference to conflicts of law principles.
18.7 Attorneys' Fee. If either Party commences any action or proceeding
against the other Party to enforce this Agreement or any of its rights
hereunder, the prevailing Party in such action or proceeding shall be entitled
to recover from the other Party the reasonable attorneys' fees and all related
costs and expenses incurred by such prevailing Party in connection with such
action or proceeding and in connection with enforcing any judgment or order
thereby obtained.
18.8 No Waiver. No failure or delay by either Party in exercising any
right, power or remedy under this Agreement shall operate as a waiver of any
such right, power or remedy. No waiver of any provision of this Agreement shall
be effective unless in writing and signed by the Party against whom such waiver
is sought to be enforced.
<PAGE> 20
18.9 Amendments in Writing. No amendment to or modification of this
Agreement shall be binding unless in writing and signed by a duly authorized
representative of each of the Parties.
18.10 Severability. In the event that any provision of this Agreement (or
any portion hereof) is determined by a court of competent jurisdiction to be
illegal, invalid or otherwise unenforceable (an "Invalid Provision"), the
Parties shall substitute, by mutual consent, a valid and enforceable provision
for such Invalid Provision, which valid and enforceable provision in its effect
is sufficiently similar to the Invalid Provision that it can be reasonably
assumed that the Parties would have entered into this Agreement with such
alternate provision. If such provision cannot be agreed upon, the invalidity of
one or several provisions of this Agreement shall not affect the validity of
this Agreement as a whole, unless an Invalid Provision is of such essential
importance to this Agreement that it can be reasonably assumed that the Parties
would not have entered into this Agreement without the Invalid Provision.
18.11 No Third Party Beneficiaries. No provisions of this Agreement,
whether express or implied, are intended or shall be construed to confer upon or
give to any person or entity other than the specific Parties and their
Subsidiaries, as applicable, any rights, remedies or other benefits under or by
reason of this Agreement.
18.12 Headings for Convenience. The section headings used in this Agreement
are intended primarily for reference and shall not by themselves determine the
construction or interpretation of this Agreement or any portion hereof.
18.13 Entire Agreement. This Agreement, including all exhibits hereto,
constitutes the entire agreement and understanding of the Parties with respect
to the subject matter hereof, and, except for the Confidentiality Agreement,
supersedes all prior and contemporaneous correspondence, negotiations,
agreements and understandings between the Parties, and any representations and
warranties, both oral and written.
18.14 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and when taken together
shall constitute one and the same instrument.
In witness whereof, the duly authorized representatives of the Parties have
executed this Agreement as of the day and year first above written.
SAGE, INC. FAROUDJA LABORATORIES, INC.
By: /s/ CHANDRASHEKAR M. REDDY By: /s/ GLENN W. MARSHEL
----------------------------------- ------------------------------------
Name: Chandrashekar M. Reddy Name: Glenn W. Marshel
--------------------------------- ----------------------------------
Title: President and CEO Title: CEO
-------------------------------- ---------------------------------
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
of our report dated June 30, 1999 except for Note 13, as to which the date is
October 5, 1999, relating to the consolidated financial statements of Sage,
Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers
San Jose, California
October 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,473
<SECURITIES> 0
<RECEIVABLES> 893
<ALLOWANCES> 89
<INVENTORY> 412
<CURRENT-ASSETS> 3,861
<PP&E> 846
<DEPRECIATION> 414
<TOTAL-ASSETS> 4,293
<CURRENT-LIABILITIES> 2,390
<BONDS> 0
0
77
<COMMON> 95
<OTHER-SE> 1,731
<TOTAL-LIABILITY-AND-EQUITY> 1,309
<SALES> 7,132
<TOTAL-REVENUES> 7,132
<CGS> 4,914
<TOTAL-COSTS> 4,914
<OTHER-EXPENSES> 7,000
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (4,751)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,751)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
