<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
--------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-83665
SAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0501710
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1601 MCCARTHY BOULEVARD, MILPITAS, 95035
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 383-5300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2000, there were 13,789,926 shares of the Registrant's common
stock, $0.01 par value per share, outstanding.
===============================================================================
<PAGE>
SAGE INC
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 and March 31, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2000
and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2000 and 1999
(unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity for the six months ended September 30, 2000
(unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 MARCH 31,
(NOTE) 2000
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,873 $ 38,936
Accounts receivable, net 6,775 3,398
Inventory 2,455 1,132
Prepaids & other assets 1,152 765
-------------- -------------
Total current assets 61,255 44,231
Property & equipment, net 4,104 1,180
Deposits 1,745 -
Goodwill & other intangibles, net 114,115 -
-------------- -------------
Total assets $ 181,219 $ 45,411
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,189 $ 1,755
Accrued expenses and other liabilities 7,957 2,379
-------------- -------------
Total current liabilities 10,146 4,134
Commitments
Stockholders' equity (deficit):
Common stock, $0.01 par value; 50,000,000 shares
authorized; 13,780,000 and 10,467,000 issued and
outstanding 138 105
Additional paid-in capital 199,817 54,889
Notes receivable from stockholders (58) (75)
Deferred stock based compensation (220) (372)
Accumulated deficit (28,604) (13,270)
-------------- -------------
Total stockholders' equity 171,073 41,277
-------------- -------------
Total liabilities & stockholders' equity $ 181,219 $ 45,411
============== =============
</TABLE>
NOTE: September 2000 amounts include the assets and liabilities of Faroudja
purchased on June 7, 2000.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, (NOTE 1) SEPTEMBER 30, (NOTE 1)
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 8,598 $ 3,685 $ 15,074 $ 7,460
-------- -------- -------- --------
Cost of revenue 4,120 2,094 7,415 4,537
Amortization of intangibles charged to cost of revenue 250 -- 313 --
-------- -------- -------- --------
Gross profit 4,228 1,591 7,346 2,923
-------- -------- -------- --------
Operating expenses:
Research and development 2,253 1,090 3,692 1,805
Charge for in-process technology -- 2,500 7,200 2,500
Selling, general and administration 3,099 1,297 5,735 2,355
Amortization of intangibles 5,937 -- 7,438 --
Stock-based compensation (Note 2) 64 165 152 367
-------- -------- -------- --------
Total operating expenses 11,353 5,052 24,217 7,027
-------- -------- -------- --------
Loss from operations (7,125) (3,461) (16,871) (4,104)
Interest and other income (expense), net 884 57 1,537 83
-------- -------- -------- --------
Net loss $ (6,241) $ (3,404) $(15,334) $ (4,021)
======== ======== ======== ========
Net loss per share; basic and diluted (NOTE 3) $ (0.46) $ (1.03) $ (1.28) $ (1.36)
======== ======== ======== ========
Number of shares used in computing net loss per share:
Basic and diluted 13,648 3,295 12,014 2,956
======== ======== ======== ========
NOTE 1: Includes results of Faroudja for the period from June 8, 2000 to
September 30, 2000.
NOTE 2: Stock-based compensation charges:
Research and development $ 27 $ 95 $ 64 $ 212
Selling, general and administration 37 70 88 155
-------- -------- -------- --------
$ 64 $ 165 $ 152 $ 367
======== ======== ======== ========
</TABLE>
NOTE 3: Fully diluted earnings per share are not reported as the results would
be anti-dilutive.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,334) $ (4,021)
Adjustments to reconcile net loss to net
cash used in operating activities:
Charge for in-process technology 7,200 2,500
Depreciation 449 192
Amortization of intangibles 7,751 --
Stock compensation 152 367
Changes in assets and liabilities:
Accounts receivable (1,656) (1,417)
Inventories 306 350
Prepaid expenses and other assets (198) (155)
Accounts payable (70) 969
Accrued expenses and other liabilities (1,161) (44)
--------- --------
Net cash used in operating activities (2,561) (1,259)
--------- --------
Cash flows from investing activities:
Acquisition of property and equipment (2,523) (680)
Acquisition of other non-current assets (1,745) --
Net cash acquired with Faroudja 18,667 --
--------- --------
Net cash provided by (used in) investing activities 14,399 (680)
Cash flow from financing activities:
Payment received from shareholder for notes 17 --
Proceeds from issuance of common stock upon
exercise of stock options 82 540
Net proceeds from issuance of preferred stock -- 2,959
--------- --------
Net cash provided by financing activities 99 3,499
--------- --------
Net increase in cash and cash equivalents 11,937 1,560
--------- --------
Cash and cash equivalents at beginning of period 38,936 2,473
--------- --------
Cash and cash equivalents at end of period $ 50,873 $ 4,033
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 1 $ 8
========= =========
Non-cash investing and financing activities:
Issuance of common and preferred stock in lieu
of debt repayment $ -- $ 30
========= =========
Issuance of common stock in connection with
acquisition of Faroudja $ 144,879 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Deferred
Notes Compensation
COMMON STOCK Additional Receivable Related to
------------ Paid-in from Stock Accumulated
Shares Amount Capital Stockholders Options Deficit Total
------ ------ ------- ------------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 . 10,468 $ 105 $ 54,889 $ (75) $ (372) $ (13,270) $ 41,277
Issuance of common stock upon
exercise of stock options 131 2 80 - - - 82
Issuance of common stock in
connection with acquisition
of Faroudja. ......... 3,181 31 144,848 - - - 144,879
Repayment of notes receivable -- -- -- 17 -- -- 17
Amortization of deferred stock
based compensation ... - - - - 152 - 152
Net loss .................. - - - - - (15,334) (15,334)
----------------------------------------------------------------------------------------------
Balance at September 30, 2000 13,780 $ 138 $ 199,817 $ (58) $ (220) $ (28,604) $171,073
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
SAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and note disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted for
interim financial reporting. These condensed consolidated financial statements
should be read in conjunction with our financial statements and notes thereto
for the three years ended March 31, 2000 that are included in our S-1
Registration Statement filing with the Securities and Exchange Commission. We
believe that the accompanying financial statements reflect all adjustments,
consisting solely of normal, recurring adjustments, that are necessary for fair
presentation of the results of the interim periods presented. The results of
operations presented for the periods ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. EARNINGS PER SHARE
Primary earnings per share are computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during that
period. Diluted earnings per share have not been calculated for all periods
since the result would be anti-dilutive. All share and per share amounts have
been adjusted in all periods presented to reflect a three-for-one reverse split
effective October 1, 1999.
3. MERGER WITH FAROUDJA
On February 18, 2000 Sage and Faroudja, Inc. agreed to merge in a
transaction accounted for as a purchase. The total purchase price of $154.7
million included the issuance of Sage Common Stock valued at $133.9 million, the
assumption of Faroudja stock options and warrants valued at $16.8 million and
estimated direct transaction costs of $4.0 million. On June 7, 2000,
shareholders of Sage and Faroudja approved the Merger Agreement between the
companies, under which shareholders of Faroudja received 0.285 shares of Sage
Common Stock for every share held. Based on the value of Sage stock on June 7,
2000 the purchase price of Faroudja would have been approximately $64 million.
In compliance with US GAAP, Sage is required to value the transaction at $154.7
million based on the price of Sage stock on the date the proposal was originally
announced.
The allocation of purchase price, based in part upon an independent
appraisal was as follows (in thousands):
<TABLE>
<CAPTION>
ANNUAL USEFUL
AMOUNT AMORTIZATION LIFE
------ ------------ ------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net assets $ 25,652 $ -- --
Intangible assets acquired:
Developed technology 5,000 1,000 5 years
Trademark and trade name 2,500 500 5 years
Assembled workforce 940 188 5 years
Customer list 2,800 933 3 years
Goodwill 110,626 22,124 5 years
In-process research and development 7,200 -- --
-------- -------- -------
Total purchase price $154,718 $ 24,745
-------- --------
</TABLE>
Based on the results of this valuation, Sage reported a charge of $7.2
million for the write off of in-process technology, and approximately $7.8
million for amortization of intangibles for the six months ended September 30,
2000. The table below reflects the
7
<PAGE>
unaudited pro-forma combined results of Sage and Faroudja, as if the merger had
taken place at the beginning of the six months ended September 30, 2000 and
1999. The pro-forma information includes certain adjustments including non-cash
charges for amortization of intangibles amounting to $12.1 and $12.4 million for
the six months ended September 30, 2000 and 1999, respectively. Both periods
exclude a charge of $7.2 million for in-process technology. The pro-forma
information does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined companies. The number of shares used in September 1999 does not reflect
the conversion of Preferred stock into Common stock in conjunction with Sage's
IPO in November 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Net revenue $ 16,741 $ 14,625
Net loss (16,260) (14,593)
Net loss per share:
Basic and diluted $ (1.19) $ (2.32)
Weighted average shares outstanding:
Basic and diluted 13,619 6,299
</TABLE>
4. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
<S> <C> <C>
Raw materials $1,404 $ 306
Work-in-process 858 --
Finished goods 193 826
------ ------
Total $2,455 $1,132
====== ======
</TABLE>
5. SEGMENT INFORMATION
Sage operates in one reportable segment, which is the development and sale
of display processor integrated circuits ("ICs") and related circuit boards,
systems, 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 three
and six months ended September 30, 2000 and 1999 and its total assets as of the
respective dates were not material to Sage's consolidated financial statements.
8
<PAGE>
ITEM 2. 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 IN THE
PROSPECTUS ISSUED IN CONJUNCTION WITH OUR INITIAL PUBLIC OFFERING IN NOVEMBER
1999. 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.
OVERVIEW
We design, develop and market high performance digital display processors
used for digital displays and video processing. 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 processor ICs and will continue to do so as this is a
high-growth volume market serving major mass-market manufacturers of displays
and televisions. However, we also have a systems business supplying system
solutions to other market channels, and as of the September 2000 quarter, such
system sales actually represented 52% of our total revenue. These systems
comprise board level products, each including a display processor IC, which we
sell into the embedded display market through a network of distributors and OEM
customers, and a box level product which we sell into the home theater market
through a wide network of dealers and installers. We expect our IC business will
grow rapidly, while our system business remains static or even declines over
time resulting in ICs accounting for a growing majority of total revenue over
the next few years. Because board level products typically have lower margins
than ICs we expect this to have a beneficial impact on our gross margin. Even
though system activities are not our primary focus, we intend to continue to
offer products into the markets for the foreseeable future. Our board level
products provide a level of systems expertise that enables our major customers
to develop and customize their product offerings. Our box products, sold under
Faroudja's brand name, provide a powerful high-quality marketing umbrella which
serves to shelter and promote a quality image for all out video processing
products, including video processing ICs that may be developed and offered to
the market.
We recognize revenue at the time we ship products to our customers who
generally have a short lead-time and maintain relatively limited inventory. In
the case of systems products sold through distributors who may have limited
return rights, we do not recognize revenue until we have received evidence that
they have sold the inventory to their end customer.
Since November 1996, we have introduced a succession of new display processor
chips, starting with the Cheetah family and now featuring the Jaguar family. The
architecture of these chips has progressed from a .6 micron, through .5 and .35
micron to .25 micron and we are currently planning our first .18-micron
products. Our IC product development road map is driven by (i) introduction of
increasingly lower levels of design architecture to reduce cost and improve
performance; (ii) increasing levels of feature integration such as integrated
analog to digital conversion ("ADC") and digital receiver so as to lower total
system cost to our customer while increasing our average selling price; (iii)
addition of incremental features such as AutoSet which simplifies end user
calibration, Active Color Management which allows a manufacturer to ensure
consistent color appearance on panels sourced from different vendors, and
Picture in Picture (PiP) Autodetect to locate and optimize the color and
brightness of video window and background screen, and (iv) customization of our
various technology and IP cores to produce a wider range of ICs with optimized
price and performance levels for different market segments. Whereas at the
beginning of fiscal 1999 we offered only one IC, the Cheetah 2, we now offer a
series of eight different ICs, targeted at analog or digital interface monitors,
low or high resolution screens, and monitors
9
<PAGE>
(PC) or consumer products (televisions, DVDs and projectors). The products that
we are shipping or sampling at the end of September 2000 are set out as follows:
<TABLE>
<CAPTION>
IC DETAILS INTRO/ STATUS FEATURES
---------- ------------- --------
<S> <C> <C>
Cheetah 2 Apr 98/end of life Memory option
Cheetah 3 Apr 99/end of life Memory option, Integral ADC
Cheetah 4 Sep 99/old, still shipping Digital, Low cost
Jaguar 200 Aug 00/started shipping Memory option, Video/PiP option, SXGA
Jaguar 200MX Aug 00/started shipping Memory option, Video/PiP option, VWSGA
Jaguar D Jul 00/started shipping Digital, Active color, Video option
Jaguar 135/ASM Oct 00/sample silicon Memory option, Integral ADC, Integral PLL, Video/PiP option
FLI 2200 Oct 00/sample silicon De interlacer
</TABLE>
Currently, we produce packaged, assembled and tested semiconductor products.
However, we intend to 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 should improve
and that the transition should result in our having greater control over the
manufacturing process.
In November 1999, Sage completed an initial public offering of 3,450,000
shares of Common Stock at an initial offering price of $12.00 per share, raising
$37.2 million, net of underwriting commission and related expenses.
On February 18, 2000 Sage and Faroudja agreed to merge in a transaction that was
accounted for as a purchase. Faroudja is a developer and provider of home
theater systems that incorporate their proprietary decoding, de inerlacing and
video enhancement technologies. The total purchase price of $154.7 million
included the issuance of Sage Common Stock valued at $133.9 million, the
assumption of Faroudja stock options and warrants valued at $16.8 million, and
direct transaction costs of approximately $4.0 million. On June 7, 2000,
shareholders of Sage and Faroudja approved the Merger Agreement between the
companies, under which shareholders of Faroudja received 0.285 shares of Sage
Common Stock for every share held. Based on the value of Sage stock on June 7,
2000 the purchase price of Faroudja would have been approximately $64 million.
In compliance with US GAAP, Sage is required to value the transaction at $154.7
million based on the price of Sage stock on the date the proposal was originally
announced. As a result of the products and technology acquired in this
transaction, we have significantly strengthened our position in the consumer
display market with system level products targeted at the home theater and
broadcast markets, and have already developed the first of a new range of IC
products to serve the growing television, DVD and internet appliance markets.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain condensed
consolidated statement of operations data reflected as a percentage of revenues.
Our results of operations are reported as a single business segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ....................... 50.8 56.9 51.3 60.8
----- ----- ----- -----
Gross margin (loss) .................... 49.2 43.1 48.7 39.2
Operating expenses:
Research and development .......... 26.2 29.6 24.5 24.2
Charge for in-process technology .. -- 67.8 47.8 33.5
Selling, general and administration 36.0 35.2 38.1 31.6
Amortization of intangibles ....... 69.1 -- 49.3 --
10
<PAGE>
Stock based compensation .......... 0.7 4.4 1.0 4.9
----- ----- ----- -----
Total operating expenses 132.0 137.0 160.7 94.2
----- ----- ----- -----
Loss from operations .............. (82.9) (93.9) (112.0) (55.0)
Interest income (expense), net .... 10.3 1.5 10.2 1.1
----- ----- ----- -----
Net loss .......................... (72.6)% (92.4)% (101.8)% (53.9)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Our total revenues were $8.6 million and $3.7 million in the three
months ended September 30, 2000 and 1999, respectively, representing an increase
of 132.5%. Revenues from our digital display processor IC product line increased
by 91.3% between the September 2000 and 1999 quarters as a result of additional
customer design wins and the addition of new products to our IC product range.
As a result of the continued growth in IC sales, revenues from IC products
increased $375,000 when compared with the previous quarter and $1.9 million when
compared to the three months ended September 30, 1999. With the addition of a
full quarters of sales from Faroudja products, revenues from the sale of home
theater, circuit boards and systems, and other products increased by 181.3% to
$4.5 million in the three months ended September 30, 2000, compared to $1.6
million in the three months ended September 30, 1999. We expect sales of digital
display processor IC products to grow faster than the home theater, circuit
board and other products in future periods. Revenues from one customer, NEC,
accounted for 19.5% of total revenues for the three months ended September 30,
2000.
GROSS MARGIN. Our gross margin was 49.2% and 43.2% for the three months
ended September 30, 2000 and 1999, respectively. The increase in gross margin
for the three months ended September 30, 2000 compared to the three months ended
September 30, 1999 was due to an increasing proportion of higher margin IC
products being sold in the three months ended September 30, 2000, compared to
lower margin circuit board, system and other products.
RESEARCH AND DEVELOPMENT. Our research and development expenses were $2.3
million and $1.1 million for the three months ended September 30, 2000 and 1999,
respectively. Research and development expenses represented 26.2% and 29.6% of
revenues for the three months ended September 30, 2000 and 1999, respectively.
Our research and development expenses consist primarily 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 increase in spending on purchased materials,
designs and tooling is attributable to the development of the new range of
Jaguar and FLI products that began to be introduced this quarter. 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, and focus on developing the Faroudja technology.
CHARGE FOR IN-PROCESS TECHNOLOGY. On June 7, 2000, shareholders of Sage and
Faroudja approved the Merger Agreement between the companies, in a purchase
transaction valued at $154.7 million. 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 $7.2 million, and we recorded an expense of this amount
during the six months ended September 30, 2000. 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. The $2.5 million
charge for the three months ended September 30, 1999 represents in-process
technology related to a joint development agreement between Sage and Faroudja.
SELLING, GENERAL AND ADMINISTRATION. Selling, general and administration
expenses were $3.1 million and $1.3 million for the three months ended September
30, 2000 and 1999, 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 increased from $435,000 for the three months ended
September 30, 1999 to $1,446,000 for the three months ended September 30, 2000
partially reflecting increased headcount following the Faroudja merger. As a
percentage of revenues, our selling, general and administration expenses
increased to 36.0% of revenues for the three months ended September 30, 2000 as
compared to 31.6% of revenues for the three months ended September 30, 1999.
This increase in selling, general and
11
<PAGE>
administration expenses in proportion to revenues was largely the result of
increased promotional activities in support of new Jaguar product developments
and introductions.
AMORTIZATION OF INTANGIBLES. As a result of the purchase transaction noted
above, we recorded $121.9 million of intangibles, which will be amortized over
the expected useful lives of between three and five years. In the period from
date of acquisition through September 30, 2000, we amortized approximately $7.8
million, and expect to amortize $6.2 million per quarter in subsequent periods.
STOCK COMPENSATION. Stock compensation expenses amounted to $64,000 and
$165,000, for the three months ended September 30, 2000 and 1999, 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.
INTEREST AND OTHER INCOME AND (EXPENSE), NET. Net interest and other income
increased from $57,000 in the three months ended September 30, 1999 to $884,000
in the three months ended September 30, 2000. This increase results from the
investment of the proceeds of the IPO in November 1999 into interest bearing
accounts.
PROVISION FOR INCOME TAXES. We incurred operating losses for the three
months ended September 30, 2000 and 1999 and therefore had no provision for
income tax in either period. As of March 31, 2000, we had $6.1 million in net
operating losses, which are available to offset future taxable income. If not
used, the net operating losses expire between 2010 and 2020.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have satisfied our liquidity requirements principally
through the issuance and sale of private equity securities, totaling
approximately $17.7 million, and an initial public offering in November 1999,
which raised approximately $37.3 million, net of fees and expenses. During the
six months ended September 30, 2000, we used $2.6 million, for operating
activities, primarily due to operating losses and increased working capital
requirements relating to sales increases and Faroudja activities. Net cash
arising from investing activities was $14.4 million for the six months ended
September 30, 2000, principally due to the cash balance of $18.7 million
acquired with Faroudja, offset by deposits and asset purchases related to the
new office building, which was occupied on October 1, 2000.
As a result of the growth of IC sales in the six months ended September 30,
2000, and full-capacity limitations at the Sage's foundry partners, we
experienced certain difficulties in ensuring a regular flow of IC inventory
purchases when required. This lead to a run-down of inventory, bunching of
shipments, and delays in meeting a number of sales orders until near the end of
the quarter, and resulting low inventory and high receivables at September 30,
2000.
As of September 30, 2000, we had $50.9 million in cash and cash equivalents.
In addition, we had a $5.0 million credit facility under which no borrowings had
been made. As of September 30, 2000, we had committed approximately $1.2 million
of capital expenditure commitments in connection with new leasehold office
premises. We also continued to pay in the three months ended September 30, 2000
certain fees and expenses related to the Faroudja acquisition of approximately
$4.0 million. We believe that our existing cash resources and credit facility
will be sufficient to meet our capital requirements through 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, existing
investors could 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.
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QUANTITATIVE AND QUALITATIVE DISCUSSION OF MARKET RISKS
INVESTMENT 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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BUSINESS RISKS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS NUMEROUS STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO POTENTIAL FUTURE EVENTS OR TO OUR FUTURE
FINANCIAL PERFORMANCE. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE
FORWARD-LOOKING STATEMENTS.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED BELOW, AND ALL
OTHER INFORMATION CONTAINED IN THIS REPORT, 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
ARISES, 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
EFFECTIVE JUNE 8, 2000, SAGE MERGED WITH FAROUDJA LABS AND MAY NOT BE ABLE TO
SUCCESSFULLY INTEGRATE FAROUDJA AND ACHIEVE THE BENEFITS EXPECTED TO RESULT FROM
THE MERGER.
Following the merger, Sage and Faroudja are in the process of integrating
their operations. This integration has progressed reasonably so far, but there
can be no assurance that the integration will be completed as planned. Faroudja
personnel may leave Faroudja because of the merger. Faroudja customers,
distributors or suppliers may terminate their arrangements with Faroudja, or
demand amended terms to those arrangements. Sage management, including Faroudja
management who become part of the Sage management team, may have their attention
diverted while trying to integrate the two companies. Such diversion of
management's attention or difficulties in the transition process could have an
adverse impact on the combined operations. If Sage is not able to successfully
integrate the operations of Faroudja, Sage's expectations for its future results
of operations may not be met.
IF THE COSTS ASSOCIATED WITH THE MERGER EXCEED THE BENEFITS REALIZED, THE
COMBINED COMPANY MAY EXPERIENCE INCREASED LOSSES.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to Sage's stockholders resulting from the
issuance of shares in connection with the merger, Sage's financial results, as
well as those of the combined company on a consolidated basis, could be
adversely affected, including increased losses.
CUSTOMERS OF SAGE AND FAROUDJA MAY DELAY OR CANCEL ORDERS AS A RESULT OF
CONCERNS OVER THE MERGER.
The announcement and completion of the merger could cause customers and
potential customers of Sage and Faroudja to delay, cancel or not renew contracts
for services as a result of customer concerns and uncertainty over integration
and support of Sage's or Faroudja's services. Any delay, cancellation or
non-renewal of contracts could have a material adverse effect on the business,
operating results and financial condition of the combined company.
A SIGNIFICANT AMOUNT OF THE COMBINED COMPANY'S REVENUES WILL COME FROM A FEW
CUSTOMERS AND ANY DECREASE IN REVENUES FROM THESE FEW CUSTOMERS COULD
SIGNIFICANTLY IMPACT TOTAL REVENUES FOR THE COMBINED COMPANY.
Sage is dependent on a limited number of large customers. The combined
company will, in the foreseeable future, also be dependent on a limited number
of large customers for a substantial portion of its revenues. For the three
months ended September 30, 2000, sales of Sage's products to NEC accounted for
19.5% of our revenues. As a result of customer concentration any one of the
following factors could significantly impact the total revenues for the combined
company:
- a significant reduction, delay or cancellation of orders from one or
more of the combined company's 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 manufacturing market for digital televisions, high definition
televisions, liquid crystal display monitors and plasma displays is highly
concentrated among relatively few large manufacturers. We expect that the
operating results of the combined company will continue to depend on revenues
from a relatively small number of manufacturers and their suppliers.
THE RELIANCE BY THE COMBINED COMPANY ON A LIMITED NUMBER OF LARGE CUSTOMERS
REDUCES OUR ABILITY TO NEGOTIATE FAVORABLE PRICING TERMS WITH OUR CUSTOMERS.
The markets for digital display and video image enhancement products are
highly concentrated among relatively few large manufacturers of certain types of
personal computers, televisions, home theaters and consumer electronics. These
manufacturers have
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significantly greater financial and other resources than either Sage or
Faroudja; therefore the combined company may be unable to negotiate favorable
pricing terms with them. Any inability to negotiate favorable pricing terms with
customers could impact our ability to generate positive earnings.
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.
Sage's display manufacturing customers have regular design cycles for their
next display models. Sage's future success will depend to a substantial degree
upon its ability to develop and introduce new products and enhancements to its
existing products, and to do so on a schedule that makes its products and
enhancements available at the time its customers are making purchasing
decisions.
Likewise, Faroudja is developing products that are designed to conform with
certain current industry broadcast standards. However, there can be no assurance
that manufacturers will continue to follow these standards or that more
desirable standards will not emerge. The acceptance of Faroudja's products also
depends in part upon content providers developing and marketing content for
end-user systems, such as video and audio playback systems, in a format
compatible with Faroudja's products. There can be no assurance that these or
other factors beyond Faroudja's control will not adversely affect the
development of markets for Faroudja's products.
The products and product enhancements of the combined company must
incorporate technological changes and innovations to meet evolving customer and
industry standards. The future success of the combined company will depend, to a
substantial degree, upon its ability to develop and introduce new products and
enhancements to its existing products that meet evolving customer and industry
standards, and to do so on a schedule that makes the products and enhancements
available at the time its customers are making purchasing decisions.
BECAUSE DISPLAY AND VIDEO PROCESSORS ARE COMPLEX, THEY MAY HAVE ERRORS OR
DEFECTS THAT ARE FOUND ONLY AFTER THE PROCESSORS HAVE BEEN INCORPORATED INTO ITS
CUSTOMERS' PRODUCTS, WHICH COULD RESULT IN WARRANTY CLAIMS AND A REDUCTION IN
REVENUES.
Sage's display processors, Faroudja's video processing ASICs and the chips
that will be produced by the combined company are complex products and are
designed to be incorporated into digital and high definition display devices
which are themselves complex. Although the products are, and will be, thoroughly
tested, design and manufacturing defects may not be discovered during the
manufacturing and testing process and may only be discovered when the finished
products are connected to a signal source. Consequently, customers may discover
errors or defects in hardware or software after large quantities of products
have been fully incorporated into customers' digital and video display devices.
To date, however, neither Sage's customers nor Faroudja's customers have, to the
knowledge of either company, discovered errors or defects in their products. If
customers of Sage, Faroudja or the combined company were to discover errors or
defects that may be identified after a device is connected to a signal source,
the selling company 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;
- customer legal actions; and
- increased insurance costs.
In addition, in the event of a significant number of product returns due to a
defect or recall of its products, revenues, gross margin and the name brand of
Sage, Faroudja or the combined company could be significantly harmed.
THERE ARE RISKS ASSOCIATED WITH THE FAILURE TO IDENTIFY NEW MARKETS AND
APPLICATIONS.
The markets in which Sage and Faroudja 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 Sage's and Faroudja's products less
desirable or obsolete. If the combined company fails to produce technologically
competitive products in a cost-effective manner and on a timely basis or is
unable to comply with industry standards in the future, our business and results
of operations could be harmed.
A substantial portion of Faroudja's revenues has been derived from sales of
products that address the home theater and commercial presentation markets.
Certain of Faroudja's current products and future product plans address markets
that are not now and may never
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become substantial commercial markets. The combined company's future growth will
depend, in large part, on the combined company's ability to identify new markets
for its products and to apply its products and technology to evolving markets
and applications. There can be no assurance that these markets will become
substantial commercial markets or that the combined company's products will
achieve market acceptance in those markets. There can be no assurance that new
display technologies will be successful or that the television and personal
computer markets will converge, that these new markets will present substantial
commercial opportunities, or that the combined company's products will
adequately address these markets in a timely manner.
Although we expect to continue to make significant investments in research
and development to enhance the combined company's current products and to
develop products incorporating new and existing technologies, we cannot offer
any assurance that new products or product enhancements will be successfully
developed. If developed, we cannot offer any assurance 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.
THE COMBINED COMPANY WILL BE EXPOSED TO DISTRIBUTION RISKS AND ISSUES
SURROUNDING THE DIVERSIFICATION OF SALES CHANNELS.
Both Sage and Faroudja sell their products domestically and internationally
through distributors and dealers and the combined company's success depends on
the continued efforts of this network of direct and indirect distributors and
dealers. The loss of, or reduction in sales to, any of the company's key
customers, could have a material adverse affect on the combined company's
operating results. The short life cycles of the combined products of both Sage
and Faroudja and the difficulty in predicting future sales increase the risk
that new product introductions, price reductions by the company or its
competitors or other factors affecting the flat panel display and video imaging
industry could result in significant product returns. In addition, there can be
no assurance that new product introductions by competitors or other market
factors will not require the combined company to reduce prices in a manner or at
a time which has a material adverse impact upon the combined company's business,
financial condition and operating results.
An integral element of our strategy is to enhance and diversify our
distribution channels. The combined company's ability to achieve revenue growth
in the future will depend in large part on our success in recruiting and
training sufficient sales personnel, distributors and resellers. Certain of the
distributors for each of Sage and Faroudja currently distribute, or may in the
future distribute, the product lines of our competitors. There can be no
assurance that the combined company will be able to attract, train and retain a
sufficient number of distributors or direct sales personnel, or that such
distributors will continue to recommend, or devote sufficient resources to
market and provide customer support for the company's products. All of these
factors could have a material adverse effect on the combined company's business,
financial condition and operating results.
INTENSE COMPETITION MAY REDUCE THE DEMAND OR PRICES FOR OUR PRODUCTS, DECREASING
OUR GROSS MARGIN.
The markets in which both Sage and Faroudja compete are intensely
competitive. Rapid technological change, evolving industry standards and
declining average selling prices in these markets could have a material adverse
effect on the business, financial condition and results of operations of the
combined company. As the overall price of personal computers, televisions and
other products that use our technology 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 and video 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.
Both Sage and Faroudja have competed with a range of diversified companies
that offer display and video processors, some of which have substantially
greater resources than we do. In particular, the combined company will compete
against Communications Specialties Inc., Leitch Incorporated, Panasonic
Broadcast and Television Systems Company, DVDO, Inc., TeraNex, Miranda
Technology, Inc., NEC, RGB Spectrum, Cinema Pro Corporation dba Runco
International, Arithmos, Inc., Genesis Microchip, Inc., Pixelworks, Inc.,
Silicon Image, Inc., DWIN Electronics, Inc., Extron Electronics, NEC
Technologies, Inc. USA, Snell & Wilcox, Inc., Sony Corporation and Yamashita
Engineering Manufacturing, Inc. We also compete in some instances against
in-house processing solutions designed by large original equipment
manufacturers. In the future, our current or potential customers may also
develop their own proprietary display and video 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 our 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.
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FLUCTUATIONS IN THE OPERATING RESULTS FOR BOTH SAGE AND FAROUDJA MAKE IT
DIFFICULT TO PREDICT THE COMBINED COMPANY'S FUTURE PERFORMANCE AND MAY RESULT IN
VOLATILITY IN THE MARKET PRICE OF THE COMBINED COMPANY'S COMMON STOCK.
The quarterly operating results for both Faroudja and Sage 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 or video image
enhancement products, because we delay the release or the announcement of new
products or because of 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, and may in the future
cause, fluctuations in our quarterly operating results. 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 related to selected video processing products;
- 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;
- changes in the available production capacity at the semiconductor
fabrication foundries that manufacture our products and changes in the
costs of manufacturing; and
- our ability to develop, introduce and market new products in time to
meet the product design cycles of our customers.
There are additional factors that could, but which have not, affected our
operating results including:
- the growth rate of the overall digital display and video processing
markets;
- incorrect forecasting of future revenues;
- changes in product mix, product costs or pricing;
- general economic conditions and economic conditions specific to the
personal computer, television, home theater, display and semiconductor
markets;
- growth rate of HDTV market; and
- growth rate of projector market.
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 the combined 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.
BOTH SAGE AND FAROUDJA RELY ON INDEPENDENT FOUNDRIES AND MANUFACTURING.
Both Sage and Faroudja currently rely on independent foundries to
manufacture, assemble and test all of their semiconductor components and
products. These independent foundries fabricate products for other companies and
may also manufacture products of their own design. The combined company will
purchase products from all of its foundries pursuant to individually negotiated
purchase orders. Neither Sage nor Faroudja has long-term supply contracts with
any of these foundries, and, therefore, none of them will be obligated to supply
products to the combined company for any specific period, in any specific
quantity or at any specified price, except as may be provided in a particular
purchase order. The reliance by the combined company on independent foundries
involves a number of risks, including the inability to obtain adequate capacity,
unavailability of or interruption of access to certain process technologies,
reduced control over delivery schedules, quality assurance, manufacturing yields
and cost, and potential misappropriation of our intellectual property. The
ability of Sage and Faroudja to obtain the foundry capacity necessary to meet
the demand for their products is based in part on their ability to accurately
forecast demand. If the combined company fails to accurately forecast its future
demand, we may be unable to obtain adequate supplies of integrated circuits on a
timely basis. There can be no assurance that the combined company will be able
to accurately forecast the demand for its products or obtain sufficient foundry
capacity in the future.
While neither Sage nor Faroudja has experienced any material disruptions in
supply to date, there can be no assurance that manufacturing problems will not
occur in the future. In the event that any of the combined company's foundries
are unable or unwilling to produce sufficient supplies of our products in
required volumes at acceptable costs, the combined company will be required to
reallocate
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production among our other existing foundries or identify and qualify acceptable
alternatives. This qualification process could take six months or longer, and no
assurance can be given that any additional source would become available to the
combined company or would be in a position to satisfy the combined company's
production requirements on a timely basis. The loss of any of the combined
company's foundries, the inability of the combined company to obtain additional
production in a period of increased demand, or the combined company's inability
to obtain timely and adequate deliveries from its suppliers could reduce or
delay shipments of our products. Any of these developments could damage
relationships with the combined company's current and prospective customers and
could have a material adverse effect on our business, financial condition and
operating results.
The reliance by the combined company on third-party manufacturers limits our
control over delivery schedules, quality assurance and product cost. Disruptions
in the provision of services by the combined company's assemblers or other
circumstances that would require the combined company to seek alternative
sources of assembly could lead to supply constraints or delays in the delivery
of our products. In addition, the need for high quality assurance by the
combined company may increase costs paid by the company to third parties for
manufacturing and assembly of our products. These constraints or delays could
damage relationships with current and prospective customers and could have a
material adverse effect on our business, financial condition and operating
results. In addition, third party contractors assemble Sage's board level
display processor products and Faroudja's home theater and broadcast products.
SAGE CURRENTLY DEPENDS ON A LIMITED NUMBER OF CONTRACT MANUFACTURERS FOR ITS
SEMICONDUCTOR AND SYSTEM LEVEL PRODUCTS, AND IT MUST ORDER PRODUCTS FROM THEM
BASED ON FORECASTS FROM CUSTOMERS FROM WHICH SAGE DOES NOT HAVE FIRM PURCHASE
ORDERS.
Sage does not own or operate a semiconductor fabrication facility and it
does not have the resources to manufacture our products internally. Currently,
Cheetah2 and Cheetah4 chips are being manufactured, assembled and tested by
Kawasaki LSI U.S.A., Inc., and Cheetah3 chips are being manufactured, assembled
and tested by Fujitsu Microelectronics Inc. Sage's new Jaguar chips will be
manufactured by Taiwan Semiconductor Manufacturing Company and Sage will be
responsible for the assembly and testing. Sage intends to produce its FLI2200
de-interlacing chip at ST Micro, continuing a former long-term Faroudja
relationship. Sage's system level products are manufactured and tested by
Topline Electronics or Eagle Manufacturing while Faroudja's box products are
manufactured by Bestronics. Sage does not have a long-term supply contract with
any of its contract manufacturers, and they are not obligated to supply Sage
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. Sage
tries not to maintain substantial inventories of products, but it must often
place orders for products two to six months before they are needed and before it
has firm purchase orders for those products. None of Sage's products is
currently manufactured by more than one supplier. 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 Sage's intellectual property.
If Sage is unable to obtain its products from manufacturers on schedule,
revenues from the sale of those products may be delayed. If orders for Sage's
products are cancelled, revenues will be lost.
FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY
TO INCREASE OUR REVENUES AND IMPROVE OUR EARNINGS.
The ability of the combined company 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. The past growth
of Sage and Faroudja, and the expected future growth of the combined company,
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 BUSINESSES EFFECTIVELY, AND IF WE ARE
UNABLE TO RETAIN OR HIRE ADDITIONAL PERSONNEL, OUR REVENUES AND PRODUCT
DEVELOPMENT EFFORTS COULD BE HARMED.
The future success of the combined company 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. Current and
prospective employees of Sage and Faroudja may experience uncertainty about
their future roles with Sage. This uncertainty may adversely affect the combined
company's ability to retain key management, sales, marketing and technical
personnel, or to attract qualified personnel in the future.
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We intend to hire a significant number of engineering, sales, 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 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 PRODUCTS.
The ability of the combined company to compete effectively with other
companies will depend, in part, on our ability to maintain the proprietary
nature of our technology. However, we cannot assure you that the degree of
protection offered by the patents held by Sage and Faroudja 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.
Our competitors may also be able to design around the licensed patents. The
laws of certain foreign countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect our
products or intellectual property rights to the same extent as the laws of the
United States. There can be no assurance that the steps taken by Sage and
Faroudja to protect our intellectual property rights will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
Substantially all of the intellectual property used by Faroudja is licensed
to Faroudja by Yves Faroudja. There are risk associated with this intellectual
property because Faroudja is a licensee and not the owner of such intellectual
property rights. Under his agreement with Faroudja, Mr. Faroudja retains the
non-exclusive right to license his patents and technologies to third parties for
use outside Faroudja's field of use. Notwithstanding the particular terms of the
license agreement with Mr. Faroudja, the combined company faces the risk that he
may attempt to terminate the granted licenses and that such an attempt may be
successful or that the response to such attempt may consume substantial
financial and personnel resources. In the event Faroudja's resources are so
consumed, such consumption could have a material adverse affect on the combined
company's business, financial condition and operating results.
We may from time to time receive notifications or claims alleging 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.
SAGE HAS INCURRED NET LOSSES SINCE INCEPTION, AND SAGE MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY.
Sage incurred net losses of $2.8 million; $4.8 million and $4.6 million for
each of the respective years ended March 31, 1998, 1999 and 2000, and had an
accumulated deficit of $28.6 million as of September 30, 2000. In addition Sage
has capitalized approximately $114 million of goodwill and intangibles in
connection with the acquisition of Faroudja and intends to amortize this over
five years, resulting in annual charges to operating expenses of over $20
million per year. Accordingly, Sage expects to continue to report additional
operating losses, and even before non-cash charges, Sage may continue to report
operating losses for at least the next 12 months. Although Sage has 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 Sage and the combined company do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future or at all. This may
in turn cause Sage's stock price to decline. In addition, if Sage does not
achieve or sustain profitability in the future, we may be unable to continue our
operations.
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SAGE HAS A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS.
Sage commenced operations in January 1995, but it did not generate material
revenues from the sale of its semiconductor products until July 1998. Thus, Sage
has a limited operating history upon which to evaluate its current business and
prospects. Due to the limited history, it is difficult or impossible for Sage to
predict its future results of operations with any degree of accuracy. For
example, Sage cannot accurately forecast expenses based on its projections of
future revenues. Most of Sage's expenses are relatively fixed in the short term,
and Sage may not be able to quickly reduce spending if its revenues are lower
than projections. In addition, because substantially all of Sage's present
customers order on a purchase order basis rather than long-term purchase
commitments, Sage has only a limited ability to project future revenues.
Therefore, net losses in a given quarter may be greater than expected. Moreover,
due to the limited operating history of Sage, any evaluation of its 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 "Sage Management's Discussion
and Analysis of Financial Condition and Results of Operations" for more detailed
information on our historical results of operations.
SAGE'S FOREIGN CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF ITS REVENUES, AND
IF SAGE DOES NOT SUCCESSFULLY ADDRESS CERTAIN RISKS ASSOCIATED WITH ITS
INTERNATIONAL OPERATIONS, ITS REVENUES COULD DECREASE AND OUR BUSINESS PROSPECTS
COULD DETERIORATE BECAUSE THE MAJORITY OF ITS CUSTOMERS COULD BE LOST AT A
SUBSTANTIAL COST TO ITS BUSINESS PROSPECTS AND ITS REVENUES COULD DECLINE.
Sales outside of the U.S. accounted for 72.4% of total sales for the year
ended March 31, 2000. A substantial portion of Sage's customers are located in
Japan, Taiwan and Korea. We anticipate that sales outside of the U.S. could
increase in future periods and may account for an increasing portion of Sage's
revenues. In addition, manufacturers who incorporate Sage's processors into
their displays sell them outside of the U.S., thereby exposing Sage indirectly
to foreign risks. Specifically, Sage will be subject to the following risks:
- difficulties in maintaining sales representatives outside of the U.S.
that are knowledgeable of the display processor industry, the video
processing industry and the products of Sage;
- ongoing restructuring activities of Sage's customers and other Asian
companies may reduce purchases of our products by its customers;
- potential difficulties in collecting accounts receivable from its
customers located in Japan, Korea and Taiwan; and
- difficulties related to design piracy of display and video processing
technologies that may exist outside the U.S.
To date, sales of Sage's products have been denominated exclusively in U.S.
dollars. An increase in the value of the U.S. dollar will increase the price of
Sage's products so that they become relatively more expensive to customers in
the local currency of a particular country, potentially leading to a reduction
in Sage's revenues and profitability.
PORTIONS OF SAGE'S RESEARCH AND DEVELOPMENT EFFORTS ARE PERFORMED IN INDIA, AND
RISKS RELATED TO THOSE OPERATIONS COULD HARM ITS RESEARCH AND DEVELOPMENT
CAPABILITIES AND NEGATIVELY IMPACT ITS 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 Sage's ability to
take advantage of operations in India. In addition, circumstances beyond Sage's
control at its facilities, related to operating in a developing country, such as
unreliable power supplies, may have a material adverse effect on its 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
Sage's ability to effectively operate in both countries. If Sage is required to
relocate its India facilities, we cannot assure you that a relocation will not
disrupt Sage's business.
IF MONITORS INCORPORATING SAGE'S SOLUTIONS ARE NOT COMPATIBLE WITH PERSONAL
COMPUTERS, TELEVISIONS, AND OTHER DEVICES FOR WHICH THEY ARE MARKETED, THE
MARKET FOR SAGE'S PRODUCTS WILL BE REDUCED AND OUR BUSINESS PROSPECTS COULD BE
SIGNIFICANTLY LIMITED.
Sage's products are incorporated into its customers' display monitors which
have different parts and specifications and utilize multiple protocols that
allow them to be compatible with specific PCs, televisions, home theaters and
other devices. If Sage's 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 Sage's customers' products could be significantly reduced. As a result, a
portion of Sage's market would be eliminated, and its business would be harmed.
RISKS RELATED TO THE DISPLAY PROCESSING INDUSTRY
FAILURE OF CONSUMER DEMAND FOR FLAT PANEL DISPLAYS TO INCREASE AS WE EXPECT
COULD IMPEDE SAGE'S GROWTH PROSPECTS.
Sage's product development strategies anticipate that consumer demand
for flat panel displays and other emerging display products will increase in
the future. The success of Sage's products is dependent on increased demand
for these products, which are at early stages
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of development. The potential size of these markets and the timing of their
development are uncertain and will depend upon a number of factors, all of which
are beyond our control.
BECAUSE OF SAGE'S LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, SAGE MAY
INCUR SUBSTANTIAL EXPENSES BEFORE IT EARNS ASSOCIATED REVENUES AND MAY NOT
ULTIMATELY SELL AS MANY UNITS OF ITS PRODUCTS AS FORECASTED.
Sage develops products based on forecasts of demand and incurs substantial
product development expenditures prior to generating associated revenues. Sage's
customers typically perform numerous tests and extensively evaluate Sage's
products before incorporating them into their systems. The time required for
testing, evaluation and design of Sage's products into a customer's equipment
can take up to six months or more. Because of this lengthy development cycle,
Sage may experience a delay between the time it accrues expenses for research
and development and sales and marketing efforts and the time when it generates
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 Sage's products. A design
win is not a binding commitment by a customer to purchase Sage's products.
Rather, it is a decision by a customer to use Sage's products in the design
process of that customer's products. In addition, Sage's customers can choose at
any time to discontinue using its products in that customer's designs or product
development efforts. If Sage's products are chosen to be incorporated into a
customer's products, Sage may still not realize significant revenues from that
customer if that customer's products are not commercially successful.
IF SAGE DOES NOT ACHIEVE DESIGN WINS WITH LEADING DISPLAY MANUFACTURERS, SAGE
MAY BE UNABLE TO SECURE ADDITIONAL DESIGN WINS IN THE FUTURE AND ITS 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 Sage's part to obtain additional design wins with leading
original equipment manufacturers and to successfully design, develop and
introduce new products and product enhancements could harm its business,
financial condition and results of operations. In addition, development and
manufacturing schedules for Sage's products are difficult to predict, and we
cannot assure you that Sage will achieve timely customer shipments of new
products. The timely introduction of these products and their acceptance by
customers are important to Sage's 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
Sage's products and harm our business, financial condition and results of
operations.
IF WE HAVE TO QUALIFY A NEW CONTRACT MANUFACTURER FOR ANY OF SAGE'S PRODUCTS,
SAGE MAY LOSE REVENUES AND DAMAGE ITS CUSTOMER RELATIONSHIPS.
Sage's 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 six
months, and the estimated time for Sage 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 Sage's contract
manufacturers would impact the production of Sage's display processors for a
substantial period of time, thereby reducing the company's revenues, and would
harm Sage's customer relationships.
SHORTAGES OF MATERIALS INCLUDED IN OUR SEMICONDUCTOR AND CIRCUIT BOARD PRODUCTS
MAY INCREASE SAGE'S COSTS OR LIMIT ITS REVENUES AND DELAY ITS ABILITY TO SHIP
OUR PRODUCTS ON TIME.
From time to time, shortages of certain materials that are used in Sage's
semiconductor and circuit board products may occur. In particular, Sage may
experience shortages of semiconductor wafers. If materials shortages occur, Sage
may incur additional costs to procure the scarce components or be unable to ship
its products to its customers in a timely fashion, all of which could negatively
impact Sage's earnings.
BY SUBCONTRACTING SEPARATELY FOR THE PRODUCTION OF WAFERS FOR ITS NEXT
GENERATION PROCESSORS, SAGE IS ASSUMING RISKS THAT IT DOES NOT CURRENTLY FACE.
Currently, Sage purchases packaged, assembled and tested semiconductor
products from contract manufacturers. We expect that Sage 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 Sage does 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 Sage's revenues and harm our
gross margin and results of operations.
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THERE HAS BEEN AN UNDERSUPPLY OF FLAT PANELS, AND IF THE MANUFACTURING CAPACITY
OF FLAT PANELS DOES NOT INCREASE, SAGE'S MARKET GROWTH WILL BE LIMITED.
Recently, there has been a limited supply of flat panels, and increasing the
supply of flat panels is a costly and lengthy process requiring significant
capital investment. New capacity is expected to come on stream but the supply of
flat panels has been cyclical. We expect this pattern to continue. Undercapacity
in the flat panel market may limit Sage's ability to increase its revenues
because its customers may limit their purchases of Sage's 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.
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.
In December 1999, the Security Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101) "Revenue Recognition Financial Statements". In
October 2000, the SEC released interpretive guidance on SAB 101 in the form of
Frequently Asked Questions. We are currently evaluating the impact of SAB 101 on
its financial statements and related disclosures, but do not expect that such an
impact, if any, would be material. The accounting and disclosures prescribed by
SAB 101will be effective for Sage's fiscal year ended March 31, 2001.
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PART II
ITEM 1. LEGAL PROCEEDINGS
As of November 14, 2000, there were no pending legal proceedings to which we
are a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 31, 2000, stockholders approved the following resolutions by a
majority of the shareholders in person or by proxy.
1. RESOLVED: That the panel of directors listed by the company be
re-elected to serve until the next Annual Meeting.
For: 8,783,893
Against: 21,409
Abstain: -
2. RESOLVED: That PricewaterhouseCoopers is re-appointed as auditors of the
company for the coming year.
For: 8,785,508
Against: 14,597
Abstain: 5,197
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger and Reorganization (1)
3.1 Certificate of Amendment of Restated Certificate of Incorporation.(2)
3.2. Bylaws (3)
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the Form S-4/A (Appendix A) filed
by the Company and Faroudja with the SEC on May 5, 2000.
(2) Incorporated herein by reference to the Form S-1 filed by the Company
with the SEC which became effective on November 10, 1999 and by
reference to the 10Q filed by the Company with the Commission on
February 11, 2000.
(3) Incorporated herein by reference to the Form S-1 filed by the Company
with the SEC which became effective on November 10, 1999.
(b) REPORTS ON Form 8-K. No reports on Form 8-K were filed during the quarter
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAGE, INC.
REGISTRANT
Date: November 14, 2000 By: /s/ SIMON P WESTBROOK
-----------------------
Simon P Westbrook
CHIEF FINANCIAL OFFICER
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