QuickLinks -- Click here to rapidly navigate through this document

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 December 31, 2001

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:

SAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0501710 (IRS Employer Identification No.)
1601 McCarthy Boulevard, Milpitas, CA (Address of Principal Executive Offices)		95035 (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 February 6, 2002, there were 15,025,602 shares of the registrant's common stock, $0.01 par value per share, outstanding.

SAGE, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2001	3
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2001 and 2000	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	18
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 2.	Changes in Securities and Use of Proceeds	30
Item 6.	Exhibits and Reports on Form 8-K	30

PART I

Item 1. Financial Statements

SAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data, unaudited)

				December 31, 2001			March 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents			$	35,038		$	22,344
	Short-term marketable securities				5,580			19,040
	Accounts receivable, net				8,895			6,479
	Inventory				4,012			6,861
	Prepaids & other assets				1,342			1,220

		Total current assets			54,867			55,944
Property & equipment, net					4,528			4,440
Other non-current assets					1,947			1,906
Goodwill & other intangible assets, net					8,353			10,280

			Total assets	$	69,695		$	72,570

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	1,748		$	3,312
	Accrued expenses and other liabilities				2,930			3,299

		Total current liabilities			4,678			6,611

Stockholders' equity:
	Common stock, $0.01 par value; 50,000,000 shares authorized; 14,907,000 and 13,925,000 issued and outstanding				149			139
	Additional paid-in capital				208,900			200,844
	Notes receivable from stockholders				(58	)		(558	)
	Deferred compensation related to stock options and restricted stock				(33	)		(115	)
	Accumulated deficit				(143,941	)		(134,351	)

		Total stockholders' equity			65,017			65,959

		Total liabilities & stockholders' equity		$	69,695		$	72,570

The accompanying notes are an integral part of these condensed consolidated financial statements.

SAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data, unaudited)

			Three Months Ended December 31,						Nine Months Ended December 31,
			2001			2000			2001			2000
Revenue			$	11,898		$	9,652		$	29,869		$	24,726
Cost of revenue
	Cost of products sold			7,144			5,175			17,340			12,590
	Amortization of intangibles charged to cost of revenue			—			250			—			563
	Write off of inventory at close of board business			996			—			996			—

Gross profit				3,758			4,227			11,533			11,573

Operating expenses:
	Research and development			2,463			2,016			7,927			5,708
	Charge for in-process technology			—			—			—			7,200
	Selling, general and administration			3,353			3,134			10,528			8,869
	Business combination expenses			419			—			1,555			—
	Amortization of intangibles			643			5,937			1,928			13,375
	Severance expenses			164			—			164			—
	Stock compensation			21			58			82			210

		Total operating expenses		7,063			11,145			22,184			35,362

Loss from operations				(3,305	)		(6,918	)		(10,651	)		(23,789	)
Interest and other income, net				223			591			1,061			2,128

Net loss			$	(3,082	)	$	(6,327	)	$	(9,590	)	$	(21,661	)

Number of weighted average outstanding shares				14,750			13,752			14,263			12,492

Basic and diluted loss per share			$	(0.21	)	$	(0.46	)	$	(0.67	)	$	(1.73	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS,
(In thousands, unaudited)

					Nine Months Ended December 31,
					2001			2000
Cash flows from operating activities:
	Net loss				$	(9,590	)	$	(21,661	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Charge for in-process technology				—			7,200
		Depreciation				1,348			816
		Amortization				1,927			13,938
		Stock compensation				82			210
		Changes in assets and liabilities:
			Accounts receivable			(2,416	)		(1,716	)
			Inventories			2,849			(1,210	)
			Prepaid expenses and other assets			(122	)		(713	)
			Accounts payable			(1,564	)		532
			Accrued expenses and other liabilities			(369	)		(3,105	)

				Net cash used in operating activities		(7,855	)		(5,709	)

Cash flows from investing activities:
	Sale of marketable securities, net					13,460			—
	Acquisition of property and equipment					(1,436	)		(3,259	)
	Acquisition of other non-current assets					(41	)		(1,866	)
	Net cash acquired with Faroudja					—			18,667

				Net cash provided by investing activities		11,983			13,542

Cash flow from financing activities:
		Repayment of stockholder's note				500			(483	)
		Proceeds from issuance of common stock through employee stock purchase plan				223			—
		Proceeds from issuance of common stock upon exercise of stock options				7,843			633

				Net cash provided by financing activities		8,566			150

Net increase in cash and cash equivalents						12,694			7,983
Cash and cash equivalents at beginning of period						22,344			38,936

Cash and cash equivalents at end of period					$	35,038		$	46,919

Non-cash investing and financing activities:
	Issuance of common stock in connection with acquisition of Faroudja				$	—		$	144,879

	Current assets, excluding cash, acquired in connection with acquisition of Faroudja				$	—		$	3,519

	Current liabilities acquired in connection with acquisition of Faroudja				$	—		$	3,245

The accompanying notes are an integral part of these condensed consolidated financial statements.

SAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and business

Sage, Inc., a Delaware corporation (Sage), and its wholly owned subsidiaries, Sage Design Systems (India) Pvt., Ltd., and Faroudja, Inc., a Delaware corporation (Faroudja), (and its wholly owned subsidiary Faroudja Laboratories, Inc.), provide digital display and video processors, enabling superior picture quality for a variety of consumer technology and PC-display products ranging from web appliances to TVs and flat panel monitors. Leveraging Faroudja technology from its acquisition of Faroudja in June 2000, Sage is developing products that bring the home theater experience to the mass consumer and PC-display market through digitally enhanced television, projection displays, DVD players and internet appliances. Sage believes that its systems-on-a-chip technology provides highly integrated mixed-signal and system functionality with higher picture quality than lower-quality processors at a similar component cost.

2. Basis of presentation

The unaudited 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, 2001 that are included in our Form 10-K Statement filed with the Securities and Exchange Commission. We believe that the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal and recurring adjustments, that are necessary for fair presentation of the results of the interim periods presented. The results of operations presented for the period ended December 31, 2001 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.

3. Merger with Genesis Microchip, Incorporated

On September 27, 2001 Sage and Genesis Microchip Incorporated, a Nova Scotia corporation (Genesis), agreed to merge in a transaction to be accounted for as a purchase, subject to regulatory reviews, which have now been successfully completed, and to the approval of the stockholders of both companies. In conjunction with the merger, Genesis is converting from a Nova Scotia corporation to a Delaware corporation, which will be called Genesis Microchip, Inc. (Genesis Delaware). Upon completion of the merger, stockholders of Sage will be able to exchange each share of Sage common stock held for 0.571 shares of Genesis Delaware. It is expected that this transaction will close during February 2002. During the quarter ended December 31, 2001 Sage incurred approximately $0.4 million of expenses in connection with this business combination, and expects to incur further such expenses in the quarter ending March 31, 2002.

4. Merger with Faroudja

On February 18, 2000 Sage and Faroudja agreed to merge in a transaction accounted for as a purchase. On June 7, 2000, stockholders of Sage and Faroudja approved the Merger Agreement

between the companies, under which stockholders of Faroudja received 0.285 shares of Sage common stock for every share held.

During the quarter ended March 31, 2001, management performed an impairment assessment of the identifiable intangible assets, including goodwill, recorded upon the acquisition of Faroudja. The assessment was performed primarily due to two reasons. First, due to changed business conditions, including negative outlooks for rates of growth, Sage's expectations on revenues and profitability from the acquired operations were lower. Second, there was a significant decline in Sage's stock price since measurement date of the acquisition and the recorded balance of goodwill and other intangible assets significantly exceeded Sage's market capitalization prior to the impairment charge. As a result of this review, management recorded a $91.5 million impairment charge to reduce goodwill for the year ended March 31, 2001. The charge was determined based upon estimated discounted cash flows using a discount rate of 15 percent. The assumptions supporting cash flows, including the discount rate, were determined using management's best estimates.

5. Loss per share

Basic loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during that period. Diluted loss per share equals basic loss per share because all equity instruments other then outstanding shares would be anti-dilutive. Approximately 1.6 million and 1.0 million outstanding options were excluded from the calculation of loss per share for the quarters ended December 31, 2001 and 2000, respectively.

6. Inventories

Inventories consisted of the following:

(In thousands)		December 31, 2001			March 31, 2001
Finished goods		$	2,684		$	6,301
Work-in-process			2,781			1,569
Raw materials			727			1,400

	Subtotal		6,192			9,270
Inventory reserve			(2,180	)		(2,409	)

	Total	$	4,012		$	6,861

7. Segment Information

Sage manages its operations in two segments, integrated circuits (ICs) and systems including home theater boxes and printed circuit boards (See Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations regarding Sage exiting the printed circuit board business). Sage does not report operating expenses, depreciation and amortization, interest expense,

capital expenditures or identifiable net assets by segment. All segment revenues are generated from external customers. Segment information is as follows:

			Three Months Ended December 31,				Nine Months Ended December 31,
(In thousands)			Three Months Ended December 31,				Nine Months Ended December 31,
(In thousands)			2001		2000		2001		2000
Revenues:
	ICs		$	8,870	$	4,790	$	20,919	$	12,660
	Systems			3,028		4,862		8,950		12,066

		Total revenue		11,898		9,652		29,869		24,726
Cost of revenues:
	ICs			5,739		2,600		13,170		6,377
	Systems			2,401		2,825		5,166		6,776

		Total cost of revenue		8,140		5,425		18,336		13,153
Gross profit:
	ICs			3,131		2,190		7,749		6,283
	Systems			627		2,037		3,784		5,290

		Total gross profit	$	3,758	$	4,227	$	11,533	$	11,573

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements are subject to the safe harbors created thereby. The forward-looking statements are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding our business, which involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, our business and operations are subject to substantial risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

Overview

Sage designs, develops and markets 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 as prices fall. 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. Increasingly the display industry is showing convergence as displays are developed supporting multiple types of signal, and the need for separate PC monitors and televisions becomes unnecessary.

We offer state-of-the-art digital display processors that provide highly integrated signal interfaces, signal reformatting and color processing capabilities. Our solutions are compatible with a variety of 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 Compal, Fujitsu, NEC, Philips, Sanyo, Samsung, Sony and Toshiba.

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 legacy systems business supplying system solutions to other market channels, including board level solutions to industrial customers and video processing boxes to the home theater market. As of the quarter ended December 2001, such system sales represented 25% of our total revenue. 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. Even though system activities are not our primary focus, we intend to continue offering products into the home theater markets for the foreseeable future. Our home theater box products, sold under the Faroudja brand name, provide a powerful high-quality marketing umbrella which serves to shelter and promote a quality image for all our video processing products, including video processing ICs that may be developed and offered to the mass market. We do not expect to sell board products after December 31, 2001, and accordingly have written off all remaining inventory of board products and parts.

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 system products sold through distributors who have limited return rights, we do not recognize revenue until we have received evidence that they have sold the inventory to their end customers.

Since November 1996, we have introduced a succession of new display processor ICs, starting with the Cheetah family and now featuring the Jaguar family. Our IC product development road map is driven by (i) introduction of latest generation manufacturing processes, reducing the die size of our earliest ICs from .6 micron in stages to .18 micron in the case of our latest IC, thereby reducing cost and improving performance; (ii) integration of increased levels of features such as integrated analog to digital conversion 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) Auto Detect 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 year 1999 we offered only one IC, the Cheetah 2, we now offer a series of nineteen different ICs, targeted at analog, digital, or dual interface monitors, low or high resolution screens, and monitors (PC) or consumer products (televisions, DVDs and projectors).

Initially, we purchased packaged, assembled and tested semiconductor products for our discrete digital display processors. However, with the launch of our new range of mixed signal ICs, we have assumed greater responsibility over this process by separately subcontracting for the production of wafers, the assembly of the completed semiconductor, and their testing. While in the short term this transition to a new manufacturing model exposes us to greater responsibilities for semiconductor yields and the coordination of the assembly and testing process, we believe that in the longer term our gross margins should improve and that the transition should result in our having greater control over the manufacturing process.

In November 1999, we 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 June 7, 2000 Sage and Faroudja completed a merger 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-interlacing 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. Stockholders of Faroudja received 0.285 shares of Sage common stock for every share held.

As a result of this review, management recorded a $91.5 million impairment charge to reduce goodwill for the year ended March 31, 2001. The charge was determined based upon estimated discounted cash flows using a discount rate of 15 percent. The assumptions supporting cash flows, including the discount rate, were determined using management's best estimates.

On September 27, 2001 Sage and Genesis, a Nova Scotia corporation, agreed to merge in a transaction to be accounted for as a purchase, subject to regulatory reviews, which have now been successfully completed, and the approval of stockholders of both companies. In conjunction with the merger, Genesis is converting from a Nova Scotia corporation to a Delaware corporation, which will be called Genesis Microchip, Inc. (Genesis Delaware). Upon completion of the merger, stockholders of Sage will be able to exchange each share of Sage common stock held for 0.571 shares of Genesis Delaware. It is expected that this transaction will close during February 2002. During the quarter ended December 31, 2001 Sage incurred approximately $0.4 million of expenses in connection with this business combination, and expects to incur further such expenses in the quarter ending March 31, 2002.

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.

			Three Months Ended December 31,				Nine Months Ended December 31,
			2001		2000		2001		2000
Revenues
	ICs		74.6	%	49.6	%	70.0	%	51.2	%
	Systems		25.4	%	50.4	%	30.0	%	48.8	%

		Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues
	ICs		48.2	%	26.9	%	44.1	%	25.8	%
	Systems		20.2	%	29.3	%	17.3	%	27.4	%

		Total cost of revenue	68.4	%	56.2	%	61.4	%	53.2	%

Gross profit margin			31.6	%	43.8	%	38.6	%	46.8	%
Operating expenses:
	Research and development		20.7	%	20.9	%	26.5	%	23.1	%
	Charge for in-process technology		0.0	%	0.0	%	0.0	%	29.1	%
	Selling, general and administration		28.2	%	32.5	%	35.2	%	35.9	%
	Business combination expenses		3.5	%	0.0	%	5.2	%	0.0	%
	Amortization of intangibles		5.4	%	61.5	%	6.5	%	54.1	%
	Severance expenses		1.4	%	0.0	%	0.6	%	0.0	%
	Stock compensation		0.2	%	0.6	%	0.3	%	0.8	%

		Total operating expenses	59.4	%	115.5	%	74.3	%	143.0	%

Loss from operations			(27.8	)%	(71.7	)%	(35.7	)%	(96.2	)%
Interest and other income, net			1.9	%	6.1	%	3.6	%	8.6	%

Net loss			(25.9	)%	(65.6	)%	(32.1	)%	(87.6	)%

Results of Operations for the Three Months Ended December 31, 2001 and 2000

Revenue. Revenue increased 23% to $11.9 million in the quarter ended December 31, 2001 from $9.7 million in the quarter ended December 31, 2000. The increase in net revenue is due partly to increases in design wins as well as the introduction of new products. In the quarter ended December 31, 2001 sales revenue increased sequentially by 21% from the preceding quarter reflecting a significant increase in the number of mixed signal ICs shipped into the flat panel monitor market this quarter, offset by decreases in the number of our mature discrete ICs shipped into the display market and seasonal decreases in the number of ICs shipped into the consumer market. Revenues from two customers, Compal and Samsung, accounted for 22% and 15%, respectively, of total revenue in the three months ended December 31, 2001.

IC revenue increased 85% to $8.9 million in the quarter ended December 31, 2001 from $4.8 million in the quarter ended December 31, 2000. The increase in IC revenue is due to an 81% increase in units sold to new and existing customers. Revenues from sales of our mature discrete ICs were $1.7 million while revenues from sales of our newer mixed signal ICs were $5.1 million. As a result of pressures from customers to reduce costs, Sage experienced a significant increase in the demand of its mixed signal ICs, which grew to represent 66% of total ICs Sage shipped in the flat panel monitor market, and 55% of total ICs shipped this quarter. Sales of ICs for the consumer market

accounted for $2.0 million or 22% of IC revenue. Revenues from two customers, Compal and Samsung, accounted for 29% and 20%, respectively, of total IC revenues in the three months ended December 31, 2001.

System revenues decreased 38% to $3.0 million in the quarter ended December 31, 2001 from $4.9 million in the quarter ended December 31, 2000. System revenues include revenues from box and board level products. With the maturity of the mainstream flat panel monitor market we have seen a progressive reduction in the demand for video processing boards for custom and low volume applications. Our board sales fell from $2.3 million in the quarter ended December 31, 2000 to $0.8 million in the current quarter, and as a consequence, we have now decided to exit the board business.

Sage's future profitability and rate of growth, if any, will continue to be directly affected by increased price competition, a maturing IC market and increasingly higher revenue base from which to grow. Our growth rate and revenue depends significantly on renewals of existing orders as well as expanding our customer base. If our renewal rate or our pace of new customer gains slows, our net revenues and operating results would be adversely affected. While DisplaySearch, the firm that analyzes industry data, reports that the flat panel market grew from 6.1 million units to 15.4 million units in calendar year 2001, and is projected to grow further to 27.2 million units in calendar year 2002, any shortfall in this growth would adversely affect our sales potential.

Cost of Revenue. Cost of net revenue increased 50% to $8.1 million in the quarter ended December 31, 2001 from $5.4 million in the quarter ended December 31, 2000. The increase in cost of net revenues from the December quarter 2000 to the December quarter 2001 was primarily due to the increase in sales volume.

Cost of IC revenue consists of the cost of display processor ICs purchased from independent foundry suppliers. Cost of IC revenues increased 121% to $5.7 million in the quarter ended December 31, 2001 from $2.6 million in the quarter ended December 31, 2000. The increase in IC cost of revenue from the December quarter 2000 to the December quarter 2001 was primarily due to an 81% increase in volume of IC shipments. As a percentage of IC revenue, cost of IC revenue was 65% in the quarter ended December 31, 2001 and 54% in the quarter ended December 31, 2000. The increase in cost of IC revenue from the December quarter 2000 to December quarter 2001 as a percentage of IC revenue is due to a change in product mix in favor of new mixed signal ICs, which experienced lower than expected yields and higher than expected test costs.

Cost of system revenue consists principally of the cost of purchase, assembly and test of system level products from subcontractors. The cost of system revenue decreased 15% to $2.4 million in the quarter ended December 31, 2001 from $2.8 million in the quarter ended December 31, 2000. The decrease in cost of revenue for system products from the December quarter 2000 to the December quarter 2001 is due to a reduction in sales of board products, offset by the write off of the remaining board inventory.

Gross margin. Our overall gross margin decreased to 31.6% in the quarter ended December 31, 2001 from 43.8% in the quarter ended December 31, 2000. At December 31, 2001 following our decision to exit the board business, we wrote off the residual inventory of board parts and products amounting to $996,000. Without this one-time charge, our gross margin would have been 40.0% in the December 31, 2001 quarter compared to 43.8% in the December 31, 2000 quarter. Other factors influencing the decrease in the gross margin were the reductions in gross margin for ICs as a result of changes in product mix, lower than expected yields and higher than expected test costs on newer products, seasonal changes in product mix away from higher margin ICs sold to the consumer markets, and the erosion of ASPs for mature discrete IC products. Further, the decrease includes decreases in gross margins for box products as a result of changes in product mix following the introduction of lower priced NRS home theater products.

Research and development. Our research and development expenses consist primarily of compensation and personnel related expenses, engineering and design tools, and the costs for purchased materials, designs and tooling which can fluctuate significantly from period to period as a result of our product development cycles. Our research and development expenses were $2.5 million and $2.0 million for the quarters ended December 31, 2001 and 2000, respectively. Research and development expenses represented 21% of revenues for each of the quarters ended December 31, 2001 and 2000. The increase in R&D expenditure represents the cost of additional personnel, engineering tools, and non-recurring engineering projects necessary for development of our new range of mixed signal flat panel display and consumer display IC products and the new Native Rate Series of system products. We anticipate that future research and development expenses will continue to increase in absolute dollars, but may decline as a percentage of net revenue.

We believe that our ability to maintain our competitiveness and increase market share will depend largely upon our ability to enhance existing products and develop, acquire and integrate new products. The market for ICs is characterized by rapid technological change, and is highly competitive with respect to timely product introductions. The timing and amount of research and development expenses may vary significantly based upon the number of new products and significant upgrades under development and products acquired during a given period.

Charge for in-process technology. There is no in-process charge in the three-month periods ended December 31, 2001 and 2000.

Selling, general and administration. Selling, general and administrative expenses include salaries, in-house commissions, commissions to independent sales distributors and representatives, travel, trade shows, advertising and other promotional expenses. Selling, general and administration expenses increased 7% to $3.4 million in the quarter ended December 31, 2001 from $3.1 million in quarter ended December 31, 2000. The increase in selling, general and administration expenses was principally related to the costs associated with the introduction of new products, including the mixed signal and the FLI family of ICs, and the cost of promoting and developing new customers. As a percentage of revenue, selling, general and administration expenses represented 28% and 33% of revenues for the December quarter 2001 and 2000, respectively. We anticipate that selling, general and administrative expenses will continue to increase in absolute dollars and continue to decline as a percentage of net revenue.

Business combination expenses. Business combination expenses were $0.4 million and $0 in the quarters ended December 31, 2001 and 2000, respectively. Business combination expenses primarily represent the cost of outside consultants related to the proposed merger with Genesis.

Amortization of intangible assets. Intangible assets consist of goodwill, technology and other intangible assets acquired in the purchase of Faroudja. Sage amortized $0.6 million and $5.9 million of intangible assets for the quarters ended December 2001 and 2000, respectively. The decrease in amortization is a result of the reduction of goodwill following the write-down associated with the impairment charge against goodwill and other intangible assets recorded at the March 31, 2001 year-end.

Severance expense. Severance expense represents salary and wages and equity compensation paid to employees terminated as a part of a reduction-in-force (RIF) plan executed in October 2001. There were no RIFs in the quarter ended December 31, 2000.

Stock compensation. Sage expensed stock compensation of approximately $21,000 and $58,000 in the quarters ended December 31, 2001 and 2000, respectively. Stock compensation expenses relate to options granted below the perceived fair market value prior to Sage's initial public offering and

represent 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.

Interest and other income. Net interest and other income amounted to $223,000 and $591,000 in the quarters ended December 31, 2001 and 2000, respectively. This decrease is the result of lower investment balances and decreases in interest rates and dividends earned.

Provision for income taxes. Sage incurred operating losses in fiscal years 2001 and 2000, and therefore made no provision for income tax in these fiscal years. As of March 31, 2001, Sage had approximately $15 million in net operating losses, which are available to offset future taxable income and will expire between 2011 and 2021.

Results of Operations for the Nine Months Ended December 31, 2001 and 2000

Revenue. Revenue increased 21% to $29.9 million in the nine-month period ended December 31, 2001 from $24.7 million in the nine-month period ended December 31, 2000. The increase in net revenue is due partly to increases in design wins as well as the introduction of new products. In the nine month period ended December 31, 2001 sales increased sequentially by 20% from the nine month period ending March 31, 2001 reflecting the launch and initial shipments of new product offerings into the integrated digital interface market and the integrated analog interface market. Revenue from one customer, Compal, represented 15% of total revenues for the nine-month period ending December 31, 2001.

IC revenue increased 65% to $20.9 million in the nine-month period ended December 31, 2001 from $12.7 million in the nine-month period ended December 31, 2000. The increase in IC revenue is due to a 68% increase in units sold to new and existing customers offset by lower average selling prices (ASP). The decline in the ASP reflects an increasing proportion of shipments of our mature discrete ICs such as the Cheetah 4 and Jag D in the June and September 2001 quarters with lower ASPs. In the December 2001 quarter we experienced a significant increase in the shipment of our newer mixed signal ICs such as the Jag T, Jag ASM and the s9050, which achieved lower than planned margins as a result of early yield and test costs problems at launch. Sales of ICs to the consumer market accounted for 32% of total IC revenue. Revenues from three customers, Compal, Samsung and Panasonic accounted for 21%, 12% and 11%, respectively, of total IC revenues for the nine-month period ended December 31, 2001.

System revenues decreased 26% to $9.0 million in the nine-month period ended December 31, 2001 from $12.1 million in the nine-month period ended December 31, 2000. System revenues include revenues from box and board level products. As discussed in the results of operations for the three months ended December 31, 2001 and 2000, we have seen a progressive reduction in the demand for video processing boards for custom and low volume applications for the mainstream flat panel monitor market. Our board sales fell from $6.1 million in the nine-month period ended December 31, 2000 to $2.9 million in the nine-month period ended December 31, 2001, and as a consequence, we decided to exit the board business. The decline in system revenue also represents a slight decline in box sales as a result of changes in product mix to lower ASP products, which were introduced in March 2001.

Cost of Revenue. Cost of net revenue increased 39% to $18.3 million in the nine-month period ended December 31, 2001 from $13.2 million in the nine-month period ended December 31, 2000. The increase in the nine-month period ended December 31, 2001, including $2.5 million of incremental cost of revenue from the Faroudja acquisition. The increase in cost of net revenues from the nine-month period ending December 31, 2000 to the nine-month periods ending December 31, 2001 was primarily due to the increase in sales volume.

Cost of IC revenue consists of the cost of display processor ICs purchased from independent foundry suppliers. Cost of IC revenues increased 107% to $13.2 million in the nine-month period ended December 31, 2001 from $6.4 million in the nine-month period ended December 31, 2000. The increase in IC cost of revenue from the December quarter 2000 to the December quarter 2001 was primarily due to a 68% increase in volume of IC shipments. As a percentage of IC revenue, cost of IC revenue was 63% in the nine-month period ended December 31, 2001 and 50% in the nine-month period ended December 31, 2000. The increase in cost of IC revenue from the nine-month period ended December 31, 2000 to nine-month period ended December 31, 2001 as a percentage of cost of IC revenue is due to the increase in costs experienced as a result of higher silicon costs for ASICs purchased or committed during the foundry capacity constraints of late 2000, lower than expected yields and higher than expected test costs on recently launched mixed signal products, and product mix.

Cost of system revenue consists principally of the cost of purchase, assembly and test of system level products from subcontractors. The cost of system revenue decreased 24% to $5.2 million in the nine-month period ended December 31, 2001 from $6.8 million in the nine-month period ended December 31, 2000 due to lower volume.

Gross margin. Our overall gross margin decreased to 38.6% in the nine-month period ended December 31, 2001 from 46.8% in the nine-month period ended December 31, 2000. As discussed in the results of operations for the three months ended December 31, 2001 and 2000, following our decision to exit the board business, we wrote off the residual inventory of board parts and products amounting to $996,000. Without this one-time charge, our gross margin would have been 41.9% in the nine-month period ending December 31, 2001 compared to 46.8% in the nine-month period ended December 31, 2000. Other factors influencing the decreases in the overall gross margin include reductions in the gross margin for ICs as a result of higher silicon cost of certain ICs following increases in foundry prices experienced in the last half of 2000 as a result of capacity constraints, lower than expected yields and higher than expected test costs on newer mixed signal ICs, the erosion of ASPs for mature discrete IC products and decreases in prices charged to compete directly with competitors offering similar products. Further, the decrease in the overall gross margin includes decreases in gross margin for our box level products as a result of the introduction of lower margin home theater products.

Research and development. Our research and development expenses consist primarily of compensation and personnel related expenses, engineering and design tools, and the costs for purchased materials, designs and tooling which can fluctuate significantly from period to period as a result of our product development cycles. Our research and development expenses were $7.9 million and $5.7 million for the nine-month periods ended December 31, 2001 and 2000, respectively. Research and development expenses represented 27% and 23% of revenues for the nine-month periods ended December 31, 2001 and 2000, respectively. The increase in personnel, engineering and design tools, purchased materials, designs and tooling is attributable to the continued development of the range of Jaguar, mixed signal and video IC products and the new Native Rate Series of systems products, which were introduced in the second half of fiscal year 2001. Sage anticipates that research and development expenses will continue to increase in absolute dollars, but may decline as a percentage of net revenue

and when we commit to product development efforts in connection with our next generation of semiconductors.

Charge for in-process technology. Sage's in-process technology charges were $0 and $7.2 million in the nine-month periods ended December 31, 2001 and 2000. The acquired in-process technology from Faroudja was valued at $7.2 million, which was expensed in June 2000.

Selling, general and administration. Selling, general and administrative expenses include salaries, in-house commissions, commissions to independent sales distributors and representatives, travel, trade shows, advertising and other promotional expenses. Selling, general and administration expenses increased 19% to $10.5 million in the nine-month period ended December 31, 2001 from $8.9 million in the nine-month period ended December 31, 2000. The increase in selling, general and administration expenses was principally related to the incremental costs of Faroudja arising from the acquisition, the costs associated with the introduction of new products, including the newer Jaguar, mixed signal and video IC products, and the cost of promoting and developing new customers. As a percentage of revenue, selling, general and administration expenses represented 35% and 36% of revenues for the nine-month period ending December 31, 2001 and 2000, respectively. We anticipate that selling, general and administrative expenses will continue to increase in absolute dollars, but will continue to decline as a percentage of net revenue.

Business combination expenses. Business combination expenses were $1.6 million and $0 in the nine-month periods ended December 31, 2001 and 2000, respectively. Business combination expenses primarily represent the cost of outside consultants related to the proposed merger with Genesis.

Amortization of intangible assets. Intangible assets consist of goodwill, technology and other intangible assets acquired in the purchase of Faroudja. Sage amortized $1.9 million and $13.4 million of intangible assets for the nine-month periods ended December 31, 2001 and 2000, respectively. The decrease in amortization is a result of the reduction of goodwill following the write-down associated with the impairment charge against goodwill and other intangible assets recorded at the March 31, 2001 year-end.

Stock compensation. Sage expensed stock compensation of approximately $82,000 and $210,000 in the nine-month periods ended December 31, 2001 and 2000, respectively. Stock compensation expenses relate to options granted below the perceived fair market value prior to Sage's initial public offering and represent 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.

Interest and other income. Net interest and other income amounted to $1.1 million and $2.1 million in the nine-month periods ended December 2001 and 2000, respectively. This decrease is the result of lower investment balances and decreases in interest rates and dividends earned.

Liquidity and Capital Resources

Since inception, we have satisfied our liquidity requirements principally through the private issuance and sale of equity securities, totaling approximately $17.7 million, and an initial public offering

in November 1999, which raised approximately $37.2 million, net of fees and expenses. We also acquired $18.7 million in incremental cash as a result of our acquisition of Faroudja in June 2000. During the nine months ended December 31, 2001, cash increased $12.7 million, our investment in short-term marketable securities decreased $13.5 million, and we received proceeds of approximately $8.1 million from the purchase of stock through the employee stock purchase program and from exercised options. The net decrease in cash, cash equivalents and marketable securities is $0.8 million for the nine-month period ended December 31, 2001. The cash was used to acquire property and equipment, fund leasehold improvements at our new design center in India, and fund current operations.

As of December 31, 2001, we had $35.0 million in cash and cash equivalents and $5.6 million in short-term marketable securities. In addition, we had a $5.0 million credit facility under which no borrowings had been made. We believe that our existing cash resources and credit facility will be sufficient to meet our capital requirements through the next twelve months. 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. 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. Further, 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. Any transaction, 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.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities," which establishes new accounting and reporting standards for derivative instruments and hedging activities. SFAS 133, as amended by SFAS 137 and 138, requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of relationship that exists. As amended, SFAS 133 is effective for Sage's fiscal year 2002. We have determined that due to our limited use of derivative instruments, the adoption of SFAS 133 did not have a material impact on Sage's results of operations or its financial position.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We do not expect the adoption of SFAS 141 to have a material effect on Sage's financial position or results of operations.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," which in Sage's case is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of

certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We are currently assessing the impact of SFAS 142 on Sage's financial position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets to be Disposed Of." SFAS 144 addresses financial accounting and reporting of impairment of ling-lived assets to be disposed of. However, SFAS 144 retains the fundamental provisions of SFAS 121 for: 1) recognition and measurement of the impairment of long-lived assets to be held and used; and 2) measurement of ling-lived assets to be disposed of by sale. SFAS 144 is effective for fiscal year beginning after December 15, 2001. We are currently assessing the impact of SFAS 144 on Sage's financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Investment Risk

Sage's 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 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 in certificates of deposit issued by banks and investment-grade government and corporate debt and equity securities. These securities are 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 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 such a change.

Foreign Currency Exchange Risk

Sage is an international company, selling 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, Korea 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.

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.

A significant amount of Sage's revenues arise from a few customers and any decrease in revenues from these few customers could significantly impact our total revenues.

Sage is dependent on a limited number of large customers. We will, for the foreseeable future, also be dependent on a limited number of large customers for a substantial portion of our 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 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 our operating results will continue to depend on revenues from a relatively small number of manufacturers and their suppliers.

The reliance by Sage 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 significantly greater financial and other resources than us; therefore we 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 Sage's 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.

Likewise, we are developing consumer video products that are designed to conform to certain current video processing industry 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 our 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

our products. There can be no assurance that these or other factors beyond our control will not adversely affect the development of markets for our products.

Our products and product enhancements must incorporate technological changes and innovations to meet evolving customer and industry standards. Our future success will depend, to a substantial degree, upon our ability to develop and introduce new products and enhancements to our 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 our customers are making purchasing decisions. For example, in the face of pressure from OEM customers to reduce cost and increase performance by integrating an analog interface with a discrete display processor as a single chip solution, we took longer than planned, and longer than one of our competitors to introduce such a product, thereby losing market share

Because display and video processors are complex, they may have errors or defects that are found only after the processors have been incorporated into Sage's 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 and high definition display devices which are themselves complex. Although the products are, and will continue to 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, our customers have not, to our knowledge, discovered any significant errors or defects in their products. If our customers were to discover errors or defects that may be identified after a device is connected to a signal source, the customer might hold us responsible for:

•: 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 our products, revenues, gross margin and our name brands could be significantly harmed.

There are risks associated with the failure to identify new markets and applications.

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 products less desirable or obsolete. If we fail to produce technologically competitive products in a cost-effective manner and on a timely basis or are unable to comply with industry standards in the future, our business and results of operations could be harmed.

Substantial portions of our revenues have been derived from sales of products that address the home theater and commercial presentation markets. Certain of our current Faroudja branded products and future product plans address markets that are not now and may never become substantial commercial markets. Our future growth will depend, in large part, on our ability to identify new

markets for our products and to apply our products and technology to evolving markets and applications. There can be no assurance that these markets will become substantial commercial markets or that our 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 our 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 our 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.

Sage will be exposed to distribution risks and issues surrounding the diversification of sales channels.

We sell our products domestically and internationally through distributors, third party sales representatives and dealers and our success depends on the continued efforts of this network. The loss of, or reduction in sales to, any of our key customers, could have a material adverse affect on our operating results. The short life cycles of our products, and the difficulty in predicting future sales, increase the risk that new product introductions, price reductions by us or our 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 us to reduce prices in a manner or at a time which has a material adverse impact upon our business, financial condition and operating results.

An integral element of our strategy is to enhance and diversify our distribution channels, including the development of in-house sales forces, and reducing the cost of our third party sales representatives. Our ability to achieve revenue growth in the future will depend in large part on our success in recruiting and training sufficient sales personnel, third party sales representatives, distributors and dealers, of which, a certain number currently distribute, or may in the future distribute, the product lines of our competitors. There can be no assurance that we will be able to attract, train and retain a sufficient number of distributors, third party sales representatives or direct sales personnel, or that they will continue to recommend, or devote sufficient resources to market and provide customer support for our products. All of these factors could have a material adverse effect on our business, financial condition and operating results.

Intense competition may reduce the demand or prices for Sage's products, decreasing our gross margin.

The markets in which we 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 our business, financial condition and results of operations. 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 be sure 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 companies that offer display and video processors, some of which have substantially greater resources than we do. In particular, we principally compete against Genesis Microchip, Inc., Pixelworks, Inc., Maacronix, Trumpion, Topro, SmartAsic, Philips and ST Micro. We also compete against Communications Specialties Inc., Leitch Incorporated, Panasonic Broadcast and Television Systems Company, DVDO, Inc., nDSP, TeraNex, Miranda Technology, Inc., RGB Spectrum, Cinema Pro Corporation dba Runco International, 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.

Concerns about an economic slowdown may influence Sage's customers to reduce production and inventory of display products in anticipation of a slowdown or further slowdown of their business.

Unforeseen reduction or expectations of a reduction in demand by our customers could reduce orders and shipments, which could result in us carrying increased inventory. Since order cycles are brief and the backlog small, we are required to carry a certain level of inventory to service our customers. If our inventory builds up as a result of order postponement, or cutbacks of sales forecasts by our customers, we could end up with excess inventory that is either unusable, or that has to be sold at clearance prices which will harm our gross margins.

Fluctuations in operating results make it difficult to predict Sage's 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 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;
•: timing of major NRE payments on new products
•: the deferral of customer orders in anticipation of new products or enhancements by our competitors; or us

•: 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. Furthermore, the average daily volumes of our common stock traded are frequently light and even events like the release of press information by Sage or a competitor can give rise to a significant change in relative demand and the consequent price of our common stock.

Sage relies on independent foundries and manufacturing.

We currently rely on independent foundries to manufacture, assemble, package and test most of our semiconductor products. These independent foundries fabricate products for other companies and may also manufacture products of their own design. We purchase products from all of our foundries pursuant to individually negotiated purchase orders. We do not have long-term supply contracts with any of these foundries, and, therefore, none of them will be obligated to supply products for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. Our reliance 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. Our ability to obtain the foundry capacity necessary to meet the demand for our products is based in part on our ability to accurately forecast demand. If we fail to accurately forecast our future demand, we may be unable to obtain adequate supplies of integrated circuits on a timely basis. There can be no assurance that we will be able to accurately forecast the demand for our products or obtain sufficient foundry capacity in the future.

While we have not 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 our foundries are unable or unwilling to produce sufficient supplies of our products in required volumes at acceptable costs, we will be required to reallocate production among our other existing foundries or identify and qualify acceptable alternatives. This qualification process could take nine months or longer,

and no assurance can be given that any additional source would become available or that we would be in a position to satisfy our production requirements on a timely basis. The loss of any of our foundries, our inability to obtain additional production in a period of increased demand, or our inability to obtain timely and adequate deliveries from our suppliers could reduce or delay shipments of our products. Any of these developments could damage relationships with our current and prospective customers and could have a material adverse effect on our business, financial condition and operating results.

Our reliance on third-party manufacturers limits our control over delivery schedules, quality assurance and product cost. Disruptions in the provision of services by our assemblers or other circumstances that would require us to seek alternative sources of assembly could lead to supply constraints or delays in the delivery of our products. Further, the need for high quality assurance may increase costs paid by us 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 our system level 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.

We do not own or operate a semiconductor fabrication facility and we do not have the resources to manufacture our products internally. Our display processor ICs have historically been manufactured, assembled and tested by Kawasaki LSI, Fujitsu Microelectronics and ST Micro. The wafers of our new series of integrated mixed signal ICs are being be manufactured by Taiwan Semiconductor Manufacturing Company and we will be responsible for the assembly, packaging and testing. Our system level box products are manufactured by Bestronics. 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 nine months before they are needed and before we have firm purchase orders for those products. None of our products are 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 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.

Failure to manage Sage's 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. Our past growth, and 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 businesses effectively, and if Sage is 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. Current and prospective employees may experience uncertainty about their future roles. This uncertainty may adversely affect our ability to retain key management, sales, marketing and technical personnel, or to attract qualified personnel in the future.

We expect to hire a significant number of engineering, sales and marketing and support personnel in the future, and we believe 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 and 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.

Sage's 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.

Our ability 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 our 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.

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 us 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.

A significant portion of the intellectual property acquired with the Faroudja acquisition is licensed to one of our wholly owned subsidiaries by Yves Faroudja. There are risks associated with this intellectual property because our subsidiary is a licensee and not the owner of such intellectual property rights. Under the subsidiary's agreement with Mr. Faroudja, he retains the non-exclusive right to license his patents and technologies to third parties for use outside our subsidiary's field of use. Notwithstanding the particular terms of the license agreement with Mr. Faroudja, we face 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 our resources are so consumed, such consumption could have a material adverse affect on our 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.

We incurred net losses of $4.8 million; $4.6 million and $121.1 million for each of the respective years ended March 31, 1999, 2000 and 2001, and had an accumulated deficit of $134.4 million as of March 31, 2001. In addition we have capitalized approximately $10 million of goodwill and intangibles in connection with the acquisition of Faroudja and intend to amortize this over four years, resulting in annual non-cash charges to operating expenses of over $2.6 million per year. Accordingly, we expect to continue to report additional operating losses, and even before non-cash charges, we may continue to report operating losses for at least the next 12 months. Although we have experienced revenue growth over the last fiscal year as a whole, 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 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 reasonable future, we have limited cash resources and may therefore be unable to continue our operations.

Sage has a limited operating history, making it difficult for you to evaluate our business.

We commenced operations in January 1995, but 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 the 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 projections. In addition, because substantially all of our present customers order on a purchase orders 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 "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 we do not successfully address certain 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 the majority of total sales for the year ended March 31, 2001. Substantial numbers of our customers are located in Japan, Taiwan, Korea and PRC. 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. Specifically, we 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 our range of products;
•: ongoing restructuring activities of ours customers;
•: potential difficulties in collecting accounts receivable from our customers located in Japan, Korea, Taiwan and PRC; and
•: difficulties related to design piracy of display and video processing technologies 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.

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 our ability to take advantage of 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 Indian facilities, we cannot assure you that relocation will not disrupt our 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.

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, televisions, home theaters 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.

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.

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 these markets and the timing of their development are uncertain and will depend upon a number of factors, including available supply capacity and retail price of flat panel monitors, 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.

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 nine months or more. 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 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 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.

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 our 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 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.

If we have to qualify a new contract manufacturer for any of Sage's 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 nine 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 Sage's 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. 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 mixed signal processors, Sage is assuming risks that it does not currently face.

Historically, we purchased packaged, assembled and tested semiconductor products from contract manufacturers. We have assumed greater responsibility for this process with our new generation of mixed signal products by subcontracting separately for the production of wafers and for their assembly and testing and consequently 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. In the nine months ended December 31, 2001, we have shipped an increasing proportion of these mixed signal semiconductor products, and have experienced a lower-than-expected yield, and higher-than-expected test costs resulting in a lower weighted average gross margin. While we expect our test process and yields to improve with experience, we could continue to face adverse impact on our margins for the foreseeable future.

Interruptions of power supply in California may disrupt Sage's business.

Recently the State of California has experienced a shortage of power supplies resulting in temporary disconnection and blackouts. Such interruptions of supply are random and unforeseeable and can lead to loss of data, test results, operational capability and other inefficiencies. The resulting outcome may range from delays and added cost to lost business, and is substantially outside our control.

Merger of Sage and Genesis Microchip Incorporated.

On September 27, 2001, Sage announced that it had agreed to merge with Genesis Microchip Incorporated, subject to approval of the stockholders of both companies and statutory reviews. While all statutory approvals are now obtained, there is no assurance that this transaction will receive the necessary approval of stockholders at the Special Meeting to be held on February 11, 2002. During the period between the announcement and the closing of this transaction, we will continue to operate as an independent business. However the announcement and pending uncertainty caused by anticipated changes that might arise following a successful closing could adversely affect our current relationships with our customers, sales representatives, employees, foundries, vendors, securities analysts, competitors and potential strategic business partners in ways that could damage our competitiveness, revenue, margins, expenses, and share price. In particular, in the event that the merger agreement does not close, our competitive position vs. Genesis Microchip Incorporated could be severely damaged, and it could take a long time to recover our relative market position, if at all.

PART II

Item 1. Legal Proceedings

As of February 7, 2002, we were not party to any legal proceeding.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 6. Exhibits and Reports on Form 8-K

a.: Exhibits: None
b.: Reports on Form 8-K: None

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: February 7, 2002		By:		/s/ SIMON P. WESTBROOK Simon P. Westbrook Chief Financial Officer

QuickLinks

SAGE, INC. INDEX
PART I
SAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data, unaudited)
SAGE, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data, unaudited)
SAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (In thousands, unaudited)
SAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
BUSINESS RISKS
Risks Related to the Display Processing Industry
PART II
SIGNATURES

SAGE INC/CA 10-Q