EX-99.3 4 dex993.htm UNAUDITED PRO FORMA FINANCIAL STATEMENTS Prepared by R.R. Donnelley Financial -- Unaudited Pro Forma Financial Statements
 
Exhibit 99.3
 
GENESIS MICROCHIP INC. DELAWARE
 
UNAUDITED PRO FORMA CONSOLIDATED
 
FINANCIAL INFORMATION
 
The following unaudited pro forma consolidated financial statements are not necessarily indicative of the combined results of operations for future periods or the results of operations that would have been realized had Genesis Microchip Inc. Delaware (Genesis Microchip Delaware) and Sage Inc. (Sage) been combined during the periods specified. The unaudited pro forma consolidated financial statements and the related notes should be read in conjunction with the historical financial statements of Genesis Microchip Delaware and Sage.
 
On February 19, 2002, Genesis Microchip Delaware completed its combination with Sage (the Combination) by issuing approximately 8.8 million common shares and 1.4 million options for its common stock. The Combination will be accounted for under the purchase method of accounting. The purchase price is approximately $296.7 million, consisting of Genesis Microchip Delaware common stock valued at approximately $241.5 million, Genesis Microchip Delaware stock options valued at approximately $31.9 million, and direct acquisition costs estimated at approximately $23.3 million.
 
The unaudited pro forma consolidated balance sheet gives effect to the Combination as if it had occurred on December 31, 2001, and combines Genesis Microchip Delaware’s unaudited historical U.S. GAAP consolidated balance sheet as of December 31, 2001, with Sage’s unaudited historical U.S. GAAP consolidated balance sheet as of December 31, 2001.
 
The unaudited pro forma consolidated statement of operations for the nine months ended December 31, 2001, gives effect to the Combination as if it had occurred on April 1, 2001, and combines Genesis Microchip Delaware’s historical U.S. GAAP consolidated statement of operations for the nine months ended December 31, 2001, with Sage’s historical U.S. GAAP consolidated statement of operations for the nine months ended December 31, 2001.            
 
The unaudited pro forma consolidated statement of operations for the year ended March 31, 2001, gives effect to the Combination as if it had occurred on April 1, 2000, and combines Genesis Microchip Delaware’s historical U.S. GAAP consolidated statement of operations for the year ended March 31, 2001, with Sage’s historical U.S. GAAP consolidated statement of operations for the twelve months ended March 31, 2001 and with Faroudja, Inc. (Faroudja) historical U.S. GAAP statement of operations for the period from April 1, 2000 to June 7, 2000 acquisition date by Sage. The acquisition of Faroudja was accounted for using the purchase method and the results of operations for the period subsequent to the acquisition date are included in the historical results of Sage.
 
The unaudited pro forma consolidated financial statements have been prepared on the basis of assumptions described in the related notes and include assumptions relating to the allocation of consideration paid for the assets and liabilities of Sage based on preliminary estimates of their respective fair values.
 

1

 
GENESIS MICROCHIP INC.
 
Pro Forma Consolidated Balance Sheet
(In thousands of U.S. dollars)
 
December 31, 2001
(Unaudited)
 
    
Genesis
Microchip Inc.
     
Sage, Inc.
     
Pro forma adjustments
     
Total
  
                  
(note 3(a))
         
Assets
                                    
Current assets:
                                    
Cash and cash equivalents
   
$
84,586
 
   
$
35,038
 
   
$
—  
 
   
$
119,624
 
Short-term marketable securities
   
 
—  
 
   
 
5,580
 
   
 
—  
 
   
 
5,580
 
Accounts receivable, net
   
 
24,133
 
   
 
8,895
 
   
 
—  
 
   
 
33,028
 
Income taxes recoverable
   
 
809
 
   
 
—  
 
   
 
—  
 
   
 
809
 
Inventory
   
 
12,191
 
   
 
4,012
 
   
 
—  
 
   
 
16,203
 
Investment held for resale
   
 
1,100
 
   
 
—  
 
   
 
—  
 
   
 
1,100
 
Other
   
 
5,940
 
   
 
1,342
 
   
 
—  
 
   
 
7,282
 
    
  
  
  
Total current assets
   
 
128,759
 
   
 
54,867
 
   
 
—  
 
   
 
183,626
 
Property and equipment
   
 
10,465
 
   
 
4,528
 
   
 
—  
 
   
 
14,993
 
Deferred income taxes
   
 
3,600
 
   
 
—  
 
   
 
—  
 
   
 
3,600
 
Goodwill
   
 
—  
 
   
 
8,353
 
   
 
(8,353
)
   
 
189,393
 
                      
 
189,393
 
         
Other intangible assets
   
 
—  
 
   
 
—  
 
   
 
35,600
 
   
 
35,600
 
Other
   
 
772
 
   
 
1,947
 
   
 
—  
 
   
 
2,719
 
    
  
  
  
Total assets
   
$
143,596
 
   
$
69,695
 
   
$
216,640
 
   
$
429,931
 
    
  
  
  
Liabilities and Shareholders’ Equity
                                    
Current liabilities:
                                    
Accounts payable
   
$
15,097
 
   
$
1,748
 
   
$
—  
 
   
$
16,845
 
Accrued liabilities
   
 
5,824
 
   
 
2,930
 
   
 
14,274
 
   
 
23,028
 
Current portion of loan payable
   
 
90
 
   
 
—  
 
   
 
—  
 
   
 
90
 
    
  
  
  
Total current liabilities
   
 
21,011
 
   
 
4,678
 
   
 
14,274
 
   
 
39,963
 
Long-term liabilities:
                                    
Loan payable
   
 
328
 
   
 
—  
 
   
 
—  
 
   
 
328
 
Lease liability
   
 
—  
 
   
 
—  
 
   
 
9,019
 
   
 
9,019
 
Deferred income taxes
   
 
—  
 
   
 
—  
 
   
 
8,064
 
   
 
8,064
 
    
  
  
  
Total liabilities
   
 
21,339
 
   
 
4,678
 
   
 
31,357
 
   
 
57,374
 
    
  
  
  
Shareholders’ equity:
                                    
Share capital
   
 
108,065
 
   
 
149
 
   
 
(149
)
   
 
31
 
                      
 
(108,034
)
         
Additional paid in capital
   
 
1,293
 
   
 
208,900
 
   
 
(208,900
)
   
 
382,697
 
                      
 
273,370
 
         
                      
 
108,034
 
         
Notes receivable from stockholders
   
 
—  
 
   
 
(58
)
   
 
58
 
   
 
—  
 
Deferred compensation
   
 
(97
)
   
 
(33
)
   
 
33
 
   
 
(18,467
)
                      
 
(18,370
)
         
Cumulative other comprehensive loss
   
 
(94
)
   
 
—  
 
   
 
—  
 
   
 
(94
)
Deficit
   
 
13,090
 
   
 
(143,941
)
   
 
143,941
 
   
 
8,390
 
                      
 
(4,700
)
         
    
  
  
  
Total shareholders’ equity
   
 
122,257
 
   
 
65,017
 
   
 
185,283
 
   
 
372,557
 
    
  
  
  
Total liabilities and shareholders’ equity
   
$
143,596
 
   
$
69,695
 
   
$
216,640
 
   
$
429,931
 
    
  
  
  
 
See accompanying notes to pro forma consolidated financial statements.

2

 
GENESIS MICROCHIP INC.
 
Pro Forma Consolidated Statement of Operations
(In thousands of U.S. dollars, except shares and per share amounts)
 
Nine months ended December 31, 2001
(Unaudited)
 
    
Genesis Microchip Inc.
   
Sage, Inc.
     
Pro forma
adjustments
     
Note 3
     
Total
Revenues
   
$
107,266
   
$
29,869
 
   
$
—  
 
          
$
137,135
Cost of revenues
   
 
58,019
   
 
17,381
 
   
 
—  
 
          
 
75,400
Write off of inventory at close of board business
   
 
—  
   
 
996
 
   
 
—  
 
          
 
996
    
  
  
         
Gross profit
   
 
49,247
   
 
11,492
 
   
 
—  
 
          
 
60,739
Operating expenses:
                                       
Research and development
   
 
14,677
   
 
7,927
 
   
 
2,755
 
   
(d
)
   
 
25,359
Sales, general and administrative
   
 
14,134
   
 
10,569
 
   
 
1,837
 
   
(d
)
   
 
26,540
Amortization of intangible assets
   
 
—  
   
 
1,928
 
   
 
94
 
   
(b
)
   
 
94
                    
 
(1,928
)
   
(b
)
       
Amortization of acquired technology
   
 
—  
   
 
—  
 
   
 
6,581
 
   
(c
)
   
 
6,581
Business combination expenses
   
 
—  
   
 
1,555
 
   
 
—  
 
          
 
1,555
Severance expenses
   
 
—  
   
 
164
 
   
 
—  
 
          
 
164
    
  
  
         
Total operating expenses
   
 
28,811
   
 
22,143
 
   
 
9,339
 
          
 
60,293
    
  
  
         
Income (loss) from operations
   
 
20,436
   
 
(10,651
)
   
 
(9,339
)
          
 
446
Interest and other income
   
 
1,131
   
 
1,061
 
   
 
—  
 
          
 
2,192
    
  
  
         
Income (loss) before income taxes
   
 
21,567
   
 
(9,590
)
   
 
(9,339
)
          
 
2,638
Provision for (recovery of) income taxes
   
 
3,235
   
 
—  
 
   
 
(2,670
)
   
(e
)
   
 
565
    
  
  
         
Net income (loss)
   
$
18,332
   
$
(9,590
)
   
$
(6,669
)
          
$
2,073
    
  
  
         
Earnings per share:
                                       
Basic
   
$
0.89
   
$
(0.67
)
                   
$
0.07
Diluted
   
$
0.80
   
$
(0.67
)
                   
$
0.06
Weighted average number of common shares outstanding (in thousands):
                                       
Basic
   
 
20,683
   
 
14,263
 
                   
 
28,827
Diluted
   
 
22,817
   
 
14,263
 
                   
 
32,368
 
See accompanying notes to pro forma consolidated financial statements.

3

 
GENESIS MICROCHIP INC.
 
Pro Forma Consolidated Statement of Operations
(In thousands of U.S. dollars, except shares and per share amounts)
 
Year ended March 31, 2001
(Unaudited)
 
    
Genesis Microchip Inc.
     
Sage, Inc.
     
Pro Forma
Faroudja, Inc.
(Note 4)
     
Pro Forma
Adjustments
     
Note 3
     
Total
  
Revenues
   
$
63,627
 
   
$
31,399
 
   
$
1,668
 
   
$
—  
 
          
$
96,694
 
Cost of revenues
   
 
32,416
 
   
 
16,898
 
   
 
963
 
   
 
(1,000
)
   
(b
)
   
 
49,277
 
    
  
  
  
         
Gross profit
   
 
31,211
 
   
 
14,501
 
   
 
705
 
   
 
1,000
 
          
 
47,417
 
Operating expenses:
                                                    
Research and development
   
 
17,413
 
   
 
8,239
 
   
 
1,258
 
   
 
3,674
 
   
(d
)
   
 
30,584
 
Selling, general and administrative
   
 
15,947
 
   
 
12,302
 
   
 
3,333
 
   
 
2,449
 
   
(d
)
   
 
34,031
 
Charge for in-process technology
   
 
—  
 
   
 
7,200
 
   
 
—  
 
   
 
(7,200
)
   
(f
)
   
 
—  
 
Amortization of intangible assets
   
 
—  
 
   
 
19,310
 
   
 
4,435
 
   
 
125
 
   
(b
)
   
 
125
 
                               
 
(23,745
)
                
Impairment of intangible assets
   
 
—  
 
   
 
91,463
 
   
 
—  
 
   
 
—  
 
          
 
91,463
 
Amortization of acquired technology
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
8,775
 
   
(c
)
   
 
8,775
 
    
  
  
  
         
Total operating expenses
   
 
33,360
 
   
 
138,514
 
   
 
9,026
 
   
 
(15,922
)
          
 
164,978
 
    
  
  
  
         
Income (loss) from operations
   
 
(2,149
)
   
 
(124,013
)
   
 
(8,321
)
   
 
16,922
 
          
 
(117,561
)
Interest and other income
   
 
2,328
 
   
 
2,932
 
   
 
198
 
   
 
—  
 
          
 
5,458
 
    
  
  
  
         
Income (loss) before income taxes
   
 
179
 
   
 
(121,081
)
   
 
(8,123
)
   
 
16,922
 
          
 
(112,103
)
Recovery of income taxes
   
 
(2,483
)
   
 
—  
 
   
 
—  
 
   
 
(3,560
)
   
(e
)
   
 
(6,043
)
    
  
  
  
  
  
Net income (loss)
   
$
2,662
 
   
$
(121,081
)
   
$
(8,123
)
   
$
20,482
 
          
$
(106,060
)
    
  
  
  
         
Earnings (loss) per share:
                                                    
Basic
   
$
0.14
 
   
$
(9.48
)
                            
$
(3.97
)
Diluted
   
$
0.13
 
   
$
(9.48
)
                            
$
(3.97
)
Weighted average number of shares outstanding (in thousands):
                                                    
Basic
   
 
19,406
 
   
 
12,776
 
                            
 
26,701
 
Diluted
   
 
19,884
 
   
 
12,776
 
                            
 
26,701
 
 
See accompanying notes to pro forma consolidated financial statements.

4

1.
 
Basis of presentation:
 
Genesis Microchip Incorporated, a Nova Scotia company which we refer to as Genesis Microchip, reorganized to a Delaware corporation effective February 19, 2002. In the reorganization, the holders of shares of Genesis Microchip exchanged their shares for an equal number of newly issued shares of Genesis Microchip Inc., a newly formed Delaware corporation, which we refer to as Genesis Microchip Delaware. These unaudited pro forma consolidated financial statements present the pro forma financial position and results of operations of Genesis Microchip Delaware. For accounting purposes, the reorganization was accounted for as a non-substantive exchange whereby the net assets of Genesis Microchip were recorded by Genesis Microchip Delaware in its consolidated financial statements initially at the same carrying value as recorded in the consolidated financial statements of Genesis Microchip immediately prior to the reorganization. In addition, the financial position, results of operations and cash flows previously reported by Genesis Microchip prior to the reorganization will be reported unchanged in the comparative period to the consolidated financial statements of Genesis Microchip Delaware.
 
The unaudited pro forma consolidated balance sheet and statements of operations are based upon the historical financial information described below after giving effect to the transaction and adjustments described in notes 2, 3, 4 and 5. These unaudited pro forma consolidated financial statements are not necessarily indicative of the results of operations that would have been achieved had the transaction actually taken place at the dates indicated and do not purport to be indicative of the effects that may be expected to occur in the future.
 
The pro forma consolidated financial statements have been prepared to give pro forma effect to the proposed acquisition of Sage and the reorganization of Genesis Microchip from a Nova Scotia company to a Delaware corporation and Sage’s acquisition of Faroudja.
 
 
(a)
 
Pro forma consolidated statements of operations:
 
The pro forma consolidated statement of operations for the year ended March 31, 2001 is based on:
 
 
(i)  
 
our audited financial statements for the year ended March 31, 2001;
 
 
(ii) 
 
the audited financial statements of Sage for the year ended March 31, 2001;
 
 
(iii)
 
the unaudited financial statements of Faroudja for the period April 1, 2000 to June 7, 2000; and
 
 
(iv)
 
the additional information provided in notes 2, 3, 4 and 5.
 
The pro forma consolidated statement of operations for the nine months ended December 31, 2001 is based on:

5

 
 
(i)  
 
our unaudited financial statements for the nine months ended December 31, 2001;
 
 
(ii) 
 
the unaudited financial statements of Sage for the nine months ended December 31, 2001; and
 
 
(iii)
 
the additional information provided in notes 2, 3, 4 and 5.
 
 
(b)
 
Pro forma balance sheet:
 
The pro forma consolidated balance sheet as at December 31, 2001 is based on:
 
 
(i)  
 
our unaudited financial statements as at December 31, 2001;
 
 
(ii) 
 
the unaudited financial statements of Sage as at December 31, 2001; and
 
 
(iii)
 
the additional information provided in notes 2, 3, 4 and 5.
 
Sage’s, Genesis Microchip’s and Faroudja’s financial statements are prepared in accordance with accounting principles generally accepted in the United States.
 
2.
 
Pro forma transactions:
 
The pro forma consolidated financial statements have been prepared to give effect to the following:
 
 
(a)
 
On September 27, 2001, Genesis Microchip entered into an agreement and plan of merger and reorganization to acquire all of the issued and outstanding shares of Sage in exchange for the issuance of shares. The outstanding share capital of Sage at closing included 15.4 million shares of common stock and options to acquire approximately 2.5 million shares of common stock. In the merger, each outstanding share of Sage common stock was converted into the right to receive 0.571 of a share of Genesis Microchip Delaware common stock (the “exchange ratio”). In addition, each option to purchase a share of Sage common stock was converted into an option to purchase 0.571 of a share of Genesis Microchip Delaware common stock. Based on the total number of Sage options outstanding on February 19, 2002, Genesis Microchip issued options to purchase 1,407,128 shares of Genesis Microchip Delaware common stock. The value assigned to share consideration has been calculated based on the weighted average price of Genesis Microchip common shares on the Nasdaq National Market for the period from September 27, 2001 to October 1, 2001, inclusive, being $27.38. The fair value of the stock options issued in exchange for existing Sage stock options has been calculated based on an option pricing model. The estimated total purchase price of $296.7 million includes the issuance by Genesis Microchip Delaware of common stock valued at $241.5 million, the assumption of Sage stock options valued at $31.9 million and estimated direct transaction costs of $23.3 million. In preparation for the business combination with Sage, Genesis Microchip will reorganize from a Nova Scotia company to a newly formed Delaware corporation.

6

 
A Sage acquisition equation for purposes of these pro forma consolidated financial statements based on the fair value of the net assets and liabilities of Sage at December 31, 2001 has been set forth below:
 
    
Book Value
     
Fair Value
     
Adjustments
  
Net assets acquired:
                           
Cash and cash equivalents
   
$
35,038
 
   
$
35,038
 
   
$
—  
 
Short-term marketable securities
   
 
5,580
 
   
 
5,580
 
   
 
—  
 
Accounts receivable, net
   
 
8,895
 
   
 
8,895
 
   
 
—  
 
Inventory
   
 
4,012
 
   
 
4,012
 
   
 
—  
 
Other assets
   
 
1,342
 
   
 
1,342
 
   
 
—  
 
Property and equipment
   
 
4,528
 
   
 
4,528
 
   
 
—  
 
Goodwill
   
 
8,353
 
   
 
—  
 
   
 
(8,353
)
Other intangible assets
   
 
1,947
 
   
 
1,947
 
   
 
—  
 
Accounts payable
   
 
(1,748
)
   
 
(1,748
)
   
 
—  
 
Accrued liabilities
   
 
(2,930
)
   
 
(2,930
)
   
 
—  
 
    
  
  
    
$
65,017
 
   
$
56,664
 
   
$
(8,353
)
Allocation of the net purchase price:
                           
In process research and development
            
 
4,700
 
         
Acquired developed product technology
            
 
30,800
 
         
Acquired core technology
            
 
4,300
 
         
Trademarks and trade names
            
 
500
 
         
Goodwill
            
 
189,393
 
         
Deferred stock-based compensation
            
 
18,370
 
         
Deferred income taxes
            
 
(8,064
)
         
             
        
             
$
296,663
 
         
             
        
Consideration paid:
                           
Share consideration
            
 
241,468
 
         
Stock option consideration
            
 
31,902
 
         
Costs of acquisition
            
 
23,293
 
         
             
        
             
$
296,663
 
         
             
        
 
The purchase price for pro forma purposes was allocated to assets acquired and liabilities assumed based on the book value of Sage’s tangible assets and liabilities and on an independent appraisal for all other identifiable assets. Management believes that the book values of Sage’s assets and liabilities approximate their market values. The excess of the purchase price over the net tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.
 
An independent valuation specialist performed an allocation of the total purchase price of Sage to its individual assets and liabilities. In addition to the value assigned to in-process research and development projects, and Sage’s tangible assets, specific intangible assets were identified and valued. The related amortization of the identifiable intangible assets is reflected as pro forma adjustments to the unaudited pro forma consolidated statement of operations. The identifiable intangible assets consist of acquired developed product technology, acquired core technology and trademarks and trade names.

7

 
Sage is currently developing new products that qualify as in-process research and development in multiple product areas. For the purposes of determining which products qualified as in-process research and development, Genesis Microchip Delaware defines technological feasibility as being equivalent to completion of design verification, testing when the design is finalized and ready for pilot manufacturing. Current engineering efforts are focused on improving product performance, reducing product form factors integrating multiple functions into single components and component integration into modules. Products that will incorporate in-process technologies include digital video interfacer/line doublers and integrated chips. Developing and enhancing these products is time-consuming, costly and complex. There is a risk that these developments and enhancements will be late, fail to meet customer or market specifications, and will not be competitive with other products using alternative technologies that offer comparable functionality.
 
The value of $4,700 assigned to in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Sage and its competitors.
 
The rates utilized to discount the net cash flows to their present value are based on Sage’s weighted average cost of capital. Given the nature of the risks associated with the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets, the weighted average cost of capital was adjusted. Based on these factors, discount rates of 18%, 21.5%, and 25% were deemed appropriate for the acquired developed product technology, acquired core technology and in-process research and development.
 
The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may ultimately be found to be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results used in the assessment of values assigned and these variations may be material. Any such variance may result in a material adverse effect on Genesis Microchip Delaware’s financial condition and results of operations.
 
A portion of the purchase price has been allocated to acquired developed product and acquired core technology and in-process research and development. Acquired developed product and acquired core technology and in-process research and development were identified and valued through analysis of data provided by Sage concerning developmental products, their stage of development, the time and resources needed to complete them, if applicable, their expected income generating ability, target markets and associated risks. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the developed technology and in-process research and development.
 
Where developmental projects had reached technological feasibility, they were classified as either acquired developed product technology or acquired core technology, and the value assigned was capitalized. Where

8

the developmental projects had not reached technological feasibility and had no alternative uses, they were classified as in-process research and development and have been charged to expenses upon closing of the merger.
 
The acquired developed product technology, which is comprised of products that are already technologically feasible, includes products in most of Sage’s product lines. These include digital video interface/line doublers, video enhancers, decoders and integrated chips for their home theatre and multi-media products. Genesis Microchip Delaware expects to amortize the acquired developed product technology of approximately $30,800 on a straight-line basis over an estimated remaining useful life of four years.
 
The acquired core technology, which is comprised of products that are already technologically feasible, includes products that are expected to leverage functionality from developed products and technologies. Genesis Microchip Delaware expects to amortize the acquired core technology of approximately $4,300 on a straight-line basis over an estimated remaining useful life of four years.
 
The trademarks and trade names consist of the Faroudja trade name and its Directional Correlational De-Interfacing label. Genesis Microchip Delaware expects to amortize the assigned value of approximately $500 on a straight-line basis over an estimated remaining useful life of four years.
 
3.
 
Pro forma adjustments:
 
The pro forma consolidated financial statements give effect to the transactions described in note 2, as if they had occurred at December 31, 2001 for purposes of the pro forma consolidated balance sheet and at the beginning of the periods presented for purposes of the pro forma consolidated statements of operations. The pro forma consolidated statements of operations do not include any material non-recurring charges (see (f) and (g) below) that will arise as a result of the transactions described in note 2. Pro forma transactions recognized in the pro forma consolidated financial statements are as follows:
 
 
(a)
 
The pro forma consolidated balance sheet as of December 31, 2001 gives effect to the acquisition of Sage described in note 2, as if it had occurred on December 31, 2001, including the effect of recording of the consideration paid and the fair value of the identified intangible assets acquired. In preparation for the business combination with Sage, Genesis Microchip has reorganized from a Nova Scotia company to a newly formed Delaware corporation. Share capital has been adjusted in order to reflect this reorganization through share capital and additional paid in capital. The pro forma consolidated balance sheet as of December 31, 2001 gives effect to certain acquisition related expenses, consisting primarily of investment banking fees, attorneys, accountants, financial printing and other related charges, as well as employee termination costs, disposal of fixed assets and lease cancellation costs, of approximately $23.3 million. The estimated acquisition related expenses and purchase price allocation are preliminary and are therefore subject to change.
 
 
(b)
 
To give effect to the amortization of the Sage trademarks and trade names arising on the acquisition over a period of four years, which amortization is in the amount of $94 and $125 for the periods ended December 31, 2001 and March 31, 2001, respectively, and the reversal of amortization recorded by Sage relating to its intangible assets.

9

 
 
(c)
 
To give effect to the amortization of the Sage acquired technology arising on the acquisition over a period of four years for developed product technology and core technology, respectively, which amortization is in the amount of $6,581 and $8,775 for the periods ended December 31, 2001 and March 31, 2001, respectively.
 
 
(d)
 
To give effect to the compensation expense of approximately $4,592 and $6,123 for the periods ended December 31, 2001 and March 31, 2001, respectively. The deferred stock-based compensation arising from the acquisition is being amortized on a straight-line basis over the future service period in which the related stock options vest of three years and has been classified in accordance with the nature of the services provided by the option holder.
 
 
(e)
 
To give effect to the income tax impact of the pro forma adjustments described above.
 
 
(f)
 
To give effect to the elimination of non-recurring adjustment previously recorded in Sage for purchased in-process research and development recorded in connection with the acquisition of Faroudja, Inc.
 
 
(g)
 
The pro forma statement of operations adjustments do not include a nonrecurring adjustment of $4,700 to recognize in-process research and development identified as part of the purchase price allocation (note 1). This charge will be reflected in our actual income statement due to the immediate write-off of in-process research and development under generally accepted accounting principles.
 
4.
 
Pro Forma Faroudja, Inc.:
 
The following table details the unaudited pro forma statement of operations of Faroudja, Inc. for the period from April 1, 2000 to June 7, 2000 and gives effect to the Faroudja, Inc. acquisition under the purchase method of accounting and assumes the transaction was consummated on April 1, 2000.
 
The pro forma adjustments and the resulting unaudited pro forma statement of operations have been prepared based upon information and certain assumptions and estimates deemed appropriate by Sage, Inc. Sage’s management believes that the pro forma adjustments and the underlying assumptions and estimates reasonably present the significant effects of the transaction reflected thereby and that any changes in the underlying assumptions and estimates will not materially affect the unaudited pro forma statement of operations presented herein. The unaudited pro forma statement of operations does not reflect changes that may occur as the result of post-transaction activities and other matters.

10

 
    
Historical
Faroudja, Inc.
     
Pro Forma
Adjustments
     
Pro Forma
Faroudja, Inc.
  
Revenues
   
$
1,668
 
   
$
—  
 
   
$
1,668
 
Cost of revenues
   
 
776
 
   
 
187
(i)
   
 
963
 
Gross profit
   
 
892
 
   
 
(187
)
   
 
705
 
Operating expenses:
                           
Research and development
   
 
1,258
 
   
 
—  
 
   
 
1,258
 
Selling, general and administrative
   
 
3,333
 
   
 
—  
 
   
 
3,333
 
Amortization of intangible assets
   
 
—  
 
   
 
4,435
(i)
   
 
4,435
 
    
  
  
Total operating expenses
   
 
4,591
 
   
 
4,435
 
   
 
9,026
 
    
  
  
Loss from operations
   
 
(3,699
)
   
 
(4,622
)
   
 
(8,321
)
Interest and other income
   
 
198
 
   
 
—  
 
   
 
198
 
    
  
  
Loss before income taxes
   
 
(3,501
)
   
 
(4,622
)
   
 
(8,123
)
Income taxes
   
 
—  
 
   
 
—  
 
   
 
—  
 
    
  
  
Net Loss
   
$
(3,501
)
   
$
(4,622
)
   
$
(8,123
)
    
  
  
 
(i)
 
To give effect to the amortization by Sage of the Faroudja acquired intangible assets arising on the acquisition over a period of three and five years, respectively. The amortization is in the amount of $4,622 for the period April 1, 2000 through June 7, 2000.
 
5.
 
Basic and diluted pro forma earnings per share:
 
Basic pro forma earnings per share have been presented based on our historical consolidated financial statements after giving pro forma effect to the proposed acquisition of Sage as if it had occurred at the beginning of the periods presented.
 
Basic earnings per share have been calculated by dividing the pro forma consolidated income for the periods by the pro forma weighted average number of shares as calculated in the table below (in thousands):
 
    
Nine months
ended
December 31,
2001
   
Year ended
March 31,
2001
Our actual basic weighted average number of shares outstanding
   
20,683
   
19,406
Weighted average number of shares issued on Sage acquisition
   
8,144
   
7,295
    
  
Total pro forma basic weighted average number of shares outstanding
   
28,827
   
26,701
    
  
 
Diluted pro forma earnings per share have been presented based on our historical consolidated financial statements after giving pro forma effect to the proposed acquisition of Sage as if it had occurred at the beginning of the periods presented. Diluted earnings per share have been calculated by the treasury stock method by dividing the pro forma consolidated income for the periods by the pro forma weighted average number of shares as calculated in the table below (in thousands):

11

 
    
Nine months
ended
December 31,
2001
   
Year ended
March 31,
2001
Our actual basic weighted average number of shares outstanding
   
—  
   
19,406
Our actual diluted weighted average number of shares outstanding
   
22,817
     
Weighted average number of shares issued on Sage acquisition
   
8,144
   
7,295
Weighted average number of diluted shares issued through stock options on Sage acquisition
   
1,407
   
—  
    
  
Total pro forma diluted weighted average number of shares outstanding
   
32,368
   
26,701
    
  
 
The deemed exercise of all outstanding stock options after the acquisition has been excluded from the diluted pro forma earnings per share calculation at March 31, 2001 as the effect of their exercise would be anti-dilutive.

12