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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
Form 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________to _________
Commission File Number 0-27712
OSE USA, Inc. (Exact Name of Registrant as Specified in its Charter)
Delaware 77-0309372
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2221 Old Oakland Road 95131-1402
San Jose, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number including area code: (408) 321-3600
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 19, 2002, was
approximately $360,000. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 19, 2002 was 82,279,607. The Registrant also had 3,000,000 shares and
3,023,225 shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, respectively, outstanding on such date which is
convertible at any time by the holder into 41,246,312 shares and 41,565,626
shares, respectively, of Common Stock.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
Page
Part I
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 12
Item 3. Legal Proceedings....................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 13
Item 6. Selected Financial Data................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 15
Item 7a. Quantitative and Qualitative Disclosures About Market Data.............. 23
Item 8. Financial Statements and Supplemental Data.............................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 48
Part III
Item 10. Directors and Executive Officers of the Registrant...................... 49
Item 11. Executive Compensation.................................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 49
Item 13. Certain Relationships and Related Transactions.......................... 49
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 49
SIGNATURES..................................................................................... 53
2
PART I
This Annual Report of OSE USA, Inc. Form 10-K contains forward-looking
statements, particularly those identified with the words, "anticipates,"
"believes," "expects," "plans," and similar expressions. These statements
reflect management's best judgment based on factors known to them at the time of
such statements. The reader may find discussions containing such forward-looking
statements in the material set forth under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as elsewhere in this Annual Report on Form 10-K. Actual events or results
may differ materially from those discussed herein. The reader should carefully
consider the risk factors discussed under "Risk Factors," among others, in
evaluating the Company's prospects and future financial performance.
Item 1. Business
OSE USA, Inc. ("The Company") formerly Integrated Packaging Assembly
Corporation, was incorporated in California on April 28, 1992 and reincorporated
in Delaware on June 19, 1997. The Company has two operating segments: (1)
manufacturing and (2) distribution.
The manufacturing segment assembles and packages integrated circuits from
wafers consigned by its customers. The Company's focus is on quad flat packages
("QFPs"), thin quad flat packages ("TQFPs"), ball grid array packages ("BGAs"),
flip chips, and chip scale packaging ("CSPs"), which are used in complex
integrated circuits with high pin-counts in the personal computer and
telecommunications industries.
The distribution segment is the exclusive North American sales and
marketing organization for Orient Semiconductor Electronics, Ltd. ("OSE") of
Taiwan, a public Taiwanese company and the Company's principal stockholder. The
Company is also the exclusive North American sales and marketing organization
for affiliated company Orient Semiconductor Electronics Philippines, Inc.
("OSEP"). Revenues are derived from fees received on the sales of OSE and OSEP
semiconductor assemblies and test services to customers headquartered in North
America. The Company's distribution operations are conducted through its wholly
owned subsidiary OSE Inc. ("OSEI")
Manufacturing
Semiconductor Packaging Services
The Company has focused on packages designed for assembly using Surface
Mount Technology ("SMT") in which leads on integrated circuits are soldered to
the surface of the printed circuit board. Within the SMT market, the Company
focuses on high pin-count packages, such as Quad Flat Packages ("QFPs") and Thin
Quad Flat Packages ("TQFPs"). The Company offers eight different QFP and TQFP
families with body sizes ranging from 7x7 mm to 32x32 mm and lead counts from 32
to 256 leads, two Plastic Ball Grid Array ("PBGA")/ Cavity Down Ball Grid Array
("CDBGA") families with body sizes of 27x27 and 35x35 with ball counts from 225
to 532 balls, three Low Profile Fine Pitch Ball Grid Array ("LFBGA")/Thin
Profile Fine Pitch Ball Grid Array ("TFBGA") families with ball counts from 144
to 196 balls and several Micro Lead Frame package (MLP or QFN). Integrated
circuits packaged by the Company are used in the following applications:
personal computers, modems, disk drives, automobiles, cameras and
telecommunications, among others. Since inception, QFPs and TQFPs have accounted
for substantially all of the Company's packaging revenues.
Packaging involves several manufacturing operations, which are highly
automated to facilitate high volume production. The assembly process begins with
the mounting of a finished, tested wafer onto a carrier. After a dicing saw cuts
the wafer into individual die, the cut wafer is moved to a die bonder which
picks each good die off the wafer and bonds it to a lead frame with epoxy resin.
A lead frame is a miniature sheet of metal,
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generally made of copper with selective silver-plating on which the pattern of
input/output (I/0) leads has been cut. Next, very fine (typically 0.001 inches
in diameter) gold wires are connected to the die and the leads through the use
of automated machines known as wire bonders. These wire leads provide the
electrical path necessary for the device to function. Each die is then
encapsulated in a plastic casing and marked. The leads protruding from the
finished casing are then plated with tin and lead composition to permit the
leads to be connected to the printed circuit board. At the end of the packaging
process, the leads are trimmed and formed into requisite shapes. After this
packaging process is complete, the devices undergo final inspection and are
prepared for shipment.
The Company shipped approximately 15.8 million devices in 1999,
approximately 19.5 million devices in 2000 and approximately 5.3 million devices
in 2001. Since the fourth quarter of 1996, the Company has had excess
manufacturing capacity. The Company's manufacturing capacity utilization is a
function of the mix of different package types produced by the Company at any
one time and the proportion of standard production runs compared to expedited
production runs. Thus, as the Company shifts its production among different
package types or allocates a different amount of available capacity to standard
production runs, the rate of the Company's capacity utilization changes, at
times significantly.
The Company has made substantial investments in expanding its manufacturing
capacity during its operating history, in anticipation of increased future
business. Since early 1997, the Company has incurred net losses as revenues
dropped substantially, while overhead and fixed costs increased, with the result
that there was substantial underutilized manufacturing capacity. The Company
continues to operate with significant underutilized capacity. There can be no
assurance that the Company will receive orders from new or existing customers
that will enable it to utilize such manufacturing capacity in a timely manner.
The Company is developing a plan to reduce its excess production capacity by
either transferring excess equipment to OSE and/or looking for buyers for
certain equipment.
The Company's inability to generate the additional revenues necessary to
more fully utilize its capacity has had and will continue to have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company intends to focus more of its operations on quick-turn and
engineering lot assemblies to improve its profitability, due to the fact that
quick-turn and engineering lot assemblies provide higher profit margins. To
achieve this objective, the Company recently restructured its internal sales
force and increased the frequency of customer contacts. The Company is also
working on using outside sales representatives in promoting the Company to new
customers throughout the United States.
The semiconductor packaging business is capital intensive and requires a
substantial amount of highly automated, expensive capital equipment, which is
manufactured by a limited number of suppliers, many of which are located in Asia
or Europe. The Company's operations are significantly dependent upon the
Company's ability to obtain capital equipment for its manufacturing operations
in a timely manner. In this regard, the Company spent approximately $2.6 million
and $290,000 in 2000 and 2001, respectively and expects to continue spending to
purchase capital equipment in 2002 in order to continue to meet industry
manufacturing requirements. The Company currently purchases capital equipment
from a limited group of suppliers including Dai-Ichi Seiko Co., Ltd., ESEC SA
and Kaijo Corporation. The Company has no long-term agreement with any such
supplier and acquires such equipment on a purchase order basis. The market for
capital equipment used in semiconductor packaging has at times been
characterized by intense demand, limited supply and long delivery cycles. The
Company's dependence on such equipment suppliers poses substantial risks. Should
any of the Company's major suppliers be unable or unwilling to provide the
Company with high quality capital equipment in amounts necessary to meet the
Company's requirements, the Company would experience severe difficulty locating
alternative suppliers in a timely fashion and its operations could be materially
adversely affected.
4
Quality Control
The Company believes that total quality management is a vital component of
customer satisfaction and internal productivity. The Company has established
quality control systems, which are designed to maintain acceptable manufacturing
yields at quick turn engineering lots and small scale production. The Company
has also developed a sophisticated proprietary software program for material
resource planning, shop floor control, work in process tracking, statistical
process control and product costing. The Company obtained certification for its
packaging operations pursuant to ISO 9002 in December 1996 and recertification
in March 2002.
As of December 31, 2001, the Company's quality control staff consisted of
engineers, technicians and other employees who monitor the Company's design and
production processes in order to ensure high quality. These employees include
line inspectors who work with members of the production staff to conduct
examination, testing and fine-tuning of products during the production process.
Quality control personnel are involved from initial design to production. The
quality control staff also collects and analyzes data from various stages of the
production process, which is used by the Company for statistical process
control.
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, use of defective
raw materials, defective plating services and inadequate sample testing. From
time to time, the Company has experienced lower than anticipated production
yields as a result of such factors. The Company's failure to maintain high
quality production standards or acceptable production yields would likely result
in loss of customers, delays in shipments, increased costs, cancellation of
orders and product returns for rework, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Marketing and Sales
The Company's business is substantially affected by market conditions in
the semiconductor industry, which is highly cyclical and, at various times
(including currently), has been subject to significant economic downturns and
characterized by reduced product demand, rapid erosion of average selling prices
and production over capacity. In addition, rapid technological change, evolving
industry standards, intense competition and fluctuations in end user demand
characterize the markets for integrated circuits. Because the Company's business
is entirely dependent on the requirements of semiconductor companies for
independent packaging foundries, any downturn in the semiconductor industry is
expected to have an adverse effect on the Company's business, financial
condition and results of operations. For example, delays or rescheduling of
orders due to a downturn or anticipated downturn in the semiconductor industry
have in the past and could in the future have a material adverse effect on the
Company's business, operating results and financial condition. The trend in the
industry is that most high volume production will continue moving to the low
manufacturing cost areas and the local manufacturers will serve the market where
manufacturing offshore is restricted or not cost effective; or where fast
turn-around is required. The Company believes that it can serve both of these
markets by transferring the high volume production to its parent in Taiwan and
while maintaining appropriate manufacturing capacity in the U.S. for the quick
turn and small volume production market.
In addition, the Company has been substantially dependent on a relatively
small number of customers within the semiconductor industry. The high
concentration of business with a limited number of customers has adversely
affected the Company's operating results, when business volume dropped
substantially for several customers. There can be no assurance that such
customers or any other customers will continue to place orders with the Company
in the future at the same levels as in prior periods. In recent years, the
Company's need for additional financing, and the uncertainty as to whether such
financing could be obtained, adversely affected the
5
Company's ability to obtain new customers. The loss of one or more of the
Company's customers, or reduced orders by any of its key customers, would
adversely affect the Company's business, financial condition and results of
operations. In order to deal with this, the Company intends to diversify its
customer base by adding more new customers into its portfolio. By restructuring
its sales force and using outside sales representatives, the Company believes it
will mitigate the impact of customer concentration. In 2001, Atmel Semiconductor
and ATI Technologies, Ltd. accounted for 14% and 6%, respectively, of the
Company's revenues. Atmel Semiconductor and Orbit Semiconductor accounted for
32% and 5%, respectively, of the Company's revenues in 2000. Atmel and Orbit
accounted for 30% and 15%, respectively, of the Company's revenues in 1999.
Atmel Semiconductor significantly reduced their orders during the second half of
2000. The Company ships its products in accordance with customer purchase orders
and upon receipt of semiconductor wafers from its customers. The Company
generally ships products within one to seven days after receiving the customer's
wafers, and accordingly, the Company has not, to date, had a material backlog of
orders. The Company expects that revenues in any quarter will be substantially
dependent upon orders received in that quarter. The Company's expense levels are
based in part on its expectations of future revenues and the Company may be
unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
The Company's marketing and sales efforts are focused on North American
semiconductor companies that design or manufacture IC devices which are used in
applications such as personal computers, modems, disk drives and
telecommunication products. Within such markets, the Company emphasizes
packaging complex, high pin-count products. The Company sells its services
directly through its sales and customer support organization. The Company
assists its customers in evaluating designs with respect to manufacturability
and when appropriate recommends design changes to reduce manufacturing costs and
lead times. The Company also offers design services for a fee.
Risk factors
Risk of dependence on raw material suppliers
To maintain competitive manufacturing operations, the Company must obtain
from its suppliers, in a timely manner, sufficient quantities of acceptable
materials at expected prices. The Company obtains most of its raw materials,
including critical materials such as lead frames and die attach compound, from a
limited group of suppliers. Substantially all molding compound, a critical raw
material, is obtained from a single supplier. From time to time, suppliers have
extended lead times or limited the supply of required materials to the Company
because of supplier capacity constraints and, consequently, the Company has
experienced difficulty in obtaining acceptable raw materials on a timely basis.
In addition, from time to time, the Company has rejected materials from those
suppliers that do not meet its specifications, resulting in declines in output
or yield. Any interruption in the availability of or reduction in the quality of
materials from these suppliers would materially adversely affect the Company's
business, financial condition and results of operations. The Company's ability
to respond to increased orders would also be adversely affected if the Company
is not able to obtain increased supplies of key raw materials.
Risk of no long-term contracts with suppliers
The Company purchases all of its materials on a purchase order basis and
has no long-term contracts with any of its suppliers. There can be no assurance
that the Company will be able to obtain sufficient quantities of raw materials
and other supplies. The Company's business, financial condition and results of
operations would be materially adversely affected if it were unable to obtain
sufficient quantities of raw materials and other supplies in a timely manner or
if there were significant increases in the costs of raw materials that the
Company could not pass on to its customers.
6
Risk related to high fluctuation in the semiconductor industry
The Company's business is highly related to the semiconductor industry. The
semiconductor industry is comprised of different market segments based on device
type and the end use of the device. Accordingly, within the semiconductor
industry, demand for production in a particular segment may be subject to more
significant fluctuations than other segments. If any of the Company's
significant customers are in a segment, which has experienced adverse market
conditions, there would be an adverse effect on the Company's business,
financial condition and operating results. There can be no assurance that
reduced demand, or the general economic conditions underlying such demand, will
not continue to adversely affect the Company's results of operations.
Furthermore, there can be no assurance that any such continuation or expansion
of this reduced demand will not result in an additional and significant decline
in the demand for the products produced by the Company's customers and a
corresponding material adverse impact on the Company's business, operating
results and financial condition.
Risk of losing technological and manufacturing expertise
The semiconductor packaging industry is continuously going through
technological changes, which requires increased technological and manufacturing
expertise. If the Company is lagging in developing the required expertise, the
introduction of new packaging technologies, or a reduction or shift away from
the packages under development, this would result in a material adverse effect
on the Company's business, financial condition and results of operations.
Risk related to patent infringement
As is typical in the semiconductor industry, the Company may receive
communications from third parties asserting patents on certain of the Company's
technologies. In the event any third party was to make a valid claim and a
license was not available on commercially reasonable terms, the Company's
business, financial condition and results of operations could be materially and
adversely affected. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may also be necessary to enforce patents
or other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the Company's business, financial condition and results of
operations. At December 31, 2001, the Company was not a party to any litigation
relating to patent or other intellectual property matters.
Risk related to the short- term nature of customer orders and product cycle
The Company's operating results are affected by a wide variety of factors that
have in the past and could in the future materially and adversely affect
revenues, gross profit, operating income and liquidity. These factors include
the short-term nature of its customers' commitments, timing and volume of orders
relative to the Company's production capacity, long lead times for the
manufacturing equipment required by the Company, evolutions in the life cycles
of customers' products, timing of expenditures in anticipation of future orders,
lack of a meaningful backlog, effectiveness in managing production processes,
changes in costs and availability of labor, raw materials and components, costs
to obtain materials on an expedited basis, mix of orders filled, the impact of
price competition on the Company's average selling prices, the Company's ability
to secure additional financing and changes in economic conditions. Unfavorable
changes in any of the preceding factors have in the past and may in the future
adversely affect the Company's business, financial condition and results of
operations.
7
Risk related to political, economic, and military conditions in Taiwan
The Company may be significantly impacted by the political, economic and
military conditions in Taiwan due to the Company's subsidiary, OSEI, being a
distributor for OSE whose operations are principally located in Taiwan. Taiwan
and the People's Republic of China are continuously engaged in political
disputes. Such disputes may continue and even escalate, resulting in economic
embargo, a disruption in shipping or even military hostilities. This could
severely harm OSEI's business by interrupting or delaying production or shipment
of products OSEI distributes. Any kind of activity of this nature or even rumors
of such activity could severely and negatively impact the Company's results of
operations and financial position.
Risk related to geographical location
The Company's facilities are located in California near major earthquake faults.
In addition, some of the Company's suppliers are located near earthquake
sensitive areas. In the event of a major earthquake or other natural disaster
near its facilities, the Company's operations could be harmed. Similarly, a
major earthquake or other natural disaster near the Company's suppliers, like
the one that occurred in Taiwan in September 1999, could disrupt the operations
of those suppliers, which could limit the availability of products for the
Company to distribute and harm the Company's business.
Competition
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. and Siliconware in Taiwan, Amkor
Technology and ChipPAC in Korea, and other subcontractors in Singapore, Taiwan,
Malaysia and Indonesia. Each of these companies has significantly greater
manufacturing capacity, financial resources, research and development
operations, marketing and other capabilities than the Company and has been
operating for a significantly longer period of time than the Company. Such
companies have also established relationships with many large semiconductor
companies, which are current or potential customers of the Company. The Company
could face substantial competition from Asian packaging foundries should one or
more of such companies decide to establish foundry operations in North America.
The Company also faces competition from other independent, North American
packaging foundries. The Company also competes with companies with in-house
packaging capabilities as current and prospective customers constantly evaluate
the Company's capabilities against the merits of in-house packaging. Many of the
Company's customers are also customers of one or more of the Company's principal
competitors. The principal elements of competition in the semiconductor
packaging market include delivery cycle times, price, product performance,
quality, production yield, responsiveness and flexibility, reliability and the
ability to design and incorporate product improvements. The Company believes it
principally competes on the basis of shorter delivery cycle times it can offer
customers due to the close proximity of its manufacturing facility to its
customers' operations and the end users of its customers' products.
For the past several years, the Company has experienced a decline in the
average selling prices for a number of its products. During 2001 the
manufacturing segment of the Company shifted its focus to lower volume, faster
turnaround production, which generates higher average selling prices. The
Company expects that average selling prices for its products will increase in
the future due to this change in business strategy. The distribution segment of
the Company will continue to follow the pricing guidelines set by OSE in order
to compete in the global market.
8
Research and Development
The Company's research and development efforts are focused on improving the
efficiency and capabilities of its production processes, and on developing new
packages by making improvements upon commercially available materials and
technology. Particular emphasis is on developing new packages and processes that
will offer a wider range of services to its customers. BGA (ball grid array),
LFBGA (low profile fine pitch ball grid array), QFN, and Flip Chip processes
were placed into service in 2001. Developments for 2002 are expected to include
enhancements to the Flip Chip process along with development of stacked die
processes, flip chip/wire bond hybrid package and Systems in a Package (SIP)
capability. These developments will enable the Company to provide new packaging
services to its customers. The Company also works closely with the manufacturers
of its packaging equipment in designing and modifying the equipment used in the
Company's production process.
As of December 31, 2001, the Company employed 7 persons in research and
development activities. In addition, other management and operational personnel
are involved in research and development activities. The Company supplements its
research and development efforts with business and technological alliances. In
1999, 2000, and 2001, the Company's research and development expenses were
approximately $727,000, $1,308,000, and $1,285,000, respectively. The Company
expects to continue to invest significant resources in research and development.
The Company has focused its manufacturing resources on plastic QFPs,
LFBGAs, QFN and Flip Chip packages for use with SMT, and the Company has neither
the capability nor the intent to provide services to other substantial segments
of the semiconductor packaging market. For example, the Company has no capacity
to manufacture packages for use with PTH technology, nor does the Company
presently intend to manufacture packages using materials other than plastic,
such as ceramic. Technological change in the semiconductor packaging industry is
continuous and in the future semiconductor manufacturers are expected to require
increased technological and manufacturing expertise. OSE provides the Company
manufacturing and research and development support through providing engineering
staff and engineering advice.
Intellectual Property
The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights relating to its
manufacturing processes. As of December 31, 2001, the Company held thirteen U.S.
patents, which expire between 2012 and 2017, and an additional patent
application, which has been filed and is pending. The Company expects to
continue to file patent applications when appropriate to protect its proprietary
technologies; however, the Company believes that its continued success depends
primarily on factors such as the technological skills and innovation of its
personnel rather than on its patents. The process of seeking patent protection
can be expensive and time consuming. There can be no assurance that patents will
be issued from pending or future applications or that, if patents are issued,
they will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
the Company. Moreover, there can be no assurance that any patent rights will be
upheld in the future or that the Company will be able to preserve any of its
other intellectual property rights.
Environmental Matters
The semiconductor packaging process involves a significant amount of
chemicals and gases that are subject to extensive governmental regulations. For
example, liquid waste is produced at the stage at which silicon wafers are diced
into chips with the aid of diamond saws and cooled with running water. In
addition, excess materials on leads and moldings are removed from packaged
semiconductors in the trim and form process. The Company has installed equipment
to collect certain solvents used in connection with its manufacturing process
and has contracted with independent waste disposal companies to remove such
hazardous material.
9
The Company installed an advanced electroplating system at a leased
facility in Milpitas, California and substantially all of the Company's plating
is performed at such facility. This plating operation involves the use of
significant quantities of certain hazardous substances. Although the Company has
designed procedures to ensure such materials are handled in compliance with
applicable regulations, there can be no assurance that the operation of such
facility will not expose the Company to additional costs in complying with
environmental regulations or result in future liability to the Company.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals used in the Company's
manufacturing process and on the facility occupied by the Company. The Company
believes that its activities conform to present environmental and land use
regulations applicable to its operations and its current facility. Increasing
public attention has, however, been focused on the environmental impact of
semiconductor manufacturing operations and the risk to neighbors of chemical
releases from such operations. There can be no assurance that applicable land
use and environmental regulations will not in the future impose the need for
additional capital equipment or other process requirements upon the Company or
restrict the Company's ability to expand its operations. The adoption of new
ordinances or similar measures or any failure by the Company to comply with
applicable environment and land use regulations or to restrict the discharge of
hazardous substances could subject the Company to future liability or cause its
manufacturing operations to be curtailed or suspended.
The Company's OSEI subsidiary is not involved in manufacturing.
Employees
As of December 31, 2001, the Company had 146 full time employees, 108 of
whom were engaged in manufacturing, 7 in research and development, 15 in sales
and customer service, and 16 in finance and administration. Among the 146
employees, 124 were working for the manufacturing segment and 22 were working
for the distribution segment. The Company's employees are not represented by any
collective bargaining agreement, and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good. The success
of the Company's future operations depends in large part on the Company's
ability to attract and retain highly skilled technical, manufacturing and
management personnel. There can be no assurance that the Company will be
successful in attracting and retaining key personnel.
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Executive Officers
The executive officers of the Company are as follows:
Name Age Position(s)
- --------------- ----- ----------------------------------------------------
Edmond Tseng 55 Chairman of the Board of Directors, President, Chief
Executive Officer and Director
Gerald K. Fehr 64 Executive Vice President, Chief Technology Officer
Elton Li 40 Corporate Controller, Chief Accounting Officer
Chris BK Ooi 47 Vice President, Operations
Edmond Tseng has been President and Chief Executive Officer of OSE USA Inc.
since November 2000 and President and Chief Executive Officer of OSE, Inc. since
1990. Mr. Tseng has been a Director and Chairman of the Board of Directors since
April 1999. From June 1985 to December 1989, Mr. Tseng served as Director of
Packaging Technology at Condata, Incorporated.
Gerald K. Fehr is a Co-Founder of the Company and has served as Vice
President, Technology of the Company since March 1993 and Executive Vice
President, Chief Technology Officer since December 1997. From January 1991 to
March 1993, Dr. Fehr served as an independent consultant in the semiconductor
packaging industry. Prior to 1991, Dr. Fehr held various management positions in
operations with LSI Logic, Inc., Burroughs Corporation, Fairchild Semiconductor
Corporation and Intel Corporation.
Elton Li joined the Company in December 2001 as Corporate Controller, and
Chief Accounting Officer. From April 1995 to November 2001, Mr. Li served as
Controller of A-Plus Manufacturing Corporation, an electronic manufacturing
service (EMS) company. Prior to that, Mr. Li held various accounting positions
in leading firms in the public accounting and hospitality industries.
Chris BK Ooi joined the Company in February 1996 as Director of Engineering
and was appointed the Company's Vice President of Operations in June 1999. From
1994 to 1996, Mr. Ooi was Co-Founder and Executive Vice President of Ampac
Enterprises, a semiconductor sales and marketing company. Prior to 1994, Mr. Ooi
held various positions with National Semiconductor Corporation.
The Company's success depends to a significant extent upon the continued
service of its key management and technical personnel, each of whom would be
difficult to replace. The competition for qualified employees is intense, and
the loss of the services of key personnel or the inability to attract, retain
and motivate qualified new personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships among the directors or officers of the
Company.
11
Item 2. Properties
The Company's principal operations are located in an approximately 82,000
square foot building, which it occupies under a ten-year lease, which expires in
January 2008. The Company leases a separate 2,500 square foot building, with an
initial term of five years, approximately 2 miles from the Company's principal
facility, for its advanced electroplating system. The Company also leases space
for the sales offices of OSEI located in Boston, Massachusetts and Phoenix,
Arizona. On November 14, 2000, the Company entered into a sublease agreement
with a subsidiary of OSE for the lease of 16,480 square feet of building space
through January 19, 2008. The Company believes its existing facilities are
adequate to meet its needs for the foreseeable future. Since the Company does
not currently operate multiple facilities in different geographic areas, a
disruption of the Company's manufacturing operations resulting from various
factors, including sustained process abnormalities, human error, government
intervention or a natural disaster such as fire, earthquake or flood, could
cause the Company to cease or limit its manufacturing operations and
consequently would have a material adverse effect on the Company's business,
financial condition and results of operations.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter to a vote of security
holders.
12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 19, 2001, there were approximately 318 beneficial owners of the
Company's Common Stock. The Company's Common Stock is listed for quotation on
the OTC Bulletin Board under the Symbol "OSEE". The following table sets forth
for the periods indicated, the high and low prices of the Company's Common
Stock.
Fiscal Year Ended December 31, 2000 High Low
- ------------------------------------------- ------- -------
First Quarter $0.66 $0.37
Second Quarter $0.58 $0.21
Third Quarter $0.47 $0.16
Fourth Quarter $0.37 $0.06
Fiscal Year Ended December 31, 2001 High Low
- ------------------------------------------- ------- -------
First Quarter $0.16 $0.05
Second Quarter $0.13 $0.04
Third Quarter $0.12 $0.02
Fourth Quarter $0.05 $0.02
The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the semiconductor
industry, changes in earnings estimates or recommendations by analysts, the
failure of the Company to meet or exceed published earnings estimates or other
events or factors. In addition, the public stock markets have experienced
extreme price and trading volume volatility in recent months. This volatility
has significantly affected the market prices of securities of many high
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future. In addition, the
Company's bank line of credit does not permit the payment of dividends, except
for certain dividends on the Company's Series A and Series B Convertible
Preferred shares. In 2001, Company paid dividends of $408,000 on the Series A
Convertible Preferred Stock by issuing 6,010,323 shares of Common Stock and paid
dividends of $246,000 on the Series B Convertible Preferred Stock by issuing
3,956,983 shares of Common Stock. In 2000, the Company paid dividends of
$419,000 on the Series A convertible Preferred Stock by issuing 1,251,063 shares
of Common Stock. Dividends payable of $444,000 at December 31, 2001 were
satisfied via issuance of 14,800,000 shares of common stock in 2002.
13
Item 6. Selected Financial Data
Information listed below was derived from the audited financial statements of
the respective years.
Year Ended December 31, (1)
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenues .......................................... $ 19,744 $ 23,281 $ 17,441 $ 24,167 $ 11,765
Cost of revenue ................................... 24,089 29,114 23,500 23,117 12,727
-------- -------- -------- -------- --------
Gross profit (loss) ................................ (4,345) (5,833) (6,059) 1,050 (962)
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative .............. 5,167 4,068 3,651 7,215 5,199
Research and development ......................... 1,276 1,101 727 1,308 1,285
Provision for impairment of assets ............... 3,000 18,200 -- 1,389 --
-------- -------- -------- -------- --------
Total operating expenses ....................... 9,443 23,369 4,378 9,912 6,484
-------- -------- -------- -------- --------
Operating loss ..................................... (13,788) (29,202) (10,437) (8,862) (7,446)
Interest and other income .......................... 971 1,209 72 159 193
Interest expense ................................... (2,185) (1,783) (1,555) (1,836) (1,272)
-------- -------- -------- -------- --------
Loss before income taxes and
extraordinary gains .............................. (15,002) (29,776) (11,920) (10,539) (8,525)
Tax benefit ........................................ -- -- -- -- (426)
-------- -------- -------- -------- --------
Loss before extraordinary gains .................... (15,002) (29,776) (11,920) (10,539) (8,099)
Extraordinary gains ................................ -- -- 2,047 -- --
-------- -------- -------- -------- --------
Net loss ........................................... (15,002) (29,776) (9,873) (10,539) (8,099)
Preferred stock dividend ........................... -- -- (308) (413) (889)
Deemed dividends on preferred stock ................ -- -- (6,800) -- --
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders ..................................... ($15,002) ($29,776) ($16,981) ($10,952) (8,988)
======== ======== ======== ======== ========
Net loss per share (1):
Basic ............................................ ($1.08) ($ 2.12) ($ 0.68) ($ 0.20) ($ 0.15)
Diluted .......................................... ($1.08) ($ 2.12) ($ 0.68) ($ 0.20) ($ 0.15)
Number of shares used to compute
per share data (1):
Basic ............................................ 13,898 14,046 24,957 55,676 60,865
Diluted .......................................... 13,898 14,046 24,957 55,676 60,865
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
Balance Sheet Data:
Working deficit .................................. ($5,877) ($16,085) ($16,687) ($17,959) ($23,106)
Total assets ..................................... 55,482 18,728 51,648 40,677 28,672
Long-term obligations / deferred
gains .......................................... 14,249 1,249 1,111 973 836
Redeemable convertible
preferred stock ................................ -- -- 5,100 11,100 11,100
Total stockholders' equity (deficit) ............. $26,238 ($ 3,207) ($ 6,723) ($17,124) ($25,387)
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine shares used in computing per share amounts.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements
contained herein are subject to certain factors that could cause actual results
to differ materially from those reflected in the forward looking statements.
Such factors include, but are not limited to, those discussed as follows and
elsewhere in this Report on Form 10-K.
Overview
As a result of a reduction in orders from the Company's customers, the
Company has had significant excess production capacity since the first quarter
of 1997. The reduction in revenues and underutilization of capacity and the
resulting underabsorption of fixed costs resulted in operating losses that
continued in 2001. As a result of these circumstances, the Company's independent
accountants' opinion on the Company's December 31, 2001 financial statements
includes an explanatory paragraph indicating that these matters raise
substantial doubt about the Company's ability to continue as a going concern.
In April 1999, Orient Semiconductor Electronics, Limited ("OSE") purchased
4,000,000 shares of the Company's Series A Convertible Preferred Stock,
convertible into approximately 55,000,000 shares of the Company's Common Stock
for $6.8 million. As part of this transaction, the Company's secured creditors
agreed to terminate their legal actions and restructured the Company's secured
debt. On August 4, 1999, OSE converted 1,000,000 preferred shares into
13,748,771 shares of common stock. On December 26, 2000, OSE purchased 3,023,225
shares of the Company's Series B Convertible Preferred Stock, convertible into
approximately 42,000,000 shares of the Company's Common Stock for $6.0 million.
OSEI was a privately held corporation that serves as the exclusive North
American distributor of OSE, a public Taiwanese company and the Company's
principal stockholder. OSEI derives its revenues exclusively from fees received
on the sales of OSE's semiconductor assembly and test services to customers
headquartered in North America. On October 29, 1999, the Company acquired OSEI
in a stock for stock exchange valued at approximately $4.7 million. In
connection with the acquisition, the Company issued 25,910,090 shares of Common
Stock to the OSEI shareholders. As a result of the transaction, the distributor,
OSEI, is being operated as a wholly owned subsidiary of the Company. The Company
has reported consolidated results with OSEI since the acquisition date.
15
Results of Operations For The Years Ended December 31, 1999, 2000, and 2001
The following table sets forth, for the periods indicated, certain items in
the Company's statement of operations as a percentage of revenues:
1999 2000 2001
----- ----- -----
Revenues ...................................... 100.0% 100.0% 100.0%
Cost of revenues .............................. 134.7 95.7 108.2
----- ----- -----
Gross profit (loss) ........................... (34.7) 4.3 (8.2)
----- ----- -----
Operating expenses:
Selling, general and administrative ......... 20.9 29.9 44.2
Research and development .................... 4.2 5.4 10.9
Provision for impairment of assets .......... -- 5.7 --
----- ----- -----
Total operating expenses .................. 25.1 41.0 55.1
----- ----- -----
Operating loss ................................ (59.8) (36.7) (63.3)
Interest and other income ..................... 0.4 0.7 1.7
Interest expense .............................. (8.9) (7.6) (10.8)
----- ----- -----
Loss before extraordinary
gain and preferred stock dividends .......... (68.3) (43.6) (72.4)
Extraordinary gain ............................ 11.7 -- --
Tax Benefit .................................. -- -- (3.6)
----- ----- -----
Net loss before preferred stock dividends ..... (56.6)% (43.6)% (68.8)%
===== ===== =====
Revenues
The Company's manufacturing operating segment generally recognizes revenue
upon shipment of its products. The distribution segment earns revenue through a
distributor agreement with OSE. Total revenues decreased 51.2% to $11.8 million
in 2001, from $24.2 million in 2000. Revenue increased 39.1% to $24.2 million in
2000, from $17.4 million in 1999. The decrease in revenues in 2001 was primarily
due to the weakness in the overall semiconductor industry. The increase in
revenue in 2000 was primarily due to the inclusion of the new distribution
segment revenues of OSEI for the entire year. The revenues in 2001, 2000, and
1999 include $4.6 million, $7.6 million, and $1.2 million attributable to the
distribution segment.
Gross Profit (Loss)
Cost of revenues includes materials, labor, depreciation and overhead costs
associated with semiconductor packaging. There is no cost of service related to
the distribution revenues. Gross loss of approximately $1.0 million in 2001 was
a $2.0 million decrease from the $1.0 million gross profit in 2000. Gross profit
of $1.0 million in 2000 was a $7.1 million improvement over the $6.1 million
gross loss in 1999. The distribution segment recorded a gross profit of $4.6
million in 2001, $7.6 million in 2000 and $1.2 million in 1999. Excluding the
distribution segment, the gross loss of $5.6 million in 2001 was a $1.0 million
improvement over the 2000 gross loss of $6.6 million. The $6.6 million gross
loss in 2000 was a $0.7 million improvement over the 1999 gross loss of $7.3
million. The decrease in 2000 and 2001 gross loss, excluding distribution
segment, was due to a work force reduction in October 2000, in response to
continued weak demand.
16
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and management
personnel, as well as advertising, public relations, legal and facilities costs.
Selling, general and administrative expenses were $5.2 million in 2001, $7.2
million in 2000, and $3.7 million in 1999. Selling, general and administrative
expenses in 2001, 2000 and 1999 included $4.1 million, $4.1 million and $0.5
million, respectively, attributable to OSEI. Excluding OSEI, selling, general
and administrative expenses decreased by $2.0 million in 2001, $0.1 million in
2000 as compared to 1999 due to reduced spending. The spending reduction was
achieved mainly through the work force reduction.
As a percentage of revenues, selling, general and administrative expenses
increased to 44.2% in 2001 compared to 29.9% in 2000 and 20.9% in 1999. The
fluctuation from 1999 to 2000 in percentages reflects the changes resulting from
the acquisition of OSEI. The fluctuation from 2000 to 2001 in percentages was
mainly caused by the 51.2% revenue decrease in 2001.
Research and Development
Research and development expenses consist primarily of the costs associated
with research and development personnel, the cost of related materials and
services, and the depreciation of development equipment. Research and
development expenses were $1.3 million in 2001, $1.3 million in 2000, and $0.7
million in 1999.
As a percentage of revenues, research and development expenses were 10.9%
in 2001, 5.4% in 2000, and 4.2% in 1999. The increase in research and
development expenses as a percentage of revenue from 2000 to 2001 resulted from
the decrease in revenue in 2001, as there was no increase in absolute spending.
Impairment of Assets
In 2000, the Company recorded a charge to operations related to the
impairment of its manufacturing equipment of $1.4 million. The impairment was a
result of continued adverse economic conditions in the semiconductor industry,
and historical as well as forecasted manufacturing equipment underutilization,
resulting in the estimation that the carrying value of the manufacturing
equipment will not be fully recovered.
In 2001, management prepared a preliminary fair value analysis for OSEI
using the discounted cash flows method for the purpose of determining the effect
of adopting SFAS 142, Goodwill and Intangible Assets. Although the Company is
still reviewing the ultimate effect of adopting this statement, the preliminary
analysis indicated that an impairment of goodwill might exist based on the
provisions of SFAS 142. A charge was not recorded in the year ended December 31,
2001 because the analysis indicated that an impairment did not exist under the
provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS 142 is effective on January 1,
2002 and the Company intends to complete its analysis by June 30, 2002. At
December 31, 2001, the net book value of goodwill, including workforce, was
approximately $1,400,000.
Interest and Other Income
Interest income in 2001, 2000, and 1999, was $86,000, $147,000, and
$58,000, respectively. The decrease in 2001 was due to lower interest rates and
lower investment balances, which resulted from the loss from operations and
capital expenditures. The increase in 2000 was due to higher investment balances
as a result of the increase in the activity of the distribution segment, which
was acquired in October of 1999. Other income in 2001, 2000, and 1999, was
$107,000, $12,000, and $14,000, respectively. Other income was primarily from
gains on disposal of equipment.
17
Interest Expense
Interest expense consists primarily of interest payable on bank debt,
capital leases, and term loans secured by equipment. Interest expense for 2001,
2000, and 1999 was $1.3 million, $1.8 million, and $1.6 million respectively.
The decrease in 2001 was due to lower debt balances, lower interest rates, and
expiration of all of the Company's capital leases. The increase in 2000 was due
to higher debt balances, as a result of operating losses.
Provision for Income Taxes
In 2001, 2000, and 1999, the Company did not recognize any tax benefits
from net operating loss carryforwards. The income tax benefit for the year ended
December 31, 2001, represents the reversal of an over accrual of income taxes
resulting from a change in accounting estimate. The Company recognizes deferred
tax assets if realization of such assets is more likely than not. Based upon
available data, which includes the Company's historical operating performance
and the reported cumulative net losses in prior years, the Company has provided
a full valuation allowance against the Company's net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Extraordinary Gain
In April 1999, the Company's secured creditors agreed to restructure the
Company's secured debt, including debt forgiveness. As a result, the Company
recorded an extraordinary gain of $1,487,000.
In September 1999, the Company entered into a loan and security agreement
with Far East National Bank and Bank SinoPac, Los Angeles Branch. As a result,
the liabilities subject to the April 1999 restructuring were settled for less
than recorded amounts. Accordingly, this transaction resulted in an
extraordinary gain of $560,000.
Deemed Dividends on Preferred Stock
In 1999, the Company recorded a deemed dividend on preferred stock of $6.8
million. The deemed dividend results from the conversion price of the
convertible preferred stock issued to OSE being less than the market price of
the common stock on the date of the transaction. The deemed dividend related to
the transaction has been recognized as a result of the preferred stock being
immediately convertible at the discretion of the holder.
18
Segment Reporting
The Company has two segments: manufacturing and distribution. Manufacturing
comprises the semiconductor packaging services of packages designed for assembly
using Surface Mount Technology ("SMT") in which leads on integrated circuits are
soldered to the surface of the printed circuit board. Within the SMT market, the
Company focuses on high pin-count packages, such as Quad Flat packages ("QFP")
and thin Quad Flat packages ("TQFPs"). Distribution comprises the North American
sales, marketing and technical support organization for OSE. Commissions are
earned from the direct sales efforts in the "direct channel" for the
semiconductor assembly and test services of OSE. The customers are mainly US
headquartered manufacturers of high-tech products such as video components, chip
sets, graphics chips and logic components.
Manufacturing Distribution Total
------------- ------------ ---------
2001:
Revenues ....................... $ 7,150 $4,615 $ 11,765
Net profit (loss) .............. $ (9,855) $1,756 $ (8,099)
2000:
Revenues ....................... $ 16,521 $7,646 $ 24,167
Net profit (loss) .............. $(14,704) $4,165 $(10,539)
1999:
Revenues ....................... $ 16,227 $1,214 $ 17,441
Net profit (loss) .............. $(10,627) $ 754 $ (9,873)
Liquidity and Capital Resources
During 2001, the Company's net cash provided by operations was $5.1
million. Net cash provided by operations was comprised primarily of a net loss
of $8.1 million and a net increase in working capital of $9.7 million, partially
offset by $3.5 million of non-cash charges for depreciation and amortization.
The net increase in working capital items reflected a $3.7 million increase in
accounts payable and a $6.9 million decrease in accounts receivable. As of
December 31, 2001, the Company had a cash balance of $1.8 million and was
operating under a bank line of credit expiring on August 15, 2002.
In 2001, $175,000 was used by investing activities for capital expenditures
of $290,000 offset by $115,000 in proceeds from the sale of equipment. Most of
the Company's production equipment has historically been funded either through
capital leases or term loans. Future expenditures are expected to be funded out
of internal cash flow.
In 2001, $6.4 million was used in financing activities. This resulted
primarily from $6.4 million paydown on the bank credit lines.
In April 1999, OSE purchased 4,000,000 shares of the Company's Series A
Redeemable Preferred Stock, convertible into approximately 55,000,000 shares of
the Company's Common Stock for $6.8 million. As part of this transaction, the
Company's secured creditors agreed to terminate their legal actions and have
restructured the Company's secured debt, including debt forgiveness. On August
4, 1999, OSE converted 1,000,000 preferred shares into 13,748,771 shares of
common stock. On December 26, 2000, OSE purchased 3,023,225 shares of the
Company's Series B Redeemable Preferred Stock convertible into approximately
42,000,000 shares of the Company's Common Stock for $6.0 million. The proceeds
were used to reduce the payable to OSE.
19
As part of the restructuring of secured debt, certain creditors were issued
warrants to purchase a total of approximately 1.5 million shares of common stock
at a price of $0.1236 per share. In addition, warrants to purchase a total of
244,345 shares of common stock held by secured creditors were repriced from
exercise prices ranging from $0.77 to $3.30 per share of common stock to $0.1236
per share. The fair value as determined using a Black-Scholes valuation model of
the warrants issued and the incremental value of the repriced warrants was
$790,000.
As of December 31, 2001, the Company has a line of credit, as amended, with
the two banks that provides for advances up to the lesser of $15 million
(committed revolving credit line) or the advance rate against qualified accounts
receivable (as defined). Over advances under this agreement are immediately
payable to the lender. Borrowings under this line of credit accrue interest at
the banks' prime rate (4.75% at December 31, 2001) plus 0.50%, are
collateralized by the assets of the Company and are guaranteed by OSE. Amounts
outstanding under this line of credit were $11,557,000 at December 31, 2001. On
March 27, 2002, the Company extended this line of credit until August 15, 2002.
The Company intends to continue renewing its $15 million line of credit
with the guarantee of OSE. The Company does not believe this line of credit will
be increased before the Company shows positive operating results. However, based
on the Company's strategy of focusing on the quick turn and engineering lot
business, continuing to attract small to medium size volume production, and with
the recovery of the semiconductor industry, the Company expects that in 2002,
the operation will generate enough working capital to support operating needs.
However, the Company still requires continued financial support from OSE to
fulfill operating cash requirements.
As of December 31, 2001, the Company has the following contractual
obligations and commercial commitments:
Payment due by period (In Thousands)
--------------------------------------------------------
Less
than 1 After 5
Contractual obligations: Total 1 year 1-3 years 4-5 years years
------- ------- ---------- ---------- -------
Operating lease (net of sublease) $ 3,642 $ 720 $ 1,105 $ 1,188 $ 629
------- ------- ---------- ---------- ------
Total contractual cash obligation $ 3,642 $ 720 $ 1,105 $ 1,188 $ 629
======= ======= ========== ========== ======
Amount of commercial expiration per period (In Thousands)
----------------------------------------------------------
Total Less
amounts than After 5
Other commercial commitments: committed 1 year 1-3 years 4-5 years years
--------- ------- ---------- ---------- ------
Line of credit interest $15,000 $15,000 $ -- $ -- $ --
------- ------- ---------- ---------- ------
Total commercial commitments $15,000 $15,000 $ -- $ -- $ --
======= ======= ========== ========== ======
20
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results of our
operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
On an ongoing basis we re-evaluate our judgments and estimates including those
related to bad debts, inventories, and long-lived assets. We base our estimates
and judgments on our historical experience, knowledge of current conditions and
our beliefs of what could occur in the future considering available information.
Actual results may differ from these estimates under different assumptions or
conditions. Our estimates are guided by observing the following critical
accounting policies.
Revenue recognition
The Company's revenues come from the manufacturing and distribution segments.
Revenue from the manufacturing segment is recognized upon shipment of products.
Revenue from the distribution segment is recognized, on a net basis, based on
the Company's distribution agreement with OSE. Distribution revenue is
recognized when the Company is informed by OSE that products have been shipped.
Sales returns have been immaterial in the past. As a result, sales returns are
recognized as they occur and are recorded as a reduction to revenue.
The Company maintains an allowance for doubtful accounts for losses that the
Company estimates will arise from customers' inability to make required
payments. The Company makes its estimates of the uncollectability of its
accounts receivable by analyzing the accounts receivable aging. At December 31,
2001 and 2000, the allowance for doubtful accounts was $307,000 and $299,000,
respectively.
Valuation of inventory
The Company maintains an allowance for inventory obsolescence for probable
losses that arise from estimated obsolescence or unmarketable inventory, equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand, selling prices and market
conditions. Our inventories include raw material supplies such as gold wire,
lead frames and mold compound. Inventory is stated at the lower of cost,
determined by the first-in, first-out basis, or market. At The allowance for
obsolete inventory was $985,000 and $1,369,000 at December 31, 2001 and 2000,
respectively.
Valuation of long-lived assets
The Company's business requires heavy investment in manufacturing facilities
that are technologically advanced but can quickly become significantly
underutilized or rendered obsolete by rapid changes in demand for semiconductors
produced in those facilities. We estimate the useful life of our manufacturing
equipment, which is the largest component of our long-lived assets, to be six
years. We base our estimate on our experience with acquiring, using and
disposing of equipment over time. Depreciation expense is a major element of our
manufacturing cost structure. We begin depreciation on new equipment when it is
put into use for production. Whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets may not be recoverable,
the Company estimates the future cash flows, undiscounted and without interest
charges, expected to result from the use of those assets and their eventual cash
position. If the sum of the expected future cash flows is less than the carrying
amount of those assets, the Company recognizes an impairment loss based on the
excess of the carrying amount over the fair value of the assets. In 2000, the
Company recorded an impairment charge of $1.4 million related to its
manufacturing equipment. In 2001, management prepared a preliminary fair value
analysis for OSEI using the discounted cash flows method for
21
the purpose of determining the effect of adopting SFAS 142, Goodwill and
Intangible Assets. Although the Company is still reviewing the ultimate effect
of adopting this statement, the preliminary analysis indicated that an
impairment of goodwill might exist based on the provisions of SFAS 142. A charge
was not recorded in the year ended December 31, 2001 because the analysis
indicated that an impairment did not exist under the provisions of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS 142 is effective on January 1, 2002 and the Company intends
to complete its analysis by June 30, 2002. At December 31, 2001, the net book
value of goodwill, including workforce, was approximately $1,400,000.
Related parties transactions
As disclosed in Note 13 in the accompanying financial statements, the
Company is a member of a group of affiliated companies owned by Orient
Semiconductor Electronics, Ltd. of Taiwan ("OSE") and is a party to a number of
significant related party transactions with OSE and its affiliates. Such
transactions include:
o OSE is guarantor of the Company's bank debt;
o OSE was a significant shareholder in OSEI. Accordingly, when the Company
acquired OSEI, OSE received approximately 4.9 million shares of the
Company's common stock for its shares in OSEI. OSE also owns 3,000,000 and
3,023,225 shares of the Company's Series A and B convertible preferred
stock, respectively
o All the revenue of the distribution segment is earned as a result of being
a distributor for OSE. The revenue under the distribution agreement is
based on a fixed percentage of the value of the semiconductor assembly and
test services provided to customers in OSEI's distribution area of entities
headquartered in North America. Under the distribution agreement, OSEI is
required to remit amounts collected from customers, less its commission, to
OSE. Pursuant to the amended line of credit agreement however, payments
from customers are to be remitted directly to a lender. As of December 31,
2001, accounts receivable includes approximately $28.0 million, that when
collected, is due to OSE pursuant to the distribution agreement. While OSEI
is responsible for the collection of accounts receivable from its
customers, it has obtained certain guarantees from OSE, which reduce OSEI's
exposure to credit risk. OSEI normally makes payments to OSE for purchases
after OSEI has collected the related accounts receivable from its customer.
o The Company has a sublease with an affiliate Company.
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of factors
that could materially and adversely affect revenues, gross profit, operating
income and liquidity. These factors include the Company's ability to secure
additional financing, the short term nature of its customers' commitments, the
timing and volume of orders relative to the Company's production capacity, long
lead times for the manufacturing equipment required by the Company, evolutions
in the life cycles of customers' products, timing of expenditures in
anticipation of future orders, lack of a meaningful backlog, effectiveness in
managing production processes, changes in costs and availability of labor, raw
materials and components, costs to obtain materials on an expedited basis, mix
of orders filled, the impact of price competition on the Company's average
selling prices and changes in economic conditions. The occurrence or
continuation of unfavorable changes in any of the preceding factors would
adversely affect the Company's business, financial condition and results of
operations.
22
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company has a bank line of credit outstanding that matures in August
2002. This line of credit has interest rates that are based on associated rates
that may fluctuate over time based on economic changes in the environment, such
as the Prime Rate. The Company is subject to interest rate risk, and could be
subjected to increased interest payments if market interest rates fluctuate. The
Company estimates that a ten percent increase in interest rates would cause
interest expense to increase by an immaterial amount.
23
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Page
Report of Independent Certified Public Accountants.......................... 25
Consolidated Balance Sheets as of December 31, 2000 and 2001................ 27
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001.......................................... 28
Consolidated Statement of Stockholders' Deficit for the Years Ended
December 31, 1999, 2000 and 2001.......................................... 29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001.......................................... 30
Notes to Consolidated Financial Statements.................................. 31
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of OSE USA, Inc.
We have audited the accompanying consolidated balance sheets of OSE USA,
Inc. (Formerly Integrated Packaging Assembly Corporation) (a Delaware
corporation) and subsidiary as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the two years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OSE USA, Inc.
(Formerly Integrated Packaging Assembly Corporation) and subsidiary as of
December 31, 2000 and 2001, and the consolidated results of their operations and
their consolidated cash flows for the two years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of $8,099,000
during the year ended December 31, 2001, and, as of that date, the Company's
current liabilities exceeded its current assets by $23,106,000 and its total
liabilities exceeded its total assets by $14,287,000. These factors, among
others, as discussed in Note 1 to the consolidated financial statements, raised
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
San Jose, California
February 15, 2002
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of OSE USA, Inc.
In our opinion, the accompanying consolidated statements of operations, of
stockholders' deficit and of cash flows present fairly, in all material
respects, the results of operations and cash flows of OSE USA. Inc. (Formerly
Integrated Packaging Assembly Corporation) and its subsidiary for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements of OSE USA, Inc. (Formerly Integrated
Packaging Assembly Corporation) for any period subsequent to December 31, 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
OSE USA, Inc. (Formerly Integrated Packaging Assembly Corporation) is a
member of a group of affiliated companies owned by Orient Semiconductor
Electronics, Ltd of Taiwan ("OSE") and, as disclosed in Note 13 to the
consolidated financial statements, OSE is guarantor of certain debts of the
Company, and the Company had certain other transactions with OSE. It is possible
that the terms of these transactions are not the same as those that would result
from transactions among wholly unrelated parties.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
March 9, 2000
26
OSE USA, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
----------------------
2000 2001
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,300 $ 1,844
Accounts receivable, net of allowance for
doubtful accounts of $299 and $307, respectively 22,867 15,987
Inventory 839 855
Prepaid expenses and other current assets 763 331
-------- --------
Total current assets 27,769 19,017
Property and equipment, net 7,969 5,448
Intangible assets, net of accumulated amortization of $849 and
$1,577, respectively 4,928 4,198
Other assets 11 9
-------- --------
Total assets $ 40,677 $ 28,672
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Bank debt $ 18,000 $ 11,557
Accounts payable 667 630
Accounts payable - related party 24,189 27,958
Accrued expenses and other liabilities 2,872 1,978
-------- --------
Total current liabilities 45,728 42,123
Deferred gain on sale of facilities 973 836
-------- --------
Total liabilities 46,701 42,959
-------- --------
Redeemable convertible preferred stock, $.001 par value;
20,000,000 shares authorized; 6,023,225 (Series A: 3,000,000
shares, Series B: 3,023,225 shares) issued and outstanding;
redemption value: Series A: $1.70 per share, Series B: $1.98
per share 11,100 11,100
-------- --------
Commitments and contingencies (note 5) -- --
Stockholders' deficit:
Common stock, $.001 par value;
300,000,000 shares authorized;
56,373,299 (2000) and 67,153,375 (2001) shares issued and
outstanding 56 67
Additional paid-in capital 54,882 55,596
Accumulated deficit (72,062) (81,050)
-------- --------
Total stockholders' deficit (17,124) (25,387)
-------- --------
Total liabilities and stockholders' deficit $ 40,677 $ 28,672
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
OSE USA, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- --------
Revenues $ 17,441 $ 24,167 $ 11,765
Cost of revenues 23,500 23,117 12,727
-------- -------- --------
Gross profit (loss) (6,059) 1,050 (962)
-------- -------- --------
Operating expenses:
Selling, general & administrative 3,651 7,215 5,199
Research & development 727 1,308 1,285
Provision for impairment of assets -- 1,389 --
-------- -------- --------
Total operating expenses 4,378 9,912 6,484
-------- -------- --------
Operating loss (10,437) (8,862) (7,446)
Interest and other income 72 159 193
Interest expense (1,555) (1,836) (1,272)
-------- -------- --------
Loss before extraordinary gains, income taxes,
and preferred dividends (11,920) (10,539) (8,525)
Extraordinary gains 2,047 -- --
Tax benefit -- -- (426)
-------- -------- --------
Net loss (9,873) (10,539) (8,099)
Preferred stock dividend (308) (413) (889)
Deemed dividend on preferred stock (6,800) -- --
-------- -------- --------
Net loss applicable to common stockholders ($16,981) ($10,952) ($ 8,988)
======== ======== ========
Per share data:
Net loss applicable to common stockholders
before extraordinary gains per share -
Basic and diluted ($ 0.76) ($ 0.20) ($ 0.15)
Extraordinary gains per share -
Basic and diluted 0.08 -- --
-------- -------- --------
Net loss applicable to common stockholders
per share -
Basic and diluted ($ 0.68) ($ 0.20) ($ 0.15)
-------- -------- --------
Number of shares used to compute per share data:
Basic and diluted 24,957 55,676 60,865
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
OSE USA, Inc.
Consolidated Statement of Stockholders' Deficit
(In thousands)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Totals
------- --- -------- -------- --------
Balance at January 1, 1999 14,244 $14 $ 40,607 $(43,828) $ (3,207)
Common stock issued under stock plans 190 -- 20 -- 20
Common stock repurchased under stock
Plans (4) -- (1) -- (1)
Issuance and repricing of warrants -- -- 790 -- 790
Beneficial conversion feature on
redeemable preferred stock -- -- 6,800 -- 6,800
Accretion of redeemable preferred stock -- -- -- (7,101) (7,101)
Preferred stock dividend 326 -- 91 -- 91
Conversion of preferred stock 13,749 14 1,686 -- 1,700
Acquisition of OSE, Inc. 25,910 26 4,292 -- 4,318
Amortization of deferred compensation -- -- 48 -- 48
Preferred dividends -- -- -- (308) (308)
Net loss -- -- -- (9,873) (9,873)
------- --- -------- -------- --------
Balance at December 31, 1999 54,415 54 54,333 (61,110) (6,723)
Common stock issued under stock plans 707 1 131 -- 132
Preferred dividends declared -- -- -- (413) (413)
Preferred dividends paid in stock 1,251 1 418 -- 419
Net loss -- -- -- (10,539) (10,539)
------- --- -------- -------- --------
Balance at December 31, 2000 56,373 $56 $ 54,882 ($72,062) ($17,124)
Common stock issued under stock plans 813 1 70 -- 71
Preferred dividends declared -- -- -- (889) (889)
Preferred dividends paid in stock 9,967 10 644 -- 654
Net loss -- -- -- (8,099) (8,099)
------- --- -------- -------- --------
Balance at December 31, 2001 67,153 $67 $ 55,596 ($81,050) ($25,387)
======= === ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
OSE USA, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
---------------------------------
1999 2000 2001
-------- -------- -------
Cash flows from operating activities:
Net loss ($ 9,873) ($10,539) ($8,099)
Adjustments:
Depreciation and amortization 4,458 4,442 3,533
Impairment of equipment -- 1,389 --
Gain on sale of facilities, net (138) (138) (138)
Loss (Gain) on disposal of equipment 96 12 (107)
Extraordinary gains on debt restructure (2,047) -- --
Changes in assets and liabilities (in 1999, net of
effects of acquisition):
Accounts receivable (4,018) 5,428 6,881
Inventory 500 365 (16)
Prepaid expenses and other assets 196 (153) 433
Accounts payable and accounts payable- related
party 6,097 (7,235) 3,732
Accrued expenses and other liabilities (1,012) (191) (1,128)
-------- -------- -------
Net cash provided by (used in) in operating
activities (5,741) (6,620) 5,091
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment (608) (2,583) (290)
Cash acquired 1,346 -- --
Proceeds from sale of equipment -- -- 115
-------- -------- -------
Net cash provided by (used in) investing activities 738 (2,583) (175)
-------- -------- -------
Cash flows from financing activities:
Payments under capital lease obligations (694) -- --
Proceeds from note payable 4,890 -- --
Principal payments on note payable (9,629) -- --
Proceeds from bank credit lines 27,617 1,000 --
Payments under bank credit lines (18,328) -- (6,443)
Proceeds from issuance of redeemable
preferred stock, net of issuance costs 6,499 6,000 --
Proceeds from issuance of common stock 19 132 71
-------- -------- -------
Net cash provided by (used in) financing activities 10,374 7,132 (6,372)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 5,371 (2,071) (1,456)
Cash and cash equivalents at beginning of year -- 5,371 3,300
-------- -------- -------
Cash and cash equivalents at end of year $ 5,371 $ 3,300 $ 1,844
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,070 $ 1,836 $ 1,315
Supplemental disclosure of noncash financing
activities:
Issuance and repricing of warrants $ 790 $ -- $ --
Common stock issued for preferred stock dividend $ 91 $ 419 $ 654
Deemed dividend on preferred stock $ 6,800 $ -- $ --
Issuance of common stock on OSE, Inc acquisition $ 4,318 $ -- $ --
Conversion of preferred stock to common stock $ 1,700 $ -- $ --
Accretion of redeemable preferred stock $ 7,101 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements
30
OSE USA, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
OSE, USA, Inc (Formerly Integrated Packaging Assembly Corporation) (the
"Company") was incorporated in California on April 28, 1992 and reincorporated
in Delaware on June 19, 1997. The Company changed its name on June 6, 2001 in
connection with the Company's strategic reorganization. The Company operates
within two segments of the semiconductor industry: (1) manufacturing and (2)
distribution.
Within manufacturing, the Company assembles and packages integrated
circuits from wafers consigned by its customers. The Company's focus is on quad
flat packages ("QFPs"), thin quad flat packages ("TQFPs"), ball grid array
packages ("BGAs"), Flip Chips, and chip scale packaging ("CSPs"), which are used
in complex integrated circuits with high pin-counts in the personal computer and
telecommunications industries.
Within distribution, the Company is the exclusive North American sales and
marketing organization for Orient Semiconductor Electronics, Ltd. ("OSE") of
Taiwan, a public Taiwanese company and the Company's controlling stockholder.
Revenues are derived exclusively from fees received on the sales of OSE's
semiconductor assembly and test services to customers headquartered in North
America in accordance with a distribution agreement. The Company entered this
segment of the market in October 1999 with its acquisition of OSE, Inc.
("OSEI").
Basis of Presentation
As a result of a reduction in orders from the Company's customers, the
Company has significant excess production capacity. The reduction in revenues
and underutilization of production capacity and resultant underabsorption of
fixed costs resulted in operating losses for the years ended December 31, 2001,
2000, and 1999. The Company believes that it will fund its projected working
capital and other cash requirements through January 1, 2003 from operating
activities and renewed financing facilities.
At December 31, 2001, the Company has a line of credit, which provides for
borrowings up to a total of $15.0 million, of which $11.6 million is
outstanding. On March 27, 2002, the Company extended the line of credit through
August 15, 2002.
Based on a newly adopted strategic plan, the Company intends to focus more
of its operations on quick-turn and engineering lot assemblies to improve its
profitability, due to the fact that quick-turn and engineering lot assemblies
provide higher profit margins. To achieve this objective, the Company recently
restructured its internal sales force and increased the frequency of customer
contacts. The Company also plans to use outside sales representatives in
promoting the Company to new customers throughout the United States.
These financial statements have been prepared on a going concern basis and,
therefore, do not include any adjustments that might result from these
uncertainties.
31
Risks and uncertainties
The Company may be significantly impacted by the political, economic and
military conditions in Taiwan due to the Company's subsidiary, OSEI, being a
distributor for OSE whose operations are principally located in Taiwan. Taiwan
and the People's of Republic of China are continuously engaged in political
disputes. Such disputes may continue and even escalate, resulting in economic
embargo, a disruption in shipping or even military hostilities. This could
severely harm OSEI's business by interrupting or delaying production or shipment
of products OSEI distributes. Any kind of activity of this nature or even rumors
of such activity could severely and negatively impact the Company's results of
operations and financial position.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of intercompany balances and
transactions.
Cash equivalents
The Company considers all highly liquid investments with purchased
maturities of 90 days or less to be cash equivalents.
Financial instruments
The carrying amounts reported for cash and cash equivalents, accounts
receivable and accounts payable are considered to approximate fair values based
upon the short maturities of these financial instruments. The carrying amount of
borrowings under the line of credit are also considered to approximate fair
values as the interest rates on the borrowings adjust to the bank's reference
rate.
Inventory
Inventory, which primarily consists of raw material supplies such as gold
wire, lead frames and mold compound, is stated at the lower of cost, determined
by first-in, first-out basis, or market. The Company holds product on
consignment from its customers while services are being performed.
Property and equipment
Property and equipment are recorded at cost. For certain production
machinery and equipment acquired prior to 1997, depreciation is calculated using
the units of production method, in which depreciation is calculated based upon
the units produced in a given period divided by the estimate of total units to
be produced over its life following commencement of use. Such estimate is
reassessed when facts and circumstances suggest a revision may be necessary. In
all cases, the asset will be fully depreciated by the end of its estimated
six-year life. Depreciation for all other property and equipment and all
production machinery and equipment acquired after 1996 is computed using the
straight-line method over the estimated useful lives of the assets, generally 3
to 6 years. Leasehold improvements are amortized using the straight-line method
over the lives of the respective leases or the service lives of the
improvements, whichever is shorter.
32
Long-lived assets
Long-lived assets include property and equipment and intangible assets.
Whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, the Company estimates the future cash
flows, undiscounted and without interest charges, expected to result from the
use of those assets and their eventual cash position. If the sum of the expected
future cash flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount over
the fair value of the assets.
Revenue recognition
The manufacturing operating segment generally recognizes revenue upon
shipment of its products. The distribution segment earns revenue through a
distributor agreement with OSE. The nature of the distributor transactions is
such that the Company does not bear the risks and rewards of ownership of the
product being distributed and is compensated in a manner similar to a
commission. Accordingly, revenue relating to the Company's distribution
agreement is recognized on a net basis. Net revenues recorded by the
distribution segment were $1.2 million, $7.6 million, and $4.6 million, on gross
billings of $23.1 million, $158.9 million, and $96.2 million for the years ended
December 31, 1999, 2000, and 2001, respectively.
Income taxes
The Company accounts for income taxes using the asset and liability
approach, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or income tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
Stock based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation for stock options is generally measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock. The
Company adopted the disclosure only requirements of SFAS 123.
Comprehensive income
There was no difference between the Company's net loss and its total
comprehensive loss for the periods reported in these financial statements.
33
Net loss per share
Basic loss per share ("EPS") is computed by dividing net loss available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options and warrants, using the treasury stock method, and convertible preferred
stock, using the if-converted method. The Company incurred a net loss during the
period resulting in all options, warrants and convertible preferred stock
outstanding being antidilutive and therefore, excluded from the calculations.
Year Ended December 31, 2001
----------------------------
1999 2000 2001
------ ------ ------
Antidilutive Securities:
- ------------------------
Convertible preferred stock 3,000 6,023 6,023
====== ====== ======
Options and warrants outstanding 11,478 12,739 11,040
====== ====== ======
Weighted-average exercise price of options and warrants $ 0.50 $ 0.48 $ 0.44
====== ====== ======
Use of estimates
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could vary from these estimates.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001.
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives would no longer be subject to amortization.
o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
o All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting. The Company's reporting
unit is OSEI, its distribution segment.
The Company will continue to amortize goodwill and intangible assets recognized
prior to July 1, 2001, under its current method until January 1, 2002, at which
time annual and quarterly goodwill amortization of
34
$370,500 and $92,625, respectively, will no longer be recognized. As of January
1, 2002, goodwill will include amounts previously assigned to both goodwill and
workforce. In connection with this adoption, the Company is also reassessing the
useful life of OSEI's distributor contract, which is currently being amortized
over 10 years. By December 31, 2002, the Company will have completed a
transitional fair value based impairment test of the carrying value of goodwill
as of January 1, 2002. Impairment losses, if any, resulting from the
transitional testing will be recognized in the first quarter of the year ended
December 31, 2002, as a cumulative effect of a change in accounting principle.
Although it is still reviewing the effect of adopting SFAS 142, management's
preliminary assessment is that this Statement may have a material impact on the
Company's financial position or results of operations. Management prepared a
preliminary fair value analysis for OSEI using the discounted cash flows method.
Though the analysis indicated that an impairment of goodwill may exist based on
the provisions of SFAS 142, a charge was not recorded in the year ended December
31, 2001, because the analysis indicated that an impairment did not exist under
the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. At December 31, 2001, the net book
value of goodwill, including workforce, was approximated $1,400,000.
In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations.
SFAS 143 applies to all entities that have legal obligations associated with the
retirement of a tangible long-lived asset. SFAS 143 requires that a liability
for an asset retirement obligation be recognized if the obligation meets the
definition of a liability in FASB Concepts Statement 6, Elements of Financial
Statements, and if the amount of the liability can be reasonably estimated. SFAS
143 is effective for fiscal years beginning after June 15, 2002, but earlier
application is encouraged. The Company does not expect this Statement to have a
material effect on its financial statements.
In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as well as the
provisions of Opinion 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, that address the disposal of a
business. SFAS 144 also amends ARB 51, Consolidated Financial Statements, to
eliminate the exception to consolidate a subsidiary for which control is likely
to be temporary. SFAS 144 carries over the recognition and measurement
provisions of SFAS 121, but differs from SFAS 121 in that it provides guidance
in estimating future cash flows to test recoverability. SFAS 144 also includes
criteria that have to be met for an entity to classify a long-lived asset or
asset group as held for sale, and extends the presentation of discontinued
operations permitted by Opinion 30 to include disposals of a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 15,
2001, except for the disposal provisions, which are immediately effective. The
Company does not expect this Statement to have a material effect on its
financial statements.
35
NOTE 2 - BALANCE SHEET COMPONENTS:
(In thousands)
December 31,
---------------------
2000 2001
-------- --------
Inventory
Raw materials $ 2,088 $ 1,816
Work in process 120 24
-------- --------
Subtotal $ 2,208 $ 1,840
Allowance for obsolescence (1,369) (985)
-------- --------
Total $ 839 $ 855
======== ========
Property and equipment
Buildings and improvements $ 697 $ 697
Machinery and equipment 30,983 30,249
Office and computer equipment 1,135 1,132
Furniture and fixtures 289 290
-------- --------
33,104 32,367
Less: accumulated depreciation and amortization (25,135) (26,919)
-------- --------
$ 7,969 $ 5,448
======== ========
Accrued expenses and other liabilities
Accrued payroll and related expenses $ 753 $ 482
Other accrued liabilities (Deferred rent, dividends
payable, and other) 2,119 1,496
-------- --------
$ 2,872 $ 1,978
======== ========
NOTE 3 - EQUIPMENT IMPAIRMENT CHARGE:
In 2000, the Company recorded charges of $1.4 million related to the
impairment of its manufacturing equipment and accordingly, reduced the carrying
value of such manufacturing equipment. The impairment is a result of continued
adverse economic conditions in the semiconductor industry, and historical as
well as forecasted manufacturing equipment underutilization, resulting in an
estimation that the carrying value of the manufacturing equipment will not be
fully recovered. The fair value of manufacturing equipment was based upon an
independent estimate of fair values.
36
NOTE 4 - ACQUISITION OF THE NORTH AMERICAN DISTRIBUTOR OF ORIENT
SEMICONDUCTOR ELECTRONICS, LTD.
On October 29, 1999, the Company acquired the North American distributor of
OSE in a stock for stock exchange valued at approximately $4.7 million. In
connection with the acquisition, the Company issued 25,910,090 shares of its
Common Stock with a fair market value of $4.3 million. As a result of the
transaction, the distributor, OSEI, operates as a wholly owned subsidiary of the
Company.
OSEI was a privately held corporation that serves as the exclusive North
American distributor of OSE, a public Taiwanese company and the Company's
principal stockholder. OSEI derives its revenues from fees earned exclusively
from the sales of OSE's semiconductor assembly and test services to customers
headquartered in North America. The Company reported consolidated results with
OSEI since the acquisition date.
The purchase price of $4.7 million, which includes acquisition costs of
$0.4 million, was accounted for using the purchase method of accounting, which
means that the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair values at the date of the
acquisition. The fair value of the assets of OSEI and a summary of the
consideration exchanged for these assets is as follows (in thousands):
Assets acquired:
Tangible assets, primarily cash and
accounts receivable $23,642
Distributor contract 3,557
Workforce 280
Goodwill 1,940
Liabilities assumed (24,711)
-----------
Total purchase price $4,708
===========
The amount allocated to the distributor contract and the workforce is
amortized on a straight-line basis over ten years and three years, respectively.
The goodwill recorded on the acquisition is amortized over its expected life of
seven years.
Summarized below are the unaudited pro forma results of the Company as
though OSEI had been acquired at the beginning of periods presented. Adjustments
have been made for the estimated increases in amortization related to the
purchase of the distributor contract, workforce and goodwill, and other
appropriate pro forma adjustments. Non-recurring transactions have been excluded
from the results of both periods presented.
1999
---------
Net revenues $19,630
Net loss ($11,972)
Net loss per share - basic and diluted ($0.26)
The above amounts are based on certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies of scale
which might be achieved from combined operations. The pro forma financial
information presented above is not necessarily indicative of either the results
of operations that would have occurred had the acquisition taken place at the
beginning of the periods presented, or of future results of operations of the
combined companies.
37
NOTE 5 - LEASING ARRANGEMENTS AND COMMITMENTS:
On January 20, 1998, the Company completed the sale of its facilities,
which consists of land and two buildings with a total of 138,336 square feet of
building space, and agreed to lease back the 82,290 square foot building it
occupies. Net proceeds from the sale were $7.3 million, net of the elimination
of $6.6 million of mortgage debt, fees, commissions and closing costs. The
Company recognized a gain of $700,000 from the sale of the land and building not
occupied by the Company. The remaining gain of approximately $1,400,000 is being
amortized as a reduction of lease expense over the initial ten-year term of the
lease for the building that the Company occupies.
On November 14, 2000, the Company entered into a sublease agreement with a
subsidiary of OSE for the lease of 16,480 square feet of building space through
January 19, 2008.
The Company has a non-cancelable operating lease for a 2,500 square foot
portion of a building for its plating operations. The lease is for five years,
with an option to extend.
Rent expense was $1,529,000, $1,549,000, and $1,654,000 in 1999, 2000, and
2001, respectively.
Net future minimum lease payments over the next five years and thereafter
under operating leases at December 31, 2001 are as follows (in thousands):
Net Future
Lease Sublease Min. Lease
Payment Income Payment
------- -------- ----------
Year ending December 31:
2002 $1,373 $653 $720
2003 1,250 704 546
2004 1,316 757 559
2005 1,316 757 559
2006 1,448 819 629
Thereafter 1,448 819 629
------ ------ ------
Total minimum payments $8,151 $4,509 $3,642
====== ====== ======
NOTE 6 - BANK DEBT
Bank debt
The Company has a line of credit, as amended, with the two banks that
provides for advances up to the lesser of $15 million (committed revolving
credit line) or the advance rate against qualified accounts receivable (as
defined). The amount of $15 million was an amendment from the $18 million in the
February 2001 line of credit agreement. Over advances under this agreement are
immediately payable to the lender. Borrowings under this line of credit accrue
interest at the banks' prime rate (4.75% at December 31, 2001) plus 0.50%, are
collateralized by the assets of the Company and are guaranteed by OSE. Amounts
outstanding under this line of credit were $18,000,000 and $11,557,000 at
December 31, 2000 and 2001, respectively.
On March 27, 2002, the Company renewed the $15 million line of credit with
the banks. This line of credit expires on August 15, 2002.
38
Equipment Notes Payable
Prior to 1999, due to covenant noncompliance and failure to make scheduled
repayments, the Company defaulted on its equipment notes payable. As part of the
April 1999 transaction outlined in Note 7, under which the Company issued Series
A mandatorily redeemable convertible preferred stock, the Company's secured
creditors agreed to restructure the secured debt, including debt forgiveness,
extended payment terms and terminate related legal actions. As a result of the
April debt restructuring, the Company recorded an extraordinary gain of
$1,487,000.
In September 1999, when the Company obtained a new borrowing facility, the
Company used it to settle amounts due to secured creditors that were subject to
the April 1999 debt restructuring for less than the recorded amounts. This
transaction resulted in an extraordinary gain of $560,000.
NOTE 7 - PREFERRED STOCK:
The Company has 20,000,000 shares of preferred stock authorized at December
31, 2001.
During 1999 and 2000, the Board of Directors designated 4,000,000 shares
and 3,023,225 shares of the preferred stock, as Series A convertible preferred
stock and Series B convertible preferred stock, respectively with a par value of
$.001.
The Company issued 4,000,000 shares of Series A mandatorily redeemable
convertible preferred stock (Series A Preferred) to OSE on April 29, 1999 for
proceeds of $6,499,000, net of issuance costs of $301,000. Each share of Series
A Preferred is initially convertible into 13.7487705 shares of the Company's
common stock at the option of the holder. On August 4, 1999, OSE converted
1,000,000 shares of Series A Preferred with a value of $1,700,000 into
13,748,771 shares of the Company's common stock.
The Company issued 3,023,225 shares of Series B mandatorily redeemable
convertible preferred stock (Series B Preferred) to OSE on December 26, 2000 for
proceeds of $6,000,000. Each share of Series B Preferred is initially
convertible into 13.7487705 shares of the Company's common stock at the option
of the holder. The proceeds were used to reduce the accounts payable to OSE.
The holders of shares of Series A Preferred and Series B Preferred are
entitled to dividends at the rate of $0.136 and $0.159, respectively, per annum
per share payable semiannually on July 1 and January 1 each year. The dividends
on Series A and Series B Preferred are payable in cash, shares of common stock
or any combination of cash and shares of Common Stock, at the option of the
holders of Series A and Series B Preferred. The Series A Preferred and Series B
Preferred are mandatorily redeemable for $1.70 and $1.98 respectively, per share
in the event of a transaction whereby the existing shareholders of the Company
own less than a 50% equity interest subsequent to the transaction or any
liquidation, dissolution, or winding up of the Company.
In 1999, the Company recorded a deemed dividend on Series A Preferred stock
of $6.8 million. This is the result of the effective conversion price of the
convertible preferred stock issued to OSE during the quarter being less than the
market price of the common stock on the date of the transaction. The deemed
dividend related to the transaction has been recognized during the second
quarter as a result of the preferred stock being immediately convertible at the
discretion of the holder. The conversion price of the Series B Preferred stock
issued to OSE in 2000 was not less than the market price of the common stock on
the date of the transaction and, accordingly, no deemed dividend was recorded.
39
Included in accrued expenses and other liabilities on the accompanying
balance sheets are dividends payable amounting to $209,000 and $444,000, at
December 31, 2000 and 2001, respectively. The $444,000 owing at December 31,
2001 was satisfied via the issuance of 14,800,000 shares of common stock in
2002.
NOTE 8 - STOCK PLANS:
Stock Option Plan
The Company has a Stock Option Plan (the "Plan"), which as amended,
provides for the grant of incentive stock options (ISOs) and nonqualified stock
options (NSOs) to purchase up to 20,000,000 shares of Common Stock. ISOs may be
granted to employees and NSOs may be granted to either employees or consultants.
In accordance with the Plan, the stated exercise price shall not be less than
100% and 85% of the estimated fair market value of Common Stock on the date of
grant for ISOs and NSOs, respectively, as determined by the Board of Directors.
The Plan provides that the options shall be exercisable over a period not to
exceed ten years and shall vest as determined by the Board of Directors.
Substantially all of the options vest 25% one year after the date of grant and
1/48 each month thereafter. There is no deferred compensation balance at
December 31, 2000 and 2001.
Options outstanding under this plan at December 31, 2000 and 2001 amount to
9,404,000 and 7,526,019 shares, respectively.
40
1999 Director Option Plan
In September 1999, the Company adopted the 1999 Director Option Plan (the
"1999 Director Plan"). A total of 4,000,000 shares of Common Stock have been
authorized for issuance under the 1999 Director Plan. The 1999 Director Plan
provides for the grant of NSOs to non-employee directors of the Company. The
1999 Director Plan provides that each non-employee director who joins the Board
will automatically be granted an NSO to purchase 100,000 shares of Common Stock
on the date upon which such person first becomes a non-employee director. In
addition, each non-employee director will automatically receive an NSO to
purchase 100,000 shares of Common Stock upon such directors' annual reelection
to the Board if the director has served on the Board for at least six months as
of the date of the reelection. All options granted under the 1999 Director Plan
will have an exercise price equal to the fair value of the Common Stock on the
date of grant and will be fully vested and exercisable on the date of grant. The
options will have a term of ten years.
Options outstanding under this plan at December 31, 2000 and 2001 amount to
700,000 and 1,000,000 shares, respectively.
Non-Statutory Stock Plan
The Company has a Non-Statutory Stock Plan, which, as amended, provides for
the grant of non-qualified stock options to purchase up to 750,000 share of
Common Stock. In accordance with the Plan, the stated exercise price shall not
be less than 85% of the estimated fair market value of the Common Stock on the
date of grant of the NSO. The options shall be exercisable over a period not to
exceed ten years and shall vest 25% one year after the year of grant and 1/48
each month thereafter.
Options outstanding under this plan at December 31, 2000 and 2001 amount to
324,938 and 304,438 shares, respectively.
Employee Stock Purchase Plan
The Company's Stock Purchase Plan (the "Purchase Plan") was adopted by the
Company's Board of Directors and stockholders in December 1995, and became
effective upon the closing of the Company's initial public offering on February
28, 1996. Under the Purchase Plan, a total of 5,000,000 shares of Common Stock
have been reserved for issuance to eligible employees. The Purchase Plan allows
employees to purchase shares through payroll deductions at 85% of the fair
market value of the Common Stock at the beginning or the end of the applicable
twelve-month purchase period. The Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the U.S. Internal Revenue
Code. Unless terminated sooner, the Purchase Plan will terminate ten years from
its effective date. During, 1999, 2000, and 2001 respectively, 185,292, 841,579,
and 812,770 shares, respectively, were issued under the Plan.
41
Summary of Option Activity
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category for each of the
years ended December 31, 1999, 2000 and 2001.
1999 2000 2001
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------- -------- ----------- -------- ----------- --------
Options outstanding at January 1 1,679,997 $1.00 9,146,842 $0.44 10,429,738 $0.42
Options granted 7,957,376 $0.36 2,500,000 $0.32 1,408,500 $0.07
Options canceled (485,948) $1.06 (1,199,437) $0.37 (3,007,781) $0.37
Options exercised (4,583) $0.22 (17,667) $0.24 -- --
---------- ----- ----------- ----- ----------- -----
Options outstanding at December 31 9,146,842 $0.44 10,429,738 $0.42 8,830,457 $0.38
========== ===== =========== ===== =========== =====
Options exercisable at December 31 809,841 $0.93 3,418,076 $0.51 4,601,918 $0.42
========== ===== =========== ===== =========== =====
Available for grant at December 31 14,908,048 13,607,485 15,206,766
========== =========== ===========
Significant option groups outstanding at December 31, 2001, and the related
weighted average exercise price and remaining contractual life information are
as follows:
Outstanding Exercisable Weighted
Weighted Weighted Average
Average Average Remaining
Exercise Exercise Life
Options with exercise prices ranging from: Shares Price Shares Price (Years)
- ------------------------------------------ --------- -------- --------- -------- ---------
$0.03 -- $0.06 908,000 $0.05 400,000 $0.05 8
0.09 -- 0.22 824,656 0.15 183,594 0.18 9
0.221-- 0.23 554,364 0.23 516,864 0.23 3
0.24 2,343,876 0.24 1,166,690 0.24 8
0.25 -- 0.52 1,042,812 0.38 513,352 0.35 7
0.54 -- 0.56 96,500 0.54 34,125 0.54 8
0.59 2,532,000 0.59 1,266,000 0.59 8
0.63 -- 3.00 526,749 1.03 519,793 1.04 6
3.06 1,000 3.06 1,000 3.06 6
9.50 500 9.50 500 9.50 4
--------- ------ --------- ----- --
Options outstanding at December 31, 2001 8,830,457 0.38 4,601,918 0.42 7
========= ====== ========= ===== ==
42
Fair Value of Stock Options and Employee Purchase Rights
The Company has four stock option plans, which reserve shares of common
stock for issuance to employees, officers, directors, and consultants. The
Company applies APB Opinion 25 and related interpretations in accounting for its
plans.
For the Stock Option Plans, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1999, 2000, and
2001, respectively: dividend yield of 0% in all three years; expected life of 4
years for each year; expected volatility of 310%, 705%, and 342%; and risk-free
interest rates of 5.75%, 4.74%, and 4.34% for 1999, 2000, and 2001,
respectively. The weighted-average fair value of those stock options granted in
1999, 2000, and 2001 was $0.40, $0.27, and $0.07 per option, respectively.
The fair value of the employees' purchase rights for the Purchase Plan,
which was initiated on February 28, 1996, was estimated at the beginning of the
offering period using the Black-Scholes option pricing model with the following
assumptions used for 1999, 2000 and 2001, respectively: dividend yield of 0%; an
expected life of six months; expected volatility of 310%, 705%, and 342%; and
risk-free interest rate of 4.8% in 1999, 4.63% in 2000, and 4.06% for 2001. The
weighted-average fair value of these purchase rights granted in 1999, 2000, and
2001 was $0.15, $0.20, and $0.08, respectively, per right.
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its stock
option plans and stock purchase plan, the Company's net loss and loss per share
would have been increased to the following pro forma amounts (in thousands,
except per share amounts):
1999 2000 2001
-------- -------- -------
Net loss applicable to common stockholders, as reported (in thousands) ($16,981) ($10,952) ($8,988)
Net loss applicable to common stockholders, pro forma ($17,881) ($12,827) ($9,656)
Net loss applicable to common stockholders, per share as reported
Basic and diluted ($0.68) ($0.20) ($0.15)
Net loss applicable to common stockholders, per share, pro forma
Basic and diluted ($0.72) ($0.23) ($0.16)
43
NOTE 9 - WARRANTS:
Prior to 1999, in connection with acquiring equipment under capital leases,
the Company issued warrants to the lessors to purchase an aggregate of 628,978
shares of common stock at exercise prices ranging from $0.77 to $8.00 per share.
The estimated value of these warrants at the time of issuance, as determined by
the Company, was amortized as interest expense over the period the leases were
outstanding.
Prior to 1999, in connection with bank debt and various loan agreements,
the Company issued warrants to the lenders to purchase an aggregate of 202,483
shares of common stock at exercise prices ranging from $3.30 to $4.60. The
estimated value of these warrants at the time of issuance, as determined by the
Company, was amortized as interest expense over the terms of the loans.
As part of the April 1999 restructuring of secured debt, certain creditors
were issued warrants to purchase a total of 1,500,000 shares of common stock at
a price of $0.1236 per share. In addition, warrants to purchase a total of
244,345 shares of common stock held by secured creditors were repriced from
exercise prices ranging from $0.77 to $3.30 per share of common stock to $0.1236
per share. The fair value as determined using a Black-Scholes valuation model of
the warrants issued and the incremental value of the repriced warrants was
$790,000. The value of the warrants and incremental value of the repriced
warrants was offset against the outstanding debt.
Outstanding warrants total 2,331,461 shares, of which 150,490 are
exercisable at December 31, 2001. The remaining warrants become exercisable
during 2002 (10,000 shares), 2003 (100,000 shares), 2004 (401,717 shares), 2005
(269,254 shares) and 2006 (1,400,000 shares).
NOTE 10 - INCOME TAXES:
In 1999, 2000 and 2001, the Company incurred net operating losses and
recorded no provision for income taxes. The income tax benefit for the year
ended December 31, 2001, represents the reversal of an over accrual of income
taxes resulting from a change in accounting estimate.
Deferred income tax assets comprise the following (in thousands):
December 31,
---------------------
2000 2001
-------- --------
Federal and state credit carryforwards $ 2,676 $ 2,676
Federal and state net operating loss carryforwards 21,930 26,106
Provision for impaired assets 8,021 8,017
Leases, treated as operating for tax (2,396) (2,396)
Depreciation (3,994) (209)
Reserves and accruals 1,506 1,379
Other (320) 2
-------- --------
Deferred tax assets 27,423 35,575
Less valuation allowance (27,423) (35,575)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
Management believes that sufficient uncertainty exists with regard to the
realizability of these tax assets such that a full valuation allowance is
necessary. These factors include the lack of a significant history of consistent
profits and a lack of carryback capacity to realize these assets. Based on the
absence of objective evidence, management is unable to assert that it is more
likely than not that the Company will generate
44
sufficient taxable income to realize the Company's net deferred tax assets. The
valuation allowance increased by $15,238,000 and $8,152,000 in 2000 and 2001,
respectively.
At December 31, 2001, the Company had federal and state net operating loss
and tax credit forwards ("NOLs") of approximately $71,000,000 and $31,000,000,
respectively, which can be used to reduce future taxable income. The federal
NOLs, state NOLs and federal and state credits expire through 2020, 2010 and
2019 respectively, if not utilized. The availability and timing of these carry
forwards to offset the taxable income maybe limited due to the occurrence of
certain events, including change of ownership.
The Tax Reform Act of 1996 limits the use of NOLs in certain situations
where changes occur in the stock ownership of a company. The Company experienced
such an ownership change as a result of the Company's initial public offering in
1996, resulting in a limitation of the annual utilization of the NOLs generated
through the date of the initial public offering. Another such ownership change
was experienced as a result of the issuance of Series A and B convertible
preferred stock in 1999 and 2000 (Note 7), respectively, resulting in a
limitation of the annual utilization of the NOLs generated through the date of
issuance of Series A and Series B convertible preferred stock.
NOTE 11 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
Concentration of credit risk
The Company performs ongoing credit evaluations of its customers, which are
semiconductor companies, and maintains reserves for estimated credit losses.
Write-offs of accounts receivable were insignificant in all periods presented.
At December 31, 2000, three customers accounted for 21%, 20% and 13%,
respectively of total accounts receivable. At December 31, 2001, three customers
accounted for 24%, 10%, and 9%, respectively of total accounts receivable. For
the year ended December 31, 1999, the Company had two major customers account
for 30% and 15% of its revenue, respectively. In 2000 and 2001, the Company had
one major customer account for 32% and 14% of its revenue, respectively.
NOTE 12 - SEGMENTS
The Company has two segments: manufacturing and distribution. Manufacturing
comprises the semiconductor packaging services of packages designed for assembly
using Surface Mount Technology ("SMT") in which leads on integrated circuits are
soldered to the surface of the printed circuit board. Within the SMT market, the
Company focuses on high pin-count packages, such as Quad Flat packages ("QFP")
and thin Quad Flat packages ("TQFPs"). Distribution comprises of the North
American sales, marketing and technical support organization for OSE.
Commissions are earned from the sales for the semiconductor assembly and test
services of OSE. The customers are mainly US headquartered manufacturers of
high-tech products such as video components, chip sets, graphics chips and logic
components.
45
Manufacturing Distribution Eliminations Total
------------- ------------ ------------ --------
2001
Revenues $ 7,150 $ 4,615 -- $ 11,765
Interest income 1 1,198 (1,113) 86
Interest expense (2,385) 1,113 (1,272)
Depreciation and amortization 2,780 753 -- 3,533
Net income (loss) (9,855) 1,756 -- (8,099)
Accounts receivable, net 808 15,179 -- 15,987
Total assets 12,194 21,186 (4,708) 28,672
Expenditures for additions to long-lived assets $ 276 $ 14 -- $ 290
2000:
Revenues $ 16,521 $ 7,646 -- $ 24,167
Interest income 12 591 (456) 147
Interest expense (2,292) -- 456 (1,836)
Depreciation and amortization 3,691 751 -- 4,442
Net income (loss) (14,704) 4,165 -- (10,539)
Accounts receivable, net 1,446 21,421 -- 22,867
Total assets 16,072 34,090 (9,485) 40,677
Expenditures for additions to long-lived assets $ 2,518 $ 45 -- $ 2,563
1999:
Revenues $ 16,227 $ 1,214 -- $ 17,441
Interest income 60 12 -- 72
Interest expense (1,555) -- -- (1,555)
Depreciation and amortization 4,355 123 -- 4,478
Extraordinary gain 2,047 -- -- 2,047
Net income (loss) (10,627) 754 -- (9,873)
Accounts receivable, net 2,701 25,594 -- 28,295
Total assets 20,446 35,910 (4,708) 51,648
Expenditures for additions to long-lived assets $ 606 $ 2 -- $ 608
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company is a member of a group of affiliated companies owned by Orient
Semiconductor Electronics, Ltd of Taiwan ("OSE"). Significant related party
transactions with OSE and its affiliates are as follows:
Guarantor of Debt
OSE is guarantor for a debt agreement outlined in Note 6.
Acquisition of OSEI
OSE was a significant shareholder in OSEI. Accordingly, when the Company
acquired OSEI, as outlined in Note 4, OSE received approximately 4.9 million
shares of the Company's common stock for its shares in OSEI.
Distributor
All the revenue of OSEI, the Company's subsidiary, is earned as a result of
being a distributor for OSE. The revenue under the distribution agreement is
based on a fixed percentage of the value of the semiconductor
46
assembly and test services provided to customers in OSEI's distribution area of
entities headquartered in North America. For the years ended December 31, 1999,
2000, and 2001, OSEI distributed $23.1 million, $151.3 million, and $96.2
million in product and services for OSE and affiliates and sold such products
and services to its customers for $24.3 million, $158.9 million, and $100.8
million, respectively. Accordingly, OSEI recorded revenue of $1.2 million, $7.6
million, and $4.6 million in 1999, 2000, and 2001, respectively. Under the
distribution agreement, OSEI is required to remit amounts collected from
customers, less its commission, to OSE. Pursuant to the amended line of credit
agreement (Note 6), however, payments from customers are to be remitted directly
to the lender. As of December 31, 2001, accounts receivable includes
approximately $28.0 million, that when collected, is due to OSE pursuant to the
distribution agreement. While OSEI is responsible for the collection of accounts
receivable from its customers, it has obtained certain guarantees from OSE,
which reduce OSEI's exposure to credit risk. OSEI normally makes payments to OSE
for purchases after OSEI has collected the related accounts receivable from its
customer.
Sublease With Affiliate
The Company has a sublease with an affiliate Company as outlined in Note 5.
Preferred Series A and Series B Stock
The Company sold Series A and Series B stock to OSE as outlined in Note 7.
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
YEAR ENDED DECEMBER 31, 2001 First Second Third Fourth Total
- ------------------------------------------ ----------- ----------- ---------- ----------- -----------
Revenues $3,614 $3,152 $2,670 $2,329 $11,765
Gross profit (loss) $121 ($380) ($577) ($126) ($962)
Net loss applicable to common shareholders ($2,239) ($2,375) ($2,472) ($1,902) ($8,988)
Net loss per common share ($0.04) ($0.04) ($0.04) ($0.03) ($0.15)
Stock price
High $0.16 $0.13 $0.12 $0.05 $0.16
Low $0.05 $0.04 $0.02 $0.02 $0.02
Quarter end close $0.06 $0.05 $0.05 $0.03 $0.03
YEAR ENDED DECEMBER 31, 2000
- ------------------------------------------
Revenues $7,075 $7,003 $5,794 $4,295 $24,167
Gross profit (loss) 468 821 (220) (19) 1,050
Net loss applicable to common shareholders ($2,006) ($2,014) ($3,923) ($3,009) ($10,952)
Net loss per common share ($0.04) ($0.04) ($0.07) ($0.05) ($0.20)
Stock price
High $0.66 $0.58 $0.47 $0.37 $0.66
Low $0.37 $0.21 $0.16 $0.06 $0.06
Quarter end close $0.37 $0.23 $0.27 $0.08 $0.08
47
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
None
48
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the "Proxy Statement"), not later than 120
days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers - See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
14(a) Exhibits
Exhibit
Number Description of Document
- ------------ ----------------------------------------------------------------
3.1! Restated Articles of Incorporation.
3.4! Bylaws, as amended.
10.1! Form of Indemnification Agreement
10.2!* 1993 Stock Option Plan and form of Stock Option Agreement.
10.3!* 1996 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4!* 1996 Director Stock Option Plan and form of Stock Option
Agreement.
10.5! Registration Rights Agreement dated March 24, 1993, as amended.
49
10.6! Warrant to Purchase Series A Preferred Stock, issued to MMC/GATX
Partnership No. 1 as of October 7, 1993, as amended.
10.7! Warrant to Purchase Series A Preferred Stock, issued to Phoenix
Leasing Incorporated as of October 7, 1993.
10.8! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of March 10, 1994.
10.9! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.10! Warrant to Purchase Series A Preferred Stock, issued to Silicon
Valley Bank as of July 10, 1995.
10.11! Warrant to Purchase Series A Preferred Stock, issued to The CIT
Group/Equipment Financing, Inc. as of September 15, 1995.
10.12! Warrant to Purchase Series A Preferred Stock, issued to
Comdisco, Inc. as of January 3, 1996.
10.13!!! Warrant to Purchase Common Stock, issued to MMC/GATX Partnership
No. 1, dated September 5, 1997.
10.14!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.15!!! Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated September 5, 1997.
10.16!!! Lease Agreement dated November 1, 1997, between the Company and
Jaswinder S. Saini and Surinder K. Saini.
10.17!!!! Purchase and Sale Agreement dated November 20, 1997, between the
Company and Lincoln Property Company N.C., Inc.
10.18!!!! Lease Agreement dated January 20, 1997, between the Company and
Lincoln Property Company N.C., Inc.
10.19* 1997 Nonstatutory Stock Options Plan and form of Stock Option
Agreement.
10.20!!!!! Warrant to Purchase Stock, issued to Silicon Valley Bank as of
December 31, 1997.
10.21!!!!!!! Promissory Note dated July 23, 1999, between the Company and
Bank SinoPac
10.22!!!!!!!! Loan and Security Agreement dated as of September 17, 1999,
between the Company and Bank SinoPac and Far East National Bank.
10.23** Exclusive Sales Distributor Agreement between OSE, Inc. and
Orient Semiconductor Electronics Limited dated as of October 29,
1999.
10.24!!!!!!!! Amendment to Loan and Security Agreement dated as of September
17, 1999 between the Company and Bank SinoPac, Los Angeles
Branch and Far East National Bank.
10.25!!!!!!!! Amendment to Business Loan Agreement and Promissory Note dated
as of November 8, 1999 between the Company and Bank SinoPac.
10.26*** Amendment to Warrant to Purchase Common Stock, issued to
Transamerica Business Credit Corporation, dated May 1, 1999.
10.27*** Warrant to Purchase Common Stock, issued to Transamerica
Business Credit
50
Corporation, dated May 1, 1999.
10.28*** Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated May 1, 1999.
10.29*** Amendment to Warrant to Purchase Series A Preferred Stock,
issued to MMC/GATX Partnership No. 1, dated May 1, 1999.
10.30*** Amendment to Warrant to Purchase Common Stock, issued to
MMC/GATX Partnership No. 1, dated May 1, 1999.
10.31*** Warrant to Purchase Common Stock, issued to MMC/GATX Partnership
No. 1, dated May 1, 1999.
10.32**** Certificate of Designation for the Company's Series A Stock
10.33***** Business Loan Agreement and Promissory Note, dated March 23,
2000 between the Company and Bank Sino Pac, Los Angeles Branch
10.34***** Amendment to Business Loan Agreement and Promissory Note, dated
March 23, 2000 between the Company and Sino Pac, Los Angeles
Branch
10.35***** Acquisition of OSEI, filed on May 11, 2000
10.36 Change in Terms Agreement, dated July 26, 2000 between the
Company and Bank Sino Pac, Los Angeles Branch.
10.37 Change in Terms Agreement, dated September 21, 2000 between the
Company and Bank Sino Pac, Los Angeles Branch.
10.38 Change in Terms Agreement, dated September 29, 2000 between the
Company and Far East National Bank.
10.39 Change in Terms Agreement, dated October 29, 2000 between the
Company and Bank Sino Pac, Los Angeles Branch.
10.40 Change in Terms Agreement, dated October 31, 2000 between the
Company and Far East National Bank.
10.41 Amended and Restated Loan and Security Agreement dated December
1, 2000 between the 1 Company and Bank Sino Pac, Los Angeles
Branch and Far East National Bank.
10.42 Business Loan Agreement, dated November 29, 2000 between the
Company and Bank Sino Pac, Los Angeles Branch
10.43 Certificate of Designation, dated December 21, 2000 for the
Company's Series B Convertible Preferred Stock.
10.44 Amendment to loan and security agreement dated August 15, 2001
between the Company and Bank Sino Pac, Los Angeles Branch and
Far East National Bank.
10.45 Letter dated march 27, 2002 from Bank Sino Pac, Los Angeles
Branch substantiating the renewal of the line of credit.
23.1 Consent of Grant Thornton LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney.
- ------------- ----------------------------------------------------------------
! Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (file no. 333-326-LA), as amended, filed
on January 17,1996.
!! Incorporated by reference from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
!!! Incorporated by reference from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.
51
!!!! Incorporated by reference from the Registrant's Current Report
on Form 8-K, filed on January 30, 1997.
!!!!! Incorporated by reference from the Registrant's Annual Report on
Form 10-K, for the year ended December 31, 1997.
!!!!!! Incorporated by reference from the Registrant's Annual Report on
Form 10-K, for the year ended December 31, 1998.
!!!!!!! Incorporated by reference from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 4, 1999.
!!!!!!!! Incorporated by reference from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended October 3, 1999.
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form.
** Incorporated by reference to the Company's Current Report on
Form 8-K filed on November 15, 1999.
*** Incorporated by reference from the Registrant's Annual Report on
Form 10-K, for the year ended December 31, 1999.
**** Incorporated by reference from the Registrant's Current Report
on Form 8-KA, filed on May 7, 1999
***** Incorporated by reference from the Registrant's Quarterly Report
on 10-Q for the quarter ended April 2, 2000.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Item 14(a) hereof.
52
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on March 29, 2002.
OSE USA, Inc.
By: /s/ EDMONG TSENG
----------------
Edmond Tseng
Chairman, President, Chief Executive Officer
and Director
By: /s/ ELTON LI
------------
Elton Li
Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Edmond Tseng and Elton Li, and
each of them acting individually, as his attorney-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
In accordance with the Exchange Act, this report has been signed below on
March 15, 2002 by the following persons on behalf of the Registrant and in the
capacities indicated.
/s/ EDMOND TSENG Chairman, President, Chief Executive Officer,
Edmond Tseng and Director
(Principal Executive Officer)
/s/ ELTON LI Chief Accounting Officer
Elton Li (Principal Accounting Officer)
/s/ DONALD W. BROOKS Director
Donald W. Brooks
/s/ EDWARD S. DUH Director
Edward S. Duh
/s/ CALVIN LEE Director
Calvin Lee
/s/ PATRICK VERDERICO Director
Patrick Verderico
53