Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 30, 2003

OR

For the transition period from                  to                 

Commission file number: 0-27712

OSE USA, Inc.

(Exact name of registrant as specified in its charter)

(408) 321-3600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12B-2 of the Exchange Act).  Yes  ¨    No  x

Number of shares of common stock outstanding as of April 10, 2003: 56,725,808. As of April 10, 2003 the Company also had 3,000,000 shares of Series A Convertible Preferred Stock and 3,023,225 shares of Series B Convertible Preferred Stock, outstanding, which are convertible at any time by the holder into 41,246,312 shares and 41,565,626 shares, respectively, of common stock.

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

OSE USA, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

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

3

Table of Contents

OSE USA, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

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

4

Table of Contents

OSE USA, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

5

Table of Contents

OSE USA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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 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. The Company also provides advanced design and assembly services to satisfy its customers’ requirements. On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. The Company plans to sell the entire manufacturing segment to a third party or liquidate the assets through an auction house and use the net proceeds to pay down or reduce the liabilities of the segment. Any excess proceeds or remaining liabilities will remain with the Company.

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. The Company is also the exclusive North American sales and marketing organization for an affiliated company, Orient Semiconductor Electronics Philippines, Inc. (“OSEP”). Distribution revenues are derived exclusively from fees received on the sales of OSE and OSEP semiconductor assembly and test services to customers headquartered in North America, in accordance with a distribution agreement.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not have the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three-month periods ended March 30, 2003 and March 31, 2002 are not necessarily indicative of the results that may be expected for any subsequent period or for the entire year ending December 31, 2003.

The Company has experienced fluctuating levels of demand and ongoing net operating losses and has a negative stockholders’ equity of $39.6 million as of March 30, 2003. Furthermore, the Company had a line of credit in the amount of $15 million, which expired on February 15, 2003. The line of credit is currently operating under a letter of understanding dated March 28, 2003. Pursuant to the letter of understanding, payments from customers will continue to be remitted directly to the lender and the Company will provide a borrowing base calculation to the banks on a weekly basis. The Company is allowed to use the extra portion of the cash if total cash plus the borrowing base exceeds the outstanding loan balance from the collection of

6

Table of Contents

its accounts receivable. The Company is required to pay off the outstanding balance by September 28, 2003. The line of credit is currently guaranteed by OSE. As a result of these circumstances, the Company’s independent accountants’ opinion on the Company’s December 31, 2002 consolidated financial statements included an explanatory paragraph to indicate that these matters raise substantial doubt about this Company’s ability to continue as a going concern.

NOTE 2.    NEW ACCOUNTING STANDARDS:

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This Statement amends SFAS No. 123, “Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this Standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.

The Company accounts for stock-based awards to employees using the intrinsic value method. Accordingly, no compensation expense has been recognized in the accompanying consolidated financial statements for stock-based awards to employees when the exercise price of the award is equal to or greater than the quoted market price of the stock on the date of grant. The fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s fair value calculations for awards from stock option plans were made using the Black-Scholes option pricing model with the following weighted average assumptions:

7

Table of Contents

If the computed fair values of the stock-based awards had been amortized to expense over the vesting period of the awards, net loss and net loss per share, basic and diluted, would have been as follows (in thousands, except per share amounts):

NOTE 3.    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. On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. The Company plans to sell the entire manufacturing segment to a third party or sell the assets through an auction house. The Company performed an analysis on its inventory and determined that a $344,000 charge to operations was necessary to reduce the carrying value to the inventory’s estimated net realizable value, less costs to sell.

NOTE 4.    LONG-LIVED ASSETS IMPAIRMENT:

On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. The Company plans to sell the entire manufacturing segment to a third party or liquidate the assets through an auction house. The Company performed an analysis on its long-lived assets as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” assuming that the assets would be held and used in the operations of the Company. The results from the analysis indicated no impairment to the long-lived assets as of March 30, 2003.

NOTE 5.    ACCOUNTS RECEIVABLE:

The majority of the Company’s accounts receivable are due from semiconductor companies. Credit is extended based on evaluation of the customers’ financial condition and, generally, collateral is not required. A majority of accounts receivable are due within 30 days and are stated net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past

8

Table of Contents

due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Changes in the Company’s allowance for doubtful accounts are as follows:

NOTE 6.    INCOME TAXES:

A provision for income taxes was recorded for the three-month period ended March 30, 2003. Even though the Company expects to operate at a loss for the year, a state income tax liability has been accrued on tax criteria set by the state of Massachusetts. The Company believes the realization of its deferred tax asset is unlikely and accordingly has recorded an offsetting valuation allowance.

NOTE 7.    NET LOSS PER SHARE:

Net loss per basic and diluted share for the three month periods ended March 31, 2002 and March 30, 2003 was computed using the weighted average number of common shares outstanding during the periods but excluded the dilutive potential common shares from assumed conversions because of their anti-dilutive effect. Dilutive potential common shares include conversion of preferred shares (Note 9), and outstanding stock options and warrants (using the treasury stock method). At March 30, 2003, there were options and warrants to purchase an aggregate of 10,750,345 shares of Common Stock. At March 31, 2002, there were options and warrants to purchase an aggregate of 11,048,565 shares of Common Stock.

9

Table of Contents

NOTE 8.    BANK DEBT:

The Company had a line of credit in the amount of $15 million, which expired on February 15, 2003. The Company is required to pay off the outstanding balance by September 28, 2003. Borrowings under this line of credit accrue interest at the banks’ prime rate plus 0.50% and are collateralized by the assets of the Company and are guaranteed by OSE.

At March 30, 2003, the Company had borrowings of approximately $10.0 million, which exceeded the Company’s borrowing base of $7.3 million. The shortfall of $2.7 million was covered by the restricted cash balance the Company had with the bank (defined as restricted cash on balance sheet as of March 30, 2003). The Company subsequently paid down the loan by $2.4 million on April 25, 2003. As result, the borrowing was reduced to $7.6 million.

NOTE 9.    CONVERTIBLE PREFERRED STOCK:

As of March 30, 2003, the Company had 3,000,000 shares of Series A convertible preferred stock, and 3,023,225 shares of Series B convertible preferred stock outstanding. Each share of Series A and Series B Preferred is convertible into 13.7487705 shares of the Company’s common stock at the option of the holders.

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 semi-annually on January 1 and July 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 holders of the Series A Preferred and Series B Preferred are entitled to the payment of $1.70 and $1.98 per share, respectively, in the event of any liquidation, dissolution, or winding up of the Company, including any consolidation, merger or other reorganization whereby the existing shareholders of the Company own less than 50% of the Company’s voting power subsequent to the transaction.

On August 9, 2002, the Company executed an agreement pursuant to which it rescinded its previous distribution of common shares issued from July 1999 through January 2002 to its majority shareholder, OSE, in settlement of a preferred dividend obligation of $1.6 million. Under the terms of the agreement, OSE returned to the Company certificates representing 26,344,391 shares of the Company’s common stock. In accordance with the terms and conditions of the Certificate of Designation for the Company’s Series A and Series B Preferred Stock, the Company agreed to accrue interest on the unpaid preferred dividends. The decision to rescind the previous payment of dividends was made after the Company was advised by its counsel (and also by special counsel engaged for this purpose) that the Company’s surplus and earnings may have been insufficient to support the payment of the dividends under the law of Delaware, the Company’s state of incorporation. Dividends and interest on unpaid dividends of approximately $2.76 million and $3.03 million are included in accrued liabilities as of December 31, 2002 and March 30, 2003, respectively.

NOTE 10.    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

10

Table of Contents

(“QFPs”) and thin quad flat packages (“TQFPs”). Distribution comprises the North American sales, marketing and technical support organization for OSE and OSEP. Commissions are earned from the sales for the semiconductor assembly and test services of OSE and OSEP. Customers for both segments are mainly US headquartered manufacturers of high-tech products such as video components, chip sets, graphics chips and logic components.

On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. Please see Note 11 for details.

NOTE 11.    SUBSEQUENT EVENT:

The Company’s manufacturing segment has posted significant net losses since 1997 and especially during the recent years of general decline in the technology sector. The Company has suffered substantial net loss as a result of reduced revenue and underutilized manufacturing capacity. Therefore, on April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. The Company plans to sell the entire manufacturing segment to a third party or liquidate the assets through an auction house and use the net proceeds to pay down or reduce the liabilities of the segment. Any excess proceeds or remaining liabilities will remain with the distribution segment.

11

Table of Contents

NOTE 12.    RESTATEMENT

In 2002, the Company began to investigate data that suggested that the underlying information supporting its fixed assets did not reconcile to amounts recorded on the Company’s financial statements. The Company completed the investigation and determined that depreciation expense for the year ended December 31, 2001 was understated by $1,222,000; and the net book value of property and equipment was overstated by a like amount. As a result, the Company restated its fiscal year 2001 financial statements and the 2002 and 2001 unaudited quarterly financial statements.

Unaudited Quarterly Consolidated Statement of Operations (In thousands, except per share data)

12

Table of Contents

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 below and elsewhere in this Report on Form 10-Q.

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 revenue and underutilization of capacity and the resulting under-absorption of fixed costs resulted in operating losses that continued through the first quarter of 2003. As a result of these and other related circumstances, the Company’s independent accountants’ opinion on the Company’s December 31, 2002 financial statements included an explanatory paragraph indicating that these matters raise substantial doubt about the Company’s ability to continue as a going concern.

OSE, Inc. (“OSEI”) serves as the exclusive North American distributor for OSE, a public Taiwanese company and the Company’s principal stockholder. OSEI also serves as the exclusive North American distributor for the affiliated company OSE Philippines (“OSEP”). OSEI derives its revenues exclusively from fees received on the sales of OSE’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America.

The Company’s business is substantially affected by market conditions in the semiconductor industry, which is highly cyclical and currently, is subject to a significant economic downturn characterized by reduced product demand, rapid erosion of average selling prices and excess production capacity. In addition, rapid technological change, evolving industry standards, intense competition and fluctuations in end-user demand characterize the markets for integrated circuits. Since the Company’s business is entirely dependent on the requirements of semiconductor companies for independent packaging foundries, any future downturn in the semiconductor industry is expected to have an adverse effect on the Company’s business, financial condition and results of operations. These general industry conditions continue to affect the Company’s business for the three months ended March 30, 2003. Furthermore, since the Company’s expense levels are based in part on anticipated future revenue levels, if revenue were to fall below anticipated levels, the Company’s operating results would be materially adversely affected.

For the three months ended March 30, 2003 compared with the preceding quarter, the manufacturing segment of the Company has experienced a decrease in the average selling price for its services and an increase in production volume. However, average selling price for the three months ended March 30, 2003 was 8% higher than the average selling price for fiscal year 2002. Both the distribution and manufacturing segments are subject to intense competitive conditions. A decline in average selling prices of the Company’s services, if not offset by reductions in the cost of performing those services, would further decrease the Company’s gross margins and materially and adversely affect the Company’s business, financial condition and results of operations. .

Manufacturing Segment Closure

On April 21, 2003, the Company announced its planned closure of the manufacturing segment by the end of June 2003. The Company expects that revenues and costs related to the manufacturing activities will be

13

Table of Contents

greatly reduced if not eliminated Approximately one hundred employees in total will be affected by the closure.

During the interim period, the Company will continue to fulfill final customer orders and complete work in progress. After, the Company intends to liquidate its assets and close down the facility. The business activities of the distribution segment conducted under the Company’s subsidiary company OSEI will continue.

On May 6, 2003, the Company filed an 8-K report with pro forma financial statements announcing the intended action and its expected impact on the Company’s financial condition and results of operations. Please see filing for details.

Revenues

The Company’s manufacturing operating segment generally recognizes revenues upon shipment of its products. The distribution segment earns revenue through a distributor agreement with OSE where revenues are derived from fees received on the sales of OSE’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America and revenues are recognized on a net commission basis.

Revenues decreased 20% to $2.0 million for the three-month period ended March 30, 2003 from $2.5 million for the three-month period ended March 31, 2002.

Revenues for the three month period ended March 30, 2003 for the manufacturing segment were $1.2 million compared with $1.5 million for the comparable period in the prior fiscal year. The decrease in revenues for the manufacturing segment are primarily due to decreased orders from customers as a result of the general slowdown in the semiconductor industry.

Revenues for the three month period ended March 30, 2003 for the distribution segment were $0.8 million compared with $1.0 million for the comparable period in the prior fiscal year as a result of the general slowdown in the semiconductor industry.

Gross Profit (Loss)

Cost of revenues includes materials, labor, depreciation and overhead costs associated with semiconductor packaging. Gross loss for the three-month period ended March 30, 2003 was $0.7 million compared with a gross loss of $28,000 for the comparable period in the prior fiscal year. Gross loss as a percentage of revenues was 33% for the three-month period ended March 30, 2003, compared to gross loss as a percentage of revenues of 1% for the comparable periods in the prior fiscal year. This increase in gross loss for the three-month period ended March 30, 2003 was primarily the result of lower revenue for the manufacturing segment of $0.3 million and a $0.4 million additional inventory reserve recorded in the three-month period ended March 30, 2003.

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 accounting costs. Selling, general and administrative expenses decreased 8% to $1.2 million for the three-month period ended March 30, 2003 compared with $1.3 million for the three-month period ended March 31, 2002.

14

Table of Contents

As a percentage of revenues, selling, general and administrative expenses increased from 53% for the three-month periods ended March 31, 2002, to 61% for the three-month period ended March 30, 2003. The increase was due to the lower revenue in 2003.

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 decreased by 41% to $231,000 for the three-month period ended March 30, 2003 from $389,000 over the comparable period in 2002. This decrease is primarily due to decrease in payroll expense and other development spending.

As a percentage of revenues, research and development expenses decreased from 16% for the three-month period ended March 31, 2002, to 11% for the three-month period ended March 30, 2003. This percentage decrease was primarily due to lower spending in 2003.

Interest and Other Income

Interest income is primarily comprised of interest earnings from investments in cash equivalents. Interest and other income increased from $17,000 for the three-month period ended March 31, 2002 to $341,000 for the three-month period ended March 30, 2003. The increase was generated from $322,000 disposal gain from equipment sales during the quarter.

Interest Expense

Interest expense consists of interest payable on bank debt. Interest expense was $149,000 for the three-month period ending March 31, 2002 and $119,000 for the three-month period ended March 30, 2003. The decrease in interest expense was due to a reduction in bank debt and interest rates.

Provision for Income Taxes

The Company record $2,000 provision for income tax for the three-month period ended March 30, 2003 for Massachusetts state income tax.

Liquidity and Capital Resources

During the three month period ended March 30, 2003, the Company’s net cash provided by operations was $2.6 million. Net cash provided by operations was comprised primarily of a net loss of $1.9 million, offset by $0.4 million of non-cash charges for depreciation and amortization, a $0.3 million gain on equipment disposal, a $0.1 million gain on sale of facility, and a $4.5 million net increase in working capital items. The net increase in working capital items primarily reflected a $2.7 million decrease in accounts receivable, a $0.3 decrease in inventory, a $1.6 million increase in accounts payable, and a $0.1 million decrease in accrued liabilities. At March 30, 2003, the Company had cash and cash equivalents of $1.8 million.

In the three-month period ended March 30, 2003, cash provided by investing activities included $329,000 from equipment sale. Most of the Company’s production equipment has historically been funded either through capital leases or term loans secured by production equipment; however, future expenditures are expected to be funded out of internal cash flow. During the quarter, the Company had $2.7 million of cash restricted resulting from the borrowing base shortfall.

15

Table of Contents

The Company had a line of credit in the amount of $15 million, which expired on February 15, 2003. The line of credit is currently operating under a letter of understanding dated March 28, 2003. Pursuant to the letter of understanding, payments from customers will continue to be remitted directly to the lender and the Company will provide borrowing base calculation to the banks on a weekly basis. The Company is allowed to use the extra portion of the cash if total cash plus the borrowing base exceeds the outstanding loan balance from the collection of its accounts receivable. The Company is required to pay off the outstanding balance by September 28, 2003. Over advances under this agreement are immediately payable to the lender. Borrowings under this line of credit accrue interest at the banks’ prime rate plus 0.50% and are collateralized by the assets of the Company and are guaranteed by OSE.

Without the line of credit, the Company will require continued financial support from OSE to fulfill operating cash requirements. If OSE does not provide the Company with required cash, the Company will not be able to continue its operations.

On March 30, 2003, the outstanding loan balance was $10.0 million, which exceeded the Company’s borrowing base of $7.3 million. The shortfall of $2.7 million was covered by a restricted cash balance the Company had with the bank. The Company subsequently paid down the loan by $2.4 million on April 25, 2003. As result, the outstanding obligation was reduced to $7.6 million.

On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. The Company plans to sell the entire manufacturing segment to a third party or liquidate the assets through an auction house and use the net proceeds to pay down or reduce the liabilities of the segment. Any excess proceeds or remaining liabilities will remain with the distribution segment. The manufacturing segment has been operating at a loss since 1997; the Company expects that the discontinuance of the manufacturing segment should decrease the Company’s loss and cash requirement from OSE.

Risk Factors

Some of the following detailed risks pertain solely or partially to the manufacturing segment of the Company’s business, and it is expected that such risks will decrease in significance after the Company’s manufacturing operations are closed down.

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 could materially adversely affect the Company’s business, financial condition and results of operations. The Company’s ability to respond to increased orders could also be adversely affected if the Company were not able to obtain increased supplies of key raw materials.

16

Table of Contents

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 could 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

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 demand in other segments. If any of the Company’s significant customers are in a segment that has experienced adverse market conditions, there could 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 behind in developing the required expertise or the introduction of new packaging technologies, or if there were a reduction in or shift away from the packages under development, such events could 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 were to make a valid claim and a license were 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, could 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 September 29, 2002, 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 customers’ commitments, the timing and volume of orders relative

17

Table of Contents

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, the timing of expenditures in anticipation of future orders, the lack of a meaningful backlog, the effectiveness of the Company’s management of production processes, changes in costs and availability of labor, raw materials and components, the costs of obtaining materials on an expedited basis, the 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.

Risk related to political, economic, and military conditions in Taiwan

The Company could 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 distributed by OSEI. 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.

18

Table of Contents

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 distribution segment of the Company will continue to follow the pricing guidelines set by OSE in order to compete in the global market.

On April 21, 2003, the Company announced the planned shut down of its US manufacturing segment on or before June 30, 2003. As a result, the Company will not be competing with other US manufacturers in the North American semiconductor packaging market.

ITEM 3.     QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

With respect to our interest-bearing liabilities, approximately $10 million representing our line of credit outstanding at March 30, 2003 is subject to a variable interest rate (bank’s prime rate plus 0.5%, which was 4.75% as of March 30, 2003). The Company is subject to interest rate risk, and could be subject to increased interest payments if market interest rates fluctuate upward.

The above line of credit agreement expired on February 15, 2003. The bank has informed the Company that the line of credit will not be renewed. The line of credit is currently operating under a letter of understanding dated March 28, 2003. Pursuant to the letter of understanding, payments from customers will continue to be remitted directly to the lender and the Company will provide borrowing base calculation to the banks on a weekly basis. The Company is allowed to use the extra portion of the cash if total cash plus the borrowing base exceeds the outstanding loan balance from the collection of its accounts receivable. The Company is required to pay off the outstanding balance by September 28, 2003. Over advances under this agreement are immediately payable to the lender.

Without the line of credit with local banks, the Company will primarily depend on the cash generated from its operations and the financial support from OSE. If the Company’s operations do not generate sufficient cash and without the financial support from OSE, the Company will not be able to meet its debt obligation and continue its operations.

ITEM 4.     CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic SEC filings is recorded, processed and reported within the time periods specified in the SEC’s rules and forms. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

19

Table of Contents

PART II.    OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

None.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

20

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

21

Table of Contents

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Edmond Tseng, certify that:

Dated: May 13, 2003

/s/    EDMOND TSENG

Edmond Tseng

President, Chief Executive Officer

and Acting Chief Financial Officer

22

Table of Contents

CERTIFICATION OF CHIEF ACCOUNTING OFFICER

I, Elton Li, certify that:

Dated: May 13, 2003

/s/    ELTON LI

Elton Li

Corporate Controller and Chief Accounting Officer

23