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Table of Contents
 
 
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  
 
For the quarterly period ended September 29, 2002
 
OR
 
¨
 
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 incorporation)
  
(I.R.S. Employer
Identification No.)
 
2221 Old Oakland Road
San Jose, CA
  
95131-1402
(Address of principal executive offices)
  
(Zip Code)
 
(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  ¨
 
Number of shares of common stock outstanding as of October 25, 2002: 56,416,212. As of October 25, 2002 the Company also had 3,000,000 shares of Series A Convertible Preferred Stock and 3,023,255 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
 
         
Page
Part I.
   
Financial Information
     
Item 1.
   
Financial Statements
     
       
3
       
4
       
5
       
6
Item 2.
      
12
Item 3.
      
18
Item 4.
      
18
Part II.
   
Other Information
     
Item 1.
      
19
Item 4.
      
19
Item 6.
      
19
  
20
  
21
  
22

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Table of Contents
 
PART I.    FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
OSE USA, Inc.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
 
    
September 29,
2002
     
December 31,
2001
  
    
(unaudited)
         
Assets
                  
Current assets:
                  
Cash and cash equivalents
   
$
737
 
   
$
1,844
 
Accounts receivable, net of allowance for doubtful accounts of $146 and $307, respectively
   
 
16,210
 
   
 
15,987
 
Inventory
   
 
697
 
   
 
855
 
Prepaid expense and other current assets
   
 
388
 
   
 
331
 
    
  
Total current assets
   
 
18,032
 
   
 
19,017
 
Property and equipment, net
   
 
3,402
 
   
 
5,448
 
Intangible assets, net
   
 
2,531
 
   
 
4,198
 
Other assets
   
 
7
 
   
 
9
 
    
  
Total assets
   
$
23,972
 
   
$
28,672
 
    
  
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
                  
Current liabilities:
                  
Bank debt and notes payable
   
$
10,613
 
   
$
11,557
 
Accounts payable
   
 
366
 
   
 
630
 
Accounts payable—related parties
   
 
31,953
 
   
 
27,958
 
Accrued dividends and interest
   
 
2,492
 
   
 
444
 
Accrued expenses and other liabilities
   
 
1,325
 
   
 
1,534
 
    
  
Total current liabilities
   
 
46,749
 
   
 
42,123
 
Deferred gain on sale of facilities
   
 
733
 
   
 
836
 
    
  
Total liabilities
   
 
47,482
 
   
 
42,959
 
    
  
Redeemable convertible preferred stock, $0.001 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; liquidation preference: Series A: $1.70 per share, Series B: $1.98 per share
   
 
11,100
 
   
 
11,100
 
    
  
Stockholders’ deficit:
                  
Common stock, $.001 par value; 300,000,000 shares authorized; 56,416,212 (2002) and 67,153,375 (2001) shares issued and outstanding
   
 
56
 
   
 
67
 
Additional paid-in capital
   
 
54,239
 
   
 
55,596
 
Accumulated deficit
   
 
(88,905
)
   
 
(81,050
)
    
  
Total stockholders’ deficit
   
 
(34,610
)
   
 
(25,387
)
    
  
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit
   
$
23,972
 
   
$
28,672
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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OSE USA, Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
    
Three Months Ended
     
Nine Months Ended
  
    
Sept. 29, 2002
     
Sept. 30, 2001
     
Sept. 29, 2002
     
Sept. 30, 2001
  
Revenues
   
$
2,791
 
   
$
2,670
 
   
$
7,958
 
   
$
9,437
 
Cost of revenues
   
 
2,985
 
   
 
3,247
 
   
 
8,541
 
   
 
10,272
 
    
  
  
  
Gross profit (loss)
   
 
(194
)
   
 
(577
)
   
 
(583
)
   
 
(835
)
    
  
  
  
Operating expenses:
                                    
Selling, general & administrative
   
 
1,278
 
   
 
1,240
 
   
 
3,771
 
   
 
3,743
 
Research & development
   
 
277
 
   
 
264
 
   
 
967
 
   
 
950
 
    
  
  
  
Total operating expenses
   
 
1,555
 
   
 
1,504
 
   
 
4,738
 
   
 
4,693
 
    
  
  
  
Operating loss
   
 
(1,749
)
   
 
(2,081
)
   
 
(5,321
)
   
 
(5,528
)
Interest and other income
   
 
67
 
   
 
58
 
   
 
152
 
   
 
185
 
Interest expense
   
 
(218
)
   
 
(225
)
   
 
(582
)
   
 
(1,074
)
Provision for tax
   
 
(28
)
            
 
(38
)
         
    
  
  
  
Net loss before cumulative effect of a change in accounting principle
   
 
(1,928
)
   
 
(2,248
)
   
 
(5,789
)
   
 
(6,417
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
(1,400
)
   
 
—  
 
    
  
  
  
Net loss
   
 
(1,928
)
   
 
(2,248
)
   
 
(7,189
)
   
 
(6,417
)
Preferred stock dividend
  
 
439
 
   
 
224
 
   
 
883
 
   
 
667
 
    
  
  
  
Net loss applicable to common stockholders
   
$
(2,367
)
   
$
(2,472
)
   
$
(8,072
)
   
$
(7,084
)
    
  
  
  
Per share data:
                                    
Net loss per share applicable to common stockholders before cumulative effect of a change in accounting principle
                                    
Basic and diluted
   
$
(0.03
)
   
$
(0.04
)
   
$
(0.08
)
   
$
(0.12
)
Cumulative effect of a change in accounting principle
                                    
Basic and diluted
   
 
—  
 
   
 
—  
 
   
 
(0.02
)
   
 
—  
 
    
  
  
  
Net loss applicable to common stockholders—basic and diluted
   
$
(0.03
)
   
$
(0.04
)
   
$
(0.10
)
   
$
(0.12
)
    
  
  
  
Number of shares used to compute per share data
                                    
Basic and diluted
   
 
73,010
 
   
 
59,452
 
   
 
78,650
 
   
 
59,411
 
    
  
  
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

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OSE USA, Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
    
For Nine Months Ended
  
    
Sept. 29,
2002
     
Sept. 30,
2001
  
Cash flows provided by (used in) operating activities
                  
Net loss
   
$
(7,189
)
   
($
6,417
)
Adjustments:
                  
Depreciation and amortization
   
 
2,349
 
   
 
2,780
 
Cumulative effect of a change in accounting principle
   
 
1,400
 
   
 
—  
 
Gain on sale of facilities
   
 
(103
)
   
 
(211
)
Changes in assets and liabilities:
                  
Accounts receivable
   
 
(223
)
   
 
6,335
 
Inventories
   
 
158
 
   
 
369
 
Other assets
   
 
(55
)
   
 
208
 
Accounts payable and accounts payable—related party
   
 
3,731
 
   
 
1,920
 
Accrued liabilities
   
 
(209
)
   
 
(535
)
    
  
Net cash provided by (used in) operating activities
   
 
(141
)
   
 
4,449
 
    
  
Cash flows from investing activities
                  
Proceeds from disposal of equipment
   
 
—  
 
   
 
115
 
Capital expenditures
   
 
(35
)
   
 
(218
)
    
  
Net cash used in investing activities
   
 
(35
)
   
 
(103
)
    
  
Cash flows from financing activities
                  
Payment on bank debt
   
 
(944
)
   
 
(6,574
)
Proceeds from issuance of common stock, net
   
 
13
 
   
 
38
 
    
  
Net cash provided by (used in) financing activities
   
 
(931
)
   
 
(6,536
)
    
  
Net decrease in cash and cash equivalents
   
 
(1,107
)
   
 
(2,190
)
Cash and cash equivalents at beginning of period
   
 
1,844
 
   
 
3,300
 
    
  
Cash and cash equivalents at end of period
   
$
737
 
   
$
1,110
 
    
  
Supplemental disclosure of cash flow information
                  
Cash paid for interest
   
$
582
 
   
$
1,074
 
Common stock issued for preferred dividends
   
 
0
 
   
 
203
 
Preferred stock dividends and interest accrued
   
$
2,047
 
   
$
0
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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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 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. The Company also provides advanced design and assembly services to satisfy its customers’ requirements.
 
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”). 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.
 
The financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2001 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.
 
The results of operations for the three and nine month periods ended September 29, 2002 and September 30, 2001 are not necessarily indicative of the results that may be expected for any subsequent period or for the entire year ending December 31, 2002.
 
The Company has experienced fluctuating levels of demand and ongoing net operating losses and a negative stockholders’ equity of $34.61 million. The Company has a line of credit in the amount of $15 million that has been extended through February 15, 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, 2001 consolidated financial statements includes an explanatory paragraph to indicate that these matters raise substantial doubt about this Company’s ability to continue as a going concern.

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NOTE 2.  NEW ACCOUNTING STANDARDS
 
In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. The provisions of SFAS 142 provide that goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, not be amortized and, effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives no longer be subject to amortization. The statement also provides that upon initial application the useful lives of previously recognized intangible assets be reassessed and remaining amortization periods adjusted accordingly.
 
The Company’s previously recognized intangible assets consist primarily of the distributor contract with OSE and goodwill. Upon initial application of SFAS 142 as of January 1, 2002, the Company reassessed the useful life of the distributor contract and continued amortizing this intangible asset over its remaining useful life of eight years. Management believes that such amortization reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used.
 
As of January 1, 2002, the Company no longer amortized goodwill, resulting in approximately $93,000 and $278,000 less amortization expense for the three and nine months ended September 29, 2002 compared with the same periods in 2001. The transition provisions of SFAS 142 require the completion of a 2-step transitional impairment test. The Company completed both steps of the transitional impairment test in the second quarter of 2002. Results from the test indicated that the book value of the reporting unit to which goodwill was assigned, exceeded its implied fair value. The Company determined the amount of goodwill impairment by allocating the implied fair value of the reporting unit to its assets and liabilities. The results of this allocation indicated that goodwill was fully impaired. The Company recorded the impairment loss of $1,400,000 as a cumulative change in accounting principle.
 
The following table details the proforma transitional disclosures:
 
    
Three Months Ended
     
Nine Months Ended
  
    
Sept. 29, 2002
     
Sept. 30,
2001
     
Sept. 29, 2002
     
Sept. 30,
2001
  
    
($000 except for earnings-per-share amounts)
  
Reported net loss applicable to common stockholders
   
$
(2,367
)
   
$
(2,472
)
   
$
(8,072
)
   
$
(7,084
)
Add back: Goodwill amortization
            
 
93
 
            
 
278
 
Add back: Cumulative effect of change in accounting principle, net of tax
   
 
—  
 
   
 
—  
 
   
 
1,400
 
   
 
—  
 
    
  
  
  
Adjusted net loss applicable to common stockholders
   
$
(2,367
)
   
$
(2,379
)
   
$
(6,672
)
   
$
(6,806
)
    
  
  
  
Basic and diluted earnings per share:
                                    
Reported net loss applicable to common stockholders
   
$
(0.03
)
   
$
(0.04
)
   
$
(0.08
)
   
$
(0.12
)
Goodwill amortization
                                    
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
0.02
 
   
 
—  
 
    
  
  
  
Adjusted net loss applicable to common stockholders
   
$
(0.03
)
   
$
(0.04
)
   
$
(0.10
)
   
$
(0.12
)
    
  
  
  
 

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NOTE 3.  BALANCE SHEET COMPONENTS:
 
    
Sept. 29,
2002
     
December 31,
2001
  
    
(In thousands)
  
Inventory
                  
Raw materials
   
$
1,566
 
   
$
1,816
 
Work in process
   
 
30
 
   
 
24
 
    
  
Subtotal
   
$
1,596
 
   
$
1,840
 
Allowance for obsolescence
   
 
(899
)
   
 
(985
)
    
  
Total
   
$
697
 
   
$
855
 
    
  
 
NOTE 4.  ACCOUNTS RECEIVABLE:
 
The majority of the Company’s accounts receivable are due from semi-conductor companies. Credit is extended based on evaluation of the customers’ financial condition and, generally, collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management regularly evaluates the allowance for doubtful accounts. The estimated losses are based on the aging of our accounts receivable balances, a review of significant past due accounts, and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
 
While the Company is responsible for the collection of accounts receivable from its customers, it has obtained certain guarantees from OSE, which reduce the Company’s exposure to credit risk. The Company normally makes payments to OSE for purchases after the Company has collected the related accounts receivable from its customer. Credit losses guaranteed by OSE are offset against the accounts payable to related parties on the balance sheet.
 
NOTE 5.  INCOME TAXES:
 
Provision for income taxes was recorded for the three and nine-month periods ended September 29, 2002. Even though the Company operated at a loss, 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 6.  NET LOSS PER SHARE:
 
Net loss per basic and diluted share for the three and nine month periods ended September 29, 2002 and September 30, 2001 was computed using the weighted average number of common shares outstanding during the period but excluded the dilutive potential of common shares from assumed conversions because of their anti-dilutive effect. Potential dilutive shares include conversion of preferred shares (Note 8), and outstanding stock options and warrants using the treasury stock method. At September 29, 2002 there were options and warrants outstanding to purchase an aggregate of 10,981,565 shares of Common Stock of which 7,890,565 shares were exercisable. At September 30, 2001, there were options and warrants outstanding to purchase an aggregate of 14,398,734 shares of Common Stock of which 3,812,123 shares were exercisable.

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NOTE 7.  BANK DEBT:
 
On August 13, 2002, the Company extended a line of credit agreement with two banks that provides for advances up to the lesser of $15.0 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%) plus 0.50% and are collateralized by the assets of the Company and are guaranteed by OSE.
 
At September 29, 2002, the Company had $1.7 million available to borrow under the line of credit agreement. The line of credit agreement has been extended to February 15, 2003.
 
NOTE 8.  REDEEMABLE CONVERTIBLE PREFERRED STOCK:
 
As of September 29, 2002, the Company had 3,000,000 shares of Series A redeemable convertible preferred stock, and 3,023,225 shares of Series B redeemable 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. All outstanding preferred stock is owned by 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 stocks 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.
 
Dividends of approximately $2,275,000 and $444,000 are included in accrued dividends and interest as of September 29, 2002 and December 31, 2001, respectively. On August 9, 2002, the Company executed an agreement pursuant to which it rescinded its previous distribution of common shares received from July 1999 through January 2002 paid to its majority shareholder, OSE, in settlement of a preferred dividend obligation of $1.6 million. Dividends on the Series A and B preferred stock are cumulative until paid. Under the terms of the agreement, OSE returned to the Company certificates representing 26,344,391 shares of OSE USA common stock. The Company reduced its common stock by $26,000 and reduced its additional paid-in capital by $1.58 million, plus accrued interest of $217,000 as discussed below (dividends declared and paid through December 31, 2001) upon rescission of the stock distribution. Dividends incurred but unpaid for the nine-month period ended September 29, 2002 were $666,000. As a result, the Company recorded an obligation to pay OSE approximately $2,275,000 in unpaid preferred dividends, and, in accordance with the terms and conditions of the Certificate of Designation for the Company’s Series A Preferred and Series B Preferred Stock, the Company agreed to accrue interest in the amount of approximately $217,000 on the unpaid preferred dividends as of September 29, 2002. The Company recorded the interest in a manner similar to the unpaid 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 Delaware law, the Company’s state of incorporation.

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NOTE 9.  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 (“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. The customers are mainly US headquartered manufacturers of high-tech products such as video components, chip sets, graphics chips and logic components.
 
      
Manufacturing
     
Distribution
   
Eliminations
     
Total
  
      
(In thousands)
  
Three Months Ended September 29, 2002:
                                    
Revenues
     
$
1,579
 
   
$
1,212
   
$
—  
 
   
$
2,791
 
Interest income
     
 
—  
 
   
 
557
   
 
(552
)
   
 
5
 
Interest expense
     
 
(770
)
   
 
—  
   
 
552
 
   
 
(218
)
Depreciation and amortization
     
 
727
 
   
 
95
   
 
—  
 
   
 
822
 
Net income (loss)
     
 
(2,908
)
   
 
980
   
 
—  
 
   
 
(1,928
)
Total assets
     
 
9,853
 
   
 
18,827
   
 
(4,708
)
   
 
23,972
 
Expenditures for additions to long-lived assets
     
 
18
 
   
 
—  
   
 
—  
 
   
 
18
 
 
    
Manufacturing
     
Distribution
   
Eliminations
     
Total
  
    
(In thousands)
  
Three Months Ended September 30, 2001:
                                  
Revenues
   
$
1,530
 
   
$
1,140
   
$
—  
 
   
$
2,670
 
Interest income
   
 
—  
 
   
 
361
   
 
346
 
   
 
15
 
Interest expense
   
 
(571
)
   
 
—  
   
 
(346
)
   
 
(225
)
Depreciation and amortization
   
 
499
 
   
 
188
   
 
—  
 
   
 
687
 
Net income (loss)
   
 
(2,802
)
   
 
554
   
 
—  
 
   
 
(2,248
)
Total assets
   
 
12,881
 
   
 
37,610
   
 
(21,483
)
   
 
29,008
 
Expenditures for additions to long-lived assets
   
 
3
 
   
 
2
   
 
—  
 
   
 
5
 

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Manufacturing
     
Distribution
   
Eliminations
     
Total
  
    
(In thousands)
  
Nine Months Ended September 29, 2002:
                                  
Revenues
   
$
4,361
 
   
$
3,597
   
$
—  
 
   
$
7,958
 
Interest income
   
 
—  
 
   
 
1,531
   
 
(1,518
)
   
 
13
 
Interest expense
   
 
(2,200
)
   
 
—  
   
 
1,518
 
   
 
(582
)
Depreciation and amortization
   
 
2,065
 
   
 
284
   
 
—  
 
   
 
2,349
 
Net income (loss)
   
 
(8,686
)
   
 
1,497
   
 
—  
 
   
 
(7,189
)
Total assets
   
 
9,853
 
   
 
18,827
   
 
(4,708
)
   
 
23,972
 
Expenditures for additions to long-lived assets
   
 
30
 
   
 
5
   
 
—  
 
   
 
35
 
Nine Months Ended September 30, 2001:
                                  
Revenues
   
$
5,947
 
   
$
3,490
   
$
—  
 
   
$
9,437
 
Interest income
   
 
—  
 
   
 
789
   
 
(713
)
   
 
76
 
Interest expense
   
 
(1,787
)
   
 
—  
   
 
713
 
   
 
(1,074
)
Depreciation and amortization
   
 
2,215
 
   
 
565
   
 
—  
 
   
 
2,780
 
Net income (loss)
   
 
(7,861
)
   
 
1,444
   
 
—  
 
   
 
(6,417
)
Total assets
   
 
12,881
 
   
 
37,610
   
 
(21,483
)
   
 
29,008
 
Expenditures for additions to long-lived assets
   
 
206
 
   
 
14
   
 
—  
 
   
 
220
 
 
NOTE 10.    STOCKHOLDERS’ DEFICIT:
 
    
Common Stock
     
Additional Paid-in
Capital
     
Accumulated Deficit
     
Totals
  
    
Shares
     
Amounts
           
Balance at December 31, 2001
   
67,153
 
   
$
67
 
   
$
55,596
 
   
$
(81,050
)
   
$
(25,387
)
Common stock issued under stock plans
   
815
 
   
 
1
 
   
 
13
 
   
 
—  
 
   
 
14
 
Preferred dividends declared
                            
 
(666
)
   
 
(666
)
Preferred dividends paid in stock
   
14,800
 
   
 
14
 
   
 
429
 
   
 
—  
 
   
 
443
 
Rescission of common stock
   
(26,344
)
   
 
(26
)
   
 
(1,799
)
   
 
—  
 
   
 
(1,825
)
Repurchase of stock
   
(8
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Net loss for nine months ended September 29, 2002
   
—  
 
   
 
—  
 
   
 
—  
 
   
 
(7,189
)
   
 
(7,189
)
    
  
  
  
  
Balance at September 29, 2002
   
56,416
 
   
$
56
 
   
$
54,239
 
   
$
(88,905
)
   
$
(34,610
)
    
  
  
  
  

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ITEM 2.    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 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 third 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 2002. 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.
 
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 an affiliated company OSE Philippines (“OSEP”). OSEI derives its revenues exclusively from fees received on the sales of OSE’s and an 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 and nine-month periods ended September 29, 2002. 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 nine months ended September 29, 2002, the manufacturing segment of the Company has experienced an increase in the average selling price for its services and a decrease in production volume compared with the same period in 2001. This is due to the strategic changes implemented by the Company in late 2001 to focus on quick turn and engineering lot assemblies in order to improve its profitability, due to the fact that quick turn and engineering lot assemblies provide higher profit margins. 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 decrease the Company’s gross margins and materially and adversely affect the Company’s business, financial condition and results of operations. There can be no assurance that the Company will be able to reduce its cost per unit.

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Revenues
 
The Company’s manufacturing operating segment generally recognizes revenues upon shipment of 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.
 
Total revenues increased 3.7% to $2.8 million for the three-month period ended September 29, 2002 from $2.7 million for the three-month period ended September 30, 2001. Revenues decreased 15% to $8.0 million for the nine-month period ended September 29, 2002 from $9.4 million for the nine-month period ended September 30, 2001.
 
Revenues for the three month period ended September 29, 2002 for the manufacturing segment were $1.6 million compared with $1.5 million for the comparable period in the prior fiscal year. Revenues for the nine month period ended September 29, 2002 for the manufacturing segment were $4.4 million compared with $5.9 million for the comparable period in the prior fiscal year. The decrease in revenues for the nine month period for the manufacturing segment are primarily due to decreased orders as a result of the general slowdown in the semiconductor industry, partially offset by higher average selling prices due to a change in product mix.
 
Revenues for the three month period ended September 29, 2002 for the distribution segment were $1.2 million compared with $1.1 million for the comparable period in the prior fiscal year. Revenues for the nine month period ended September 29, 2002 for the distribution segment were $3.6 million compared with $3.5 million for the comparable period in the prior fiscal year.
 
Gross Profit
 
Cost of revenues includes materials, labor, depreciation and overhead costs associated with semiconductor packaging. Gross loss for the three and nine month periods ended September 29, 2002 was $(0.2) million and $(0.6) million respectively, compared with a gross loss of $(0.6) million and $(0.8)million for the comparable periods in the prior fiscal year. Gross loss as a percentage of revenues was (7%) and (8%) for the three and nine month periods ended September 29, 2002, compared to gross loss as a percentage of revenues of (21%) and (9%), respectively, for the comparable periods in the prior fiscal year. This decrease in gross loss for the three-month period was due to higher revenue from the manufacturing segment of $0.1 million. The decrease in gross loss for the nine-month period was mainly due to higher average selling prices as a result of a change in product mix and lower labor and manufacturing overhead cost as a result of headcount reduction in December 2001 and February 2002 in despite of ($1.5) million revenue decline from manufacturing segment.
 
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 increased to $1.3 million and $3.8 million respectively, for the three and nine- month periods ended September 29, 2002. Selling, general and administrative expenses for the three and nine month periods ended September 30, 2001 were $1.2 million and $3.7 million, respectively.

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As a percentage of revenues, selling, general and administrative expenses increased from 44% and 39% for the three and nine month periods ended September 30, 2001, respectively, to 46% and 48% for the three and nine month periods ended September 29, 2002 respectively. These increases were primarily due to the lower revenue levels in 2002.
 
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 increased by 5% to $277,000 and 2% to $967,000 for the three and nine month periods ended September 29, 2002, respectively, over the comparable periods in 2001. This increase is primarily due to increased payroll related expenses.
 
As a percentage of revenues, research and development expenses remained the same as 10% for the three-month period ended September 30, 2001 and September 29, 2002, respectively. Expenses increased from 10% to 12% for the nine-month period ended September 30, 2001 and September 29, 2002, respectively. These percentage increases were primarily due to lower revenue levels in 2002, as compared to the comparable periods in 2001.
 
Interest and Other Income
 
Interest income is primarily comprised of interest earnings from investments in cash equivalents. Interest and other income increased from $58,000 to $67,000 for the three-month period but decreased from $185,000 to $152,000 for the nine-month period ended September 30, 2001 and September 29, 2002, respectively. The decrease in interest and other income for the nine-month period ended September 29, 2002 was mainly due to an equipment disposal gain of $92,500 in 2001.
 
Interest Expense
 
Interest expense consists of interest payable on bank debt and unpaid dividend on Series A and Series B convertible preferred stock. Interest expense was $0.2 million and $1.1 million for the three and nine month periods ending September 30, 2001 and $0.2 million and $0.6 million for the three and nine-month periods ended September 29, 2002, respectively. Interest expense decreased for the nine-month period as a result of lower borrowings and interest rates.
 
Provision for Income Taxes
 
Provision for income taxes was recorded for the three and nine-month periods ended September 29, 2002. Even though the Company operated at a loss, a state income tax liability has been accrued based on tax criteria set by the state of Massachusetts.
 
Fixed Assets
 
In April 2002, The Company identified data that suggested that the underlying information supporting its fixed assets did not reconcile to amounts recorded on the Company’s financial statements. Subsequently, the Company investigated the matter and began to re-construct its fixed asset records in an effort to determine if the underlying data supports the fixed asset amounts.

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The Company is continuing its review of these transactions and expects to complete the work by the end of November 2002. When the Company has completed this review, it will determine whether its accounting for these transactions was inappropriate and, if so, what action, if any, is appropriate with respect to its reported financial results. The Company cannot predict at this time what action will be determined to be appropriate in response to all of the foregoing, although one possible outcome is a restatement of prior periods’ results.
 
Liquidity and Capital Resources
 
During the nine month period ended September 29, 2002, the Company’s net cash usage by operations was $0.1 million. Net cash provided by operations was comprised primarily of a net loss of $7.2 million, offset by $2.3 million of non-cash charges for depreciation and amortization, a $1.4 million cumulative change in accounting principle, and a net increase in working capital items of $3.5 million. The net increase in working capital items primarily reflected a $0.2 million increase in accounts receivable and a $3.5 million increase in accounts payable and accrued liabilities. At September 29, 2002, the Company had cash and cash equivalents of $0.7 million. The Company is operating under bank lines expiring on February 15, 2003.
 
In the nine months ended September 29, 2002, investing activities used $35,000 for capital expenditures. 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 through borrowing from OSE.
 
During the nine months ended September 29, 2002, $0.9 million was used in financing activities to reduce the line of credit borrowing. $13,000 was received from issuance of common stocks under Stock Purchase Plan.
 
At September 29, 2002, borrowings of $10.6 million were less than the advance rate against qualified accounts receivable by $1.7 million. This under advance was available to the Company for borrowing as of September 29, 2002. The Company believes that its existing bank line of credit of $15.0 million, which expires on February 15, 2003, will be further extended because it is guaranteed by the Company’s principal stockholder OSE. There can be no assurances, however, that the bank line will be renewed or that lower than expected revenues, increased expenses, increased costs associated with the purchase or maintenance of capital equipment, or other events will not cause the Company to seek more capital, or capital sooner than currently expected. To the extent that the bank lines are not renewed, the financial condition and results of operations of the Company will be adversely affected. There can be no assurance that such additional financing will be available when needed or, if available, will be available on satisfactory terms.
 
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 could materially adversely affect the Company’s business, financial condition and results of

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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.
 
    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.

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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 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

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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.
 
ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the expense related to those debt instruments and credit facilities that are tied to market rates. A hypothetical increase or decrease in market interest rates by 10% from the market interest rates at September 29, 2002 would not cause the interest expense paid with respect to our outstanding debt instruments to change by a material amount. Declines in interest rates over time will reduce our interest expense while increases in interest rates over time will increase our interest expense. As of September 29, 2002, the Company had not engaged in any significant foreign currency activity.
 
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

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PART II.    OTHER INFORMATION
 
ITEM 1.     LEGAL PROCEEDINGS
 
None
 
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
At the Annual Meeting of Stockholders of the Company held on September 24, 2002, the following matters were acted upon and approved by the stockholders:
 
 
1.
 
The re-election of the following directors, each to a one-year term:
 
Edmond Tseng
Patrick Verderico
Donald W. Brooks
Calvin Lee
Edward S. Duh
 
 
2.
 
To approve the amendment of certificate of incorporation to eliminate prohibition of shareholder action by written consent without meeting:
 
      
Votes in Favor
     
Votes Against
     
Votes Withheld
      
145,166,073
     
95,358
     
30,580
 
 
3.
 
To ratify the appointment of Grant Thornton LLP as independent accountants of the Company for the 2001 fiscal year:
 
      
Votes in Favor
     
Votes Against
     
Votes Withheld
      
158,945,238
     
28,353
     
22,020
 
ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K
 
 
(a)
 
Exhibits
 
 
  
 
See exhibit list.
 
 
(b)
 
Reports on Form 8-K
 
On August 14, 2002, the Company filed a form 8-K to announce the signing of an agreement with its majority shareholder Orient Semiconductor Electronics, Ltd. (“OSE”) to rescind the payment to OSE of 26,344,391 shares previously distributed to OSE as dividends on the Company’s Series A and Series B Preferred Stock.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
    
OSE USA, Inc.
Date:    November 13, 2002
   
/s/    EDMOND TSENG
    
        Edmond Tseng
        President, Chief Executive Officer
        and Acting Chief Financial Officer
Date:    November 13, 2002
   
/s/    ELTON LI
    
        Elton Li
        Corporate Controller and
        Chief Accounting Officer
 

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Edmond Tseng, certify that:
 
1.    I
 
have reviewed this quarterly report on Form 10-Q of OSE, USA, Inc.
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Dated:  November 13, 2002
/s/  EDMOND TSENG
Edmond Tseng
President and Chief
Executive Officer

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CERTIFICATION OF CHIEF ACCOUNTING OFFICER
 
I, Elton Li, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of OSE USA, Inc.
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Dated:  November 13, 2002
/s/  ELTON LI
Elton Li
Corporate Controller and
Chief Accounting Officer

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EXHIBIT LIST
 
3.1
   
Certificate of Incorporation, as amended
3.2
   
Bylaws, as amended
4.1
   
Certificate of Designation of Series A Convertible Preferred Stock (1)
4.2
   
Certificate of Designation of Series B Convertible Preferred Stock (2)
10.1
   
Exchange Agreement (3)
99.1
   
Certification Pursuant to Section 906 of Sarbanes-Oxley Act
 
(1)
 
Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed on May 7, 1999
 
 
(2)
 
Incorporated by reference from the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2000
 
 
(3)
 
Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed on August 14, 2002

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