Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

For the transition period from                      to                     .

Commission file number 000-31173

ChipPAC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

47400 Kato Road, Fremont, California 94538

(Address of Principal Executive Offices, Zip Code)

Registrant’s telephone number, including area code (510) 979-8000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Class A common stock, $.01 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b.2 of the Act). YES x  NO ¨

The aggregate market value of voting stock held by non-affiliates of the registrant (based upon the closing sales price of such shares on the Nasdaq National Market as of March 9, 2004) was $636,523,693.65.

At the close of market on March 9, 2004, there were 98,193,522 shares of the Registrant’s Class A common stock outstanding. No shares of the Registrant’s Class B common stock were outstanding on that date.

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

PART I

ITEM 1.     BUSINESS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “target,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and speak only as of their dates. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including those identified under Exhibit 99.1 of this annual report and other risks and uncertainties indicated from time to time in our filings with the SEC. Actual results could differ materially from these forward-looking statements. In addition, important factors to consider in evaluating these forward-looking statements include our proposed merger with ST Assembly Test, Ltd, possible international conflicts, changes in general economic and external market factors, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors and various other competitive factors. In light of these risks and uncertainties, there can be no assurance that the matters referred to in the forward-looking statements contained in this annual report will in fact occur.

Industry

ChipPAC is one of the world’s largest independent providers of semiconductor packaging, test, and distribution services. We offer one of the broadest portfolios of packaging and test services for integrated circuits. We supply packaging solutions to some of the leading semiconductor companies servicing the computing, communications, consumer, automotive and industrial markets. We are a leader in providing high end packaging solutions, including ball grid array packages, or BGA packages, chip scale packages, flip-chip and stacked die packages. In addition to providing assembly and test services on a global basis, we are the largest independent semiconductor packaging and test service provider in mainland China. As consumers demand smaller electronic devices with more functionality, there is a greater requirement for power regulation and generation, which we expect to drive demand for our power packages. We are a leader in high-volume assembly, test and distribution of discrete and analog power packages. We are also one of the leading providers of advanced packaging products that address the needs of semiconductors used in wireless LAN and handset applications, including chip-scale, stacked die technologies.

Our online design and characterization process, referred to as SmartDESIGN^™, is a proprietary web-based design collaboration system that we believe provides a higher rate of product qualification, improved technical performance and shorter time-to-market service for our customers. This system enables us to link to our customers via the Internet to aid with the performance of package design, electrical, thermal and mechanical analysis and to model end system performance.

Outsourcing of packaging and test services to independent packagers like ChipPAC continues to expand due to several factors, including time-to-market pressures, cost reduction, resource allocation, equipment utilization, the increased technological complexity of packaging and test services and the growth of fabless semiconductor manufacturers. Historically, outsourced semiconductor manufacturing services have grown faster than the semiconductor market as a whole. Management believes that the reduced investments in assembly and test capacity by semiconductor manufacturers over the past two years will position outsource providers well to capture a greater percentage of future volume levels. The packaging and test industry is highly fragmented as we compete against a number of established independent packaging houses as well as the internal capabilities of some of our largest customers.

The semiconductor industry has historically experienced volatility with sharp periodic downturns and steep volume ramps. These downturns have been characterized by, among other things, diminished product demand,

3

Table of Contents

excess production capacity and accelerated erosion of selling prices. The semiconductor industry is presently recovering from a downturn, and we expect conditions to continue to improve in 2004.

Our headquarters are located in Fremont, California, and our manufacturing facilities are strategically located in China, Malaysia and South Korea, to address the global needs of our customers. We have design personnel located at customer sites, as well as design centers located in Arizona, China, Malaysia and South Korea to provide 24-hour design support to our customers.

We believe that we differentiate ourselves from our competitors by the following factors:

4

Table of Contents

Pending Merger

On February 10, 2004, we signed a definitive agreement for the merger of a wholly-owned subsidiary of ST Assembly Test Ltd, or STATS, with ChipPAC in a stock-for-stock transaction. If the merger is consummated, we will become a wholly owned subsidiary of STATS. Under the terms of the agreement, ChipPAC stockholders will receive 0.87 STATS American Depositary Shares, or ADSs, for each share of ChipPAC Class A common stock. Following the consummation of the merger, STATS and ChipPAC stockholders will own approximately 54% and 46% of the combined company, respectively, on a fully-converted basis. Charles Wofford, Chairman of STATS, will remain Chairman of the combined company, Dennis McKenna, Chairman and Chief Executive Officer of ChipPAC, will be the Vice-Chairman, and Tan Lay Koon, President and Chief Executive Officer of STATS, will be the President and Chief Executive Officer of the combined company. The Board of Directors of the combined company will have 11 members, and is expected to be comprised of 7 current STATS directors and each of Messrs. Conn, Norby, Park and McKenna, current members of the ChipPAC board, who will be nominated for election by STATS shareholders. The new company is proposed to be named STATS ChipPAC Ltd, and it will be headquartered in Singapore.

Consummation of the merger is subject to certain conditions, including approval by ChipPAC and STATS stockholders, expiration of waiting periods under the Hart-Scott-Rodino Act, receipt of a private letter ruling from the Internal Revenue Service or opinions of outside legal counsel relating to the tax treatment of the merger for ChipPAC stockholders and other customary conditions. A vote of the majority of our outstanding Class A common stock will be required to approve the merger. Our board of directors has voted to approve the transaction and recommend that our stockholders vote to approve the merger. The transaction is expected to close during the second calendar quarter of 2004. There can be no assurance that the conditions to the merger will be satisfied or that the merger will close in the expected time frame or at all. Additional information, including a discussion of the background and our reasons for the merger, will be provided in the proxy statement/prospectus to be mailed to our stockholders. The information in this report is qualified in its entirety by the impact of this proposed merger on us and our stockholders.

Our Services

We offer semiconductor packaging and test services to the semiconductor industry for applications in communications, computing, consumer, automotive and industrial end markets. Approximately 86.1%, 84.5% and 86.2% of our revenue were derived from packaging services during the years ended December 31, 2003, 2002 and 2001, respectively. Approximately 13.9%, 15.5% and 13.8% of our revenue were derived from test and other services during the years ended December 31, 2003, 2002 and 2001, respectively.

Since customers require their suppliers to pass a lengthy and rigorous qualification process that can be costly to the customers, we believe they generally do business with only a few suppliers. As our services are considered part of the customer’s manufacturing infrastructure, we must have dedicated resources and systems to provide flexible manufacturing, quick-turns and real-time information transfers.

Packaging

We have provided independent semiconductor packaging and test services since 1984, and offer a broad range of packaging formats for a wide variety of electronics applications. Our two types of packaging services,

5

Table of Contents

leadframe and advanced, contributed approximately 59.0% and 27.1%, respectively, of revenue for the year ended December 31, 2003.

Leaded Packaging

“Leaded” or “leadframe” packaging is the most widely used packaging type and is used in almost every electronic application, including automobiles, household appliances, desktop and notebook computers and telecommunications. Leaded packages have been in existence since semiconductors were first produced. A semiconductor die encapsulated in a plastic mold compound with metal leads surrounding the perimeter of the package characterizes leaded packages. With leaded packages, the die is attached to a leadframe (a flat lattice of leads) and very small gold wires are bonded (welded) to the chip and then welded to the leads to provide the interconnect. The chip is then encapsulated in plastic to form a package, with the ends of the leadframe leads protruding from the edges of the package to enable connection to a printed circuit board. This packaging type has evolved from packages design to be plugged into a printed circuit board by inserting the leads into holes on the printed circuit board to the more modern surface-mount design, in which the leads or pins are soldered to the surface of the printed circuit board. Specific packaging customization and improvements are continually being engineered to improve electrical and thermal performance, shrink package sizes and enable multi-chip capability.

We offer a wide range of lead counts and body sizes within this packaging group to satisfy customer die design variations. Our traditional leaded packages are at least two millimeters in thickness and include PDIP, PLCC, and SOIC. Our advanced leaded packages are thinner than our traditional leaded packages, approximately two millimeters in thickness or less, and generally have a finer pitch lead spacing, allowing for a higher pin count and greater functionality in a smaller package foot print. Our advanced leaded packages include MQFP, TQFP, iQUAD^®, TSSOP and SSOP. Our acquisition of the Malaysian business in 2000 added power packages to our portfolio.

Power Packaging

Power semiconductors are used in a variety of end-markets, including telecommunications and networking systems, computers and computer peripherals, consumer electronics, electronic office equipment, automotive systems and industrial products. These end markets increasingly depend upon power regulation and control in the trend toward smaller devices and longer operating times. Packaging manufacturers are left to contend with shrinking chip geometries owing to continued emphasis upon greater mobility and portability. Power semiconductors typically involve higher current and voltage levels than memory, logic and microprocessor devices. The high current involved with switching on/off high voltages and the phase control of AC signals results in considerable power dissipated internally that produces heat. Thus our power packages are designed in such a way as to conduct the resultant heat away from the chip as power is dissipated, preventing the power device from being destroyed.

Power package assembly is somewhat different from non-power IC assembly as it often employs special solder alloys requiring different semiconductor bonding machines. Higher current levels of power semiconductors likewise require larger diameter aluminum and gold wire than non-power IC’s to carry the load. Our Malaysian facility maintains a vast array of these special machines needed for power semiconductor assembly and test. With a current capacity of over 12.5 million units per week, we believe we are the industry leader in power package assembly supporting a number of the world’s major power semiconductor manufacturers, whose products are designed and used in power supplies, battery chargers, ignition modules, voltage regulators, motor controllers, ignition controllers and power management devices.

Advanced Packaging

Advanced substrate based packaging represents one of the fastest growing areas in the packaging industry and is used primarily in computing platforms, networking, hand held consumer products, wireless

6

Table of Contents

communications devices, personal digital assistants, video cameras, home electronic devices such as DVDs and home video game machines.

Benefits of advanced packaging over leaded packaging include:

BGA technology was first introduced as a solution to problems associated with the increasingly high lead counts required for advanced semiconductors. As the number of leads surrounding the integrated circuit increased, high lead count packages experienced significant electrical shorting problems. The BGA methodology solved this problem by effectively creating leads on the bottom surface of the package in the form of small bumps or solder balls. In a typical BGA package, the semiconductor die is placed on top of a plastic or tape laminate substrate rather than a lead frame. The die is connected to the circuitry in the substrate by a series of fine gold wires that are bonded to the top of the substrate near its edges. On the bottom of the substrate is a grid of metal balls that connect the packaged device to a printed circuit board.

We supply our customers with substantially the entire family of BGA packaging services offered in the marketplace today, including:

7

Table of Contents

The following chart summarizes the different types of packaging services we offer and revenue for the year ended December 31, 2003. The full names of each packaging type are provided in the Glossary accompanying our registration statement on Form S-1 (Registration Number 333-39428).

Test Services

We also provide our customers with semiconductor test services for a number of device types, including mixed-signal, digital logic, memory, power and RF devices. Semiconductor testing measures and ensures the performance, functionality and reliability of a packaged device, and requires knowledge of the specific applications and functions of the devices being tested. In order to enable semiconductor companies to improve their time-to-market, streamline their operations and reduce costs, there has been an increasing trend toward outsourcing both packaging and test services. We have capitalized on this trend by enhancing our test service capabilities. Our test revenue increased 5.9% from 2002 to 2003. The acquisition of the Malaysian business expanded our mixed-signal tester base and provided us with critical expertise for testing RF devices, one of the fastest growth areas for test outsourcing. We have also noted an increased demand from our customers to provide both assembly and test services on a full turn-key basis.

In order to test the capability of a semiconductor device, a semiconductor company will provide us with its proprietary test program and specify the test equipment to run that program. Alternatively, our customers at times may consign their test equipment to us. The devices to be tested are placed into a socket-custom load board by an automated handling system, which is connected to the test equipment, which then tests the devices using software programs developed and supplied by our customers. The cost of any specific test and the time required to conduct it, ranging from a few milliseconds to several seconds, varies depending on the complexity of the semiconductor device and the customer’s test program.

8

Table of Contents

Other Services

We also provide a full range of other value-added services, including:

Customers

In 2003, we continued to diversify and broaden our customer base to over 90 customers worldwide. Our customers are comprised of companies in the semiconductor industry located primarily in the United States of America. Our customers include some of the largest semiconductor companies in the world. There were four customers in 2003 and five customers in 2002 that each accounted for more than 10% of our total sales. These customers include Fairchild Semiconductor International, Inc., Intel Corporation, Intersil Corporation, LSI Logic Corporation and nVIDIA Corporation. Our largest single customer accounted for 15.9% and 16.6% of our total sales in 2003 and 2002, respectively. We anticipate that this customer concentration will decrease as our business grows with new customers with whom we have already become qualified and as we add new customers with whom we are currently undergoing qualification.

Our customers are located around the world, but principally in the United States of America. We report geographic distribution of revenue based on the location of our customers’ headquarters. The following table details the percentage of total revenue we received from the United States, Asia and Europe:

In general, our customers rely on at least two sources for packaging. A packaging and test service company must pass a lengthy and rigorous qualification process that typically takes three to six months, and typically costs the customer approximately $250,000 to $300,000. Once a primary packager has been selected, that packager gains insight into its customer’s business operations and an understanding of its products as part of the overall working relationship. These factors, combined with the pressures of a semiconductor company to meet the time-

9

Table of Contents

to-market demands of its customers, result in high switching costs for semiconductor companies, making them adverse to changing or adding additional suppliers. We have been successful in attracting new customers because we are one of a few independent packaging and test companies that offers packaging, test and distribution services for a full portfolio of packages. Also, new customers are drawn to our advanced technologies.

Marketing, Sales and Customer Support

We provide sales support to our customers through an international network of offices coordinated from our British Virgin Islands company:

Our account managers, applications engineers, customer service representatives and sales support personnel form teams that focus on a specific customer or geographic region.

Customers generally deliver rolling six month forecasts and release production die to us in daily or weekly increments for packaging, test and distribution. These near-term forecasts guide us as to anticipated volumes, but provide no meaningful backlog statistics. Substantially all of our materials inventory is purchased based on customer forecasts, we carry relatively small quantities of raw material inventory and we have relatively low levels of finished goods inventory.

Our marketing efforts focus on creating a brand awareness and familiarity with our advanced device packaging technologies and an understanding of our end-user market applications in wireless handset and PDA graphics, PC chipsets, wireless LAN, memory, storage and networking. We market our leadership in advanced packaging, test technology, and distribution and our ability to supply a broad line of packaging and test services to the semiconductor industry. We target engineers and executive level decision makers through a direct sales force, the delivery of “white papers” at industry conferences, mailings of technical brochures and newsletters, advertisements in trade journals and our website.

10

Table of Contents

Suppliers

Our packaging operations depend upon obtaining adequate supplies of materials on a timely basis. The principal materials used in our packaging process are lead frames, rigid and flexible substrates, gold wire, molding compound, epoxy, tubes and trays. We purchase materials based on the demand forecasts of our customers. Our customers are generally responsible for the costs of any unique materials that we purchase but do not use, particularly those lead frames and substrates that are ordered on the basis of customer-supplied forecasts. We work closely with our primary materials suppliers to insure the timely availability of materials supplies, and we are not dependent on any one supplier for a substantial portion of our materials requirements. We had no significant long-term agreements with materials suppliers in 2003. The materials we procure are normally available and we are able to meet our production requirements from multiple sources through periodic negotiation and placement of written purchase orders. We typically combine our global requirements into centrally negotiated blanket purchase orders to gain economies of scale in procurement and more significant volume discounts. Should material become scarce, we would look to enter into long-term supply agreements with key suppliers. In 2003, approximately 33% of our substrate costs were incurred from the purchase of materials from supplies located in South Korea, down from 79% in 2002. The balance of our substrate purchases was from suppliers in Japan and Taiwan.

Our packaging operations and expansion plans also depend on obtaining adequate quantities of equipment on a timely basis. To that end, we work closely with our major equipment suppliers to insure that equipment deliveries are on time and the equipment meets our stringent performance specifications. We expect that equipment lead times will lengthen in 2004 based on increased demand in the semiconductor equipment market.

Intellectual Property

Our ability to develop and provide advanced packaging technologies and designs for our customers depends in part on our proprietary know-how, trade secrets and other patented and non-patented, confidential technologies, which we either own or license from third parties. We have licenses to use numerous third party patents, patent applications and other technology rights, as well as trademark rights, in the operation of our business. We believe that these licenses are renewable under normal commercial terms once they expire.

Our primary registered trademark and trade name is “ChipPAC^®.” We own or are licensed to use other secondary trademarks.

Research and Development

Our research and development efforts are focused on developing new packages, design, assembly and test technologies and on improving the efficiency and capabilities of our existing packaging and test services. Technology development is a basic competence of ChipPAC and a key competitive factor in the packaging industry. We have invested considerable resources and we are among the leaders in new product and technology development. Our web based proprietary design and performance characterization, SmartDESIGN^TM capability, provides the shortest time-to-market with predictable performance.

During the past two years, we have introduced the following new package families:

11

Table of Contents

Materials engineering plays a critical role in advanced packaging and has enabled us to develop environmentally friendly, lead free, and halogen free packaging, which is required by several of our customers.

We have established four design centers where new packages are designed and fully characterized for performance and tested both for package and system level reliability to meet end customer needs.

During 2003, 2002 and 2001, we spent approximately $11.7 million, $10.1 million and $14.2 million, respectively, on research and development. The increase in spending in 2003 is due to the timing of projects and on increase in the number of package family introductions. Employee headcount in research and development went up by 16.8% in 2003, compared to 2002 and went up by 9.2% in 2002, compared to 2001.

Competition

The packaging and test industry is highly fragmented. Our primary competitors and their primary locations are as follows:

Each of these companies has significant packaging capacity, financial resources, research and development operations, marketing and other capabilities, and has some degree of operating experience. These companies also have established relationships with many large semiconductor companies, which are current or potential customers of ours. We also compete with the internal packaging and testing capabilities of many of our largest customers. We believe the principal elements of competition in the independent semiconductor packaging market include time-to-market, breadth of packaging services, technical competence, design services, quality, yield, customer service and price. We believe that we compete favorably in these areas.

In general, our customers principally rely on at least two independent packagers. A packaging company must pass a lengthy and rigorous qualification process that can take a minimum of three months for a typical leaded package and can take more than six months for a typical BGA package. Once a primary packager has been selected, that packager gains insight into its customer’s business operations and an understanding of its products as part of the overall working relationship. These factors, combined with the pressures of a semiconductor company to meet the time-to-market demands of its customers, result in high switching costs for semiconductor companies, making them adverse to changing or adding additional suppliers. We have been successful in attracting new customers because we are one of a few independent packaging and test companies that offers packaging, test and distribution services for a full portfolio of packages.

12

Table of Contents

Employees

As of December 31, 2003, we employed 6,319 full-time employees, of whom approximately 139 were employed in research and development, 5,850 in packaging and test services and 330 in marketing, sales, customer service and administration.

Approximately 1,200 of our employees at the Ichon, South Korea facility are represented by the ChipPAC Korea Labor Union and are covered by collective bargaining and wage agreements. The collective bargaining agreement, which covers basic union activities, working conditions and welfare programs, among other things is effective through May 1, 2005 and the wage agreement is effective to May 1, 2004. We believe that we have good relationships with our employees and the union.

SEC Reports

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed with the U.S. Securities and Exchange Commission, are available for review free of charge on our website at www.chippac.com as soon as reasonably practicable after such material is electronically filed or furnished to the Commission.

ITEM 2.     PROPERTIES

Our corporate headquarters are located in Fremont, California, and we provide all packaging, test and distribution services through facilities in Ichon, South Korea, Shanghai, China and Kuala Lumpur, Malaysia. The Ichon facility was founded in 1985 and the Shanghai facility was founded in 1994. We acquired the Kuala Lumpur facility in 2000. Both the Ichon and Shanghai facilities are ISO-14001 certified and QS-9000 certified. The Kuala Lumpur facility is ISO-9002, QS-9000 and ISO-14001 certified.

The following chart summarizes the information about our main facilities:

13

Table of Contents

ITEM 3.     LEGAL PROCEEDINGS

On July 31, 2002, Seagate Technology L.L.C. filed suit against Atmel Corporation and Atmel SARL in Santa Clara County Superior Court. Seagate alleges that Atmel supplied defective semiconductor chips, and that Atmel had its chips outsourced and packaged by us, and Amkor Technology, Inc. On November 19, 2003, Atmel filed a First Amended Cross-Complaint against us, Amkor and Sumitomo Bakelite, Ltd., the Japanese manufacturer of the allegedly defective epoxy mold compound. We are currently being defended by insurance counsel, subject to the complete reservation of rights by the insurance company. In January 2004, we filed a cross-complaint against Amkor and Sumitomo. We believe the claims against us for indemnification are without merit and will vigorously defend the litigation. However, the litigation process is inherently uncertain and there can be no assurance that the outcome of these claims will be favorable for us.

We are not involved in any other legal proceedings, the outcome of which we believe would have a material adverse effect on our business, financial condition or results of operations. From time to time, however, we are involved in claims that arise in the ordinary course of business, and we maintain insurance that we believe to be adequate to cover these claims.

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

No matters were submitted to a vote of our stockholders during the fourth quarter of 2003.

14

Table of Contents

PART II

Our Class A common stock is traded on the Nasdaq National Market under the symbol “CHPC.” The following table sets forth, for the periods indicated, the high and low sale price per share of our Class A common stock as quoted on the Nasdaq National Market.

On March 9, 2004, the last reported sale price of our Class A common stock on the Nasdaq National Market was $7.93 per share. As of March 9, 2004, there were 98,193,522 shares outstanding and approximately 59 stockholders of record of our Class A common stock.

Shares Authorized for Issuance under Equity Compensation Plans

The following table sets forth the total shares of our Class A common stock that may be received by optionholders upon the exercise of currently outstanding options, the weighted average exercise price of those outstanding options and the number of shares of our Class A common stock that are still available for future issuance under our equity compensation plans after considering the stock options currently outstanding. All of the options described below have been or can be issued pursuant to our 1999 Stock Purchase and Option Plan, our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase Plan. All of these plans have been approved by our stockholders.

Dividend Policy

We have not in the past paid, and do not expect for the foreseeable future to pay dividends on our common stock. Instead, it is anticipated that all earnings, if any, in the foreseeable future will be used for working capital and other general corporate purposes. The payment of dividends by us to holders of our common stock is prohibited by our senior credit facilities and is restricted by the indenture relating to our senior subordinated

15

Table of Contents

notes. Any future determination to pay dividends will be at the discretion of the board of directors and will depend upon, among other factors, the results of operations, financial condition, capital requirements and contractual restrictions.

ITEM 6.     SELECTED FINANCIAL DATA

Our adoption of Statement of Financial Accounting Standards No. 145 in the first quarter of 2003 requires us to reclassify losses on extinguishment of debt that were previously classified as extraordinary items to non-operating income (expense) included in continuing operations. Set forth below is our last five years Selected Historical Financial Data reflecting the application of SFAS No. 145 to the periods presented. This reclassification had no impact on the reported net income (loss) of any period.

ChipPAC, Inc.

SELECTED HISTORICAL FINANCIAL DATA

(In thousands)

16

Table of Contents

The following discussion and analysis of our financial condition and results of operations covers in part periods prior to our initial public offering in August 2000. As a result of the initial public offering, we significantly changed our capitalization. Accordingly, the results of operations for periods subsequent to the initial public offering are not necessarily comparable to prior periods. The following discussion should be read in conjunction with the consolidated financial statements contained in this annual report.

History

In 1997, we were incorporated as a distinct entity and established as the parent of a stand-alone worldwide business. Prior to this time, we operated as a separate division of Hyundai Electronics, now Hynix Semiconductor, one of the world’s largest semiconductor manufacturers and a member of the Hyundai Group, the South Korean conglomerate. In 1999, as part of a recapitalization, a group of equity investors along with management obtained control of ChipPAC. This transaction was accounted for as a recapitalization.

Pending Merger

On February 10, 2004, we signed a definitive agreement for the merger of a wholly-owned subsidiary of STATS with and into ChipPAC in a stock-for-stock transaction. If the merger is consummated, we will become a wholly owned subsidiary of STATS. Under the terms of the agreement, ChipPAC stockholders will receive 0.87 STATS ADSs, for each share of ChipPAC Class A common stock. Following consummation of the merger, STATS and ChipPAC stockholders will own approximately 54% and 46% of the combined company, respectively, on a fully-converted basis.

Consummation of the merger is subject to certain conditions, including approval by ChipPAC and STATS stockholders, expiration of waiting periods under the Hart-Scott-Rodino Act, receipt of a private letter ruling from the Internal Revenue Service or opinions of outside legal counsel relating to the tax treatment of the merger for ChipPAC stockholders and other customary conditions. A vote of the majority of our outstanding Class A common stock will be required to approve the merger. Our board of directors has voted to approve the transaction and recommend that our stockholders vote to approve the merger. The transaction is expected to close during the second calendar quarter of 2004. There can be no assurance that the conditions to the merger will be satisfied or that the merger will close in the expected time frame or at all. Additional information, including a discussion of the background and our reasons for the merger, will be provided in the proxy statement/prospectus to be mailed to our stockholders. The information in this report is qualified in its entirety by the impact of this proposed merger on us and our stockholders.

Overview

Our revenue consists of fees charged to our customers for packaging, testing, and distribution of their integrated circuits. From 1996 to 2003, revenue increased from $179.2 million to $429.2 million, a cumulative annual growth rate of 13.3%, primarily from the growth of substrate or BGA packaging, the growth of test revenue and the acquisition of our Malaysian business in 2000. The semiconductor industry is inherently volatile with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. The semiconductor industry is still recovering from the worst downturn in its history. Due to the severity of this downturn for the semiconductor industry and for our customers, we experienced the first decline in revenue on a year-over-year basis in our history in 2001. Subsequently, our revenue has increased year over year from 2001 to 2003.

Our revenue for the year ended December 31, 2003 increased to $429.2 million or 18.0% compared to the year ended December 31, 2002. Our continuing growth will depend upon factors influenced by current economic conditions such as replenishment of inventory in the electronics supply chain, gradual recovery in end markets

17

Table of Contents

and the ramp-up of new customers acquired in 2003. We have re-engineered our business model over the last two years to focus on products and customers in the fastest growth segments of the industry such as chips for use in wireless, broadband, consumer and automotive products. However, we are still solidly positioned in the computing and industrial markets, which will benefit from an overall economic recovery as it occurs.

The following table describes the composition of revenue by product group and test services, as a percentage of total revenue:

Quarterly Results (Unaudited)

The following table describes our unaudited historical quarterly sales, gross profit, earnings per share and net income (loss):

Results of Operations

The following table describes our results of operations based on the percentage relationship of operating and other financial data to revenue during the periods shown:

18

Table of Contents

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenue.    Revenue was $429.2 million in the year ended December 31, 2003, an increase of 18.0% from the year ended December 31, 2002. The increase in revenue was primarily due to growth in our advance substrate product lines, and particularly due to growth in revenue of stacked packages. We continued to gain and begin work for new customers in 2003 and benefited from the rebound of demand for semiconductors in 2003. Unit volumes in 2003 increased 18.6% versus 2002.

Gross Profit.    Gross profit during the year ended December 31, 2003 was $63.9 million, an increase of 14.9% from the year ended December 31, 2002. Gross margin as a percent of revenue was 14.9% for 2003 versus 15.3% for 2002. In order to produce favorable gross profit results, we installed cost reduction programs to reduce manufacturing overhead and renegotiate lower material prices with existing suppliers. The favorable results from these actions were more than offset by the effects of lower average selling prices, continuing higher gold prices, higher substrate prices, higher oil prices and the appreciation of the South Korean Won against the United States Dollar when compared to the year ended December 31, 2002.

Selling, General, and Administrative.    Selling, general, and administrative expenses remained flat at $38.2 million for both years ended December 31, 2003 and 2002. Salaries and employee related expenses increased in 2003 over 2002 due to additional personnel added to meet increased demand for our services, while expenses related to bonuses, amortization, and third party consulting were reduced in 2003. Other cost controls in 2003 included mandatory shut-down days, salary reductions, and travel restrictions.

Research and Development.    Research and development expenses for the year ended December 31, 2003 were $11.7 million, or 2.7% of revenue, compared to $10.1 million, or 2.8% of revenue, in the year ended December 31, 2002. Our research and development expenses in 2003 represent a 15.8% increase from similar expenses in 2002. We increased the number of research and development employees in 2003 compared to the year 2002. Employee headcount in research and development went up by 16.8% in 2003, compared to 2002. In 2003, we engaged in new projects due to the increase in the number of package families introduced.

Restructuring Charge and Write Down of Impaired Assets.    During the year ended December 31, 2003, restructuring plans were executed to realign our organization and reduce operating costs to better align our expenses with revenue. As of December 31, 2003, we had a total reduction of 252 personnel related to the restructuring. Restructuring and related charges of $2.0 million were expensed during the year ended December 31, 2003. In 2002, there was a restructuring action in our Malaysian plant in which we incurred $0.6 million to terminate 30 employees. Due to stronger than expected performance from our Korean subsidiary and the sale of our plating line in Korea which we had planned on shutting down, reserve releases in the amount of $1.3 million were credited to restructuring charges in our statement of operations for December 31, 2002. This resulted in a net credit of $0.7 million in 2002.

In addition, during the year ended December 31, 2003, we wrote down impaired assets by $11.7 million. We determined that the expected cash flows related to certain manufacturing equipment were not sufficient to recover the carrying value of the equipment. As the result of this, the carrying values of these assets were written down to the estimated fair market value and will continue to be depreciated over their remaining useful lives. There were no equivalent write-offs in the same period during 2002.

Interest Expense.    Total outstanding interest-bearing debt increased to $365.0 million at December 31, 2003 compared to $267.9 million at December 31, 2002. The increase in debt outstanding of $97.1 million from December 31, 2002 to December 31, 2003 is due to issuance of convertible subordinated notes in May and June 2003 of $150.0 million offset by $36.2 million pay down of our term loans and $16.7 million pay down of foreign loans. Interest expense was $30.9 million for the year ended December 31, 2003, a decrease of

19

Table of Contents

3.4% compared to the year ended December 31, 2002. The reduction in interest expense was primarily due to the refinancing of higher interest rate debt with new lower interest rate convertible subordinated notes.

Foreign Currency Losses.    We had a net foreign currency loss of $0.4 million in the year ended December 31, 2003 compared to a net foreign currency loss of $1.0 million in the year ended December 31, 2002. These non-cash losses are primarily due to the fluctuations between the exchange rate of the United States Dollar and the South Korean Won related to long-term pension benefits payable to our South Korean employees.

Write-Off of Debt Issuance Cost and Other Related Expenses.    In May and June 2003, we issued $150.0 million of 2.5% convertible subordinated notes in a private placement and used a portion of the proceeds to payoff term loans and foreign debt. As a result of the early extinguishment of this debt, associated capitalized debt issuance costs of $1.1 million along with $0.1 million of related debt expenses were written off. In May 2002, we used proceeds from our secondary public offering to pay off term loans. As the result of this early extinguishment of debt, associated capitalized debt issuance costs of $3.0 million and no other related debt expenses were written off.

Income Taxes.    Consolidated income tax provisions were $2.0 million for both of the years ended December 31, 2003 and 2002. We have a mix of tax rates across the various jurisdictions in which we do business. Our effective tax rates were approximately (7.5%) in 2003 and (7.4%) in 2002. Because the likelihood of future profitability does not meet the tests required under GAAP, this estimate does not take into account any future benefit from loss carryforwards.

Net Loss.    As a result of the items above, the net loss decreased to $28.8 million loss for the year ended December 31, 2003 from $28.9 million for the year ended December 31, 2002.

Subsequent Events.    On February 10, 2004, we announced in a joint press conference the signing of a definitive agreement with STATS for the companies to merge in a stock-for-stock transaction. We expect the merger to be completed after regulatory approvals and other closing conditions are satisfied, which we expect to occur during the second calendar quarter of 2004.

Under the terms of the agreement, ChipPAC shareholders will receive 0.87 STATS American Depositary Shares, or ADSs, for each share of ChipPAC common stock. Based on STATS ADS closing price of US$13.34 on February 9, 2004, the aggregate value of the transaction was approximately US$1.6 billion. Following consummation of the merger, STATS and ChipPAC shareholders will own approximately 54% and 46% of the combined company, respectively, on a fully converted basis.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue.    Revenue was $363.7 million in the year ended December 31, 2002, an increase of 10.6% from the year ended December 31, 2001. The increase in revenue is primarily due to growth in our substrate and test product lines and the combination of higher end-market demand for our customers’ products and new customer and program wins in the year 2002 as compared to 2001. Unit volumes in 2002 also increased 10.2% versus the year 2001.

Gross Profit.    Gross profit during the year ended December 31, 2002 was $55.6 million, an increase of 78.8% from the year ended December 31, 2001. Gross margin as a percent of revenue was 15.3% for the year 2002 versus 9.5% for the year 2001. The actions taken by us, including reductions in work force and tight cost controls coupled with increased unit volume and higher equipment utilization contributed to the increased gross profit realized for the year ended December 31, 2002. These results were reduced by the effect of higher gold prices and the appreciation of the South Korean Won against the United States Dollar when compared to the year ended December 31, 2001.

20

Table of Contents

Selling, General, and Administrative.    Selling, general, and administrative expenses were $38.2 million in the year ended December 31, 2002, an increase of 22.4% from the year ended December 31, 2001. The increase in expenses was primarily due to implementation of strict cost reductions taken in 2001 to the decline in revenue. The cost controls in 2001 included mandatory shut-down days, salary reductions, travel restrictions, and deferment of expenditures where the timing could be delayed. In addition, we incurred additional expenses for our various employee incentive programs as a result of our improved results during the year ended December 31, 2002 as compared to the year ended December 31, 2001.

Research and Development.    Research and development expenses for the year ended December 31, 2002 were $10.1 million, or 2.8% of revenue, compared to $14.2 million, or 4.3% of revenue, in the year ended December 31, 2001. Our research and development expenses in 2002 represent a 28.9% decrease from similar expenses in 2001. Although we increased the number of research and development employees and internal resources in the year 2002 compared to the year 2001, we were engaged in a significant project that required external spending during 2001. A comparable level of external spending was not required during 2002.

Restructuring and Other Charges.    In the first and fourth quarter of 2001, we approved restructuring plans to realign our organization and reduce operating costs. These actions were designed to better align our existing workforce and to reduce operating expenses. These plans were a combination of reductions in work force and employee furloughs. Accordingly, our restructuring plans included reduction of associated employee positions by approximately 554 and 197 worldwide in connection with the first and fourth quarter plans, respectively. Restructuring and related charges of $3.0 million and $3.3 million were expensed during the first and fourth quarter of 2001, respectively. The entire first quarter charge of $3.0 million was related to employee separations and furloughs. The fourth quarter charge was comprised of $1.8 million related to employee separations and $1.5 million of other charges for the forgiveness of loans to executive officers. During the year ended December 31, 2002, we utilized $0.3 million of the restructuring accrual and completed another 92 of the planned 751 employee separations. We also utilized the $1.5 million of loan reserves. Cumulatively, we have completed 646 of the planned 751 employee separations. Due to stronger than expected performance from our Korean subsidiary and the sale of our plating line in Korea which we had planned on shutting down, reserve releases in the amount of $1.3 million were credited to restructuring charges in our statement of operations for December 31, 2002. We plan no further terminations or other restructuring activities related to our planned 2002 actions reserved in 2001. This credit was reduced by a restructuring action in our Malaysian plant in which $0.6 million was incurred to terminate 30 employees. This action was not included in the 2001 reserves.

In addition, we wrote down impaired assets by $34.7 million in the fourth quarter of 2001. There were no comparable write offs in the year ended December 31, 2002.

Interest Expense.    Total outstanding interest bearing debt decreased to $267.9 million at December 31, 2002 compared to $383.6 million at December 31, 2001. The decrease in debt outstanding of $115.7 million from December 31, 2001 to December 31, 2002 was due to the $82.4 million pay down of our term loans and the $50.0 million pay down of our revolving line of credit, offset by an increase in foreign loans of $16.7 million. The decrease in debt was funded by our January 2002 and May 2002 public offerings of our common stock. Related interest expense was $32.0 million for the year ended December 31, 2002, a decrease of 14.0% compared to the year ended December 31, 2001. The reduction in interest expense was primarily due to the combination of reduced interest rates along with the reduction in debt outstanding.

Foreign Currency Losses. We had net foreign currency losses of $1.0 million in the year ended December 31, 2002 compared to a net foreign currency gain of $0.2 million in the year ended December 31, 2001. These non-cash losses are primarily due to the fluctuations between the exchange rate of the United States Dollar and the South Korean Won related to long-term pension benefits payable to our South Korean employees.

Income Taxes.    Global income tax expense was $2.0 million and $2.6 million for the years ended December 31, 2002 and 2001, respectively, for effective tax rates of approximately (7.4%) in 2002 and (2.8%) in

21

Table of Contents

2001. In the fourth quarter of 2001, we recorded a valuation reserve that reversed previously recorded benefits in 2001 and previous years. We have a mix of tax rates across the various jurisdictions in which we do business. The tax provision for 2002 does not take into account any future benefit from loss carryforwards, which we may realize once we again achieve profitability.

Write-Off of Debt Issuance Cost.    A portion of the proceeds from our May 2002 public offering was used to extinguish term loan A and our capital expenditure loan and substantially pay down term loan B under our senior credit facilities. As a result, capitalized debt issuance costs of $3.0 million were written off and the charge was included in the results for the three and six month periods ended June 30, 2002 with no comparable results for the same periods in 2001. There is no tax benefit since the costs were written off in a tax jurisdiction that provides no benefit.

Net Loss.    As a result of the items above, the net loss decreased to $28.9 million loss for the year ended December 31, 2002, compared to a net loss of $93.7 million for the year ended December 31, 2001.

Critical Accounting Policies

We believe the following accounting policies are most important to the portrayal of our financial condition and results of operations and require our significant judgments.

We have made and expect to continue to make significant investments in fixed assets, intellectual property and related intangible assets. Management evaluates the valuation of these assets every quarter paying special attention to events or changes in circumstances that would indicate that their carrying amount might not be recoverable. We determine whether or not the assets are recoverable based on estimated undiscounted future cash flows to be generated by the assets and if not, we calculate the amount of the impairment charge based on estimated fair value. If different assumptions or conditions were to prevail rather than those used in estimating future cash flows, significantly different determination of recoverability or of fair value for these assets and results of operations could be reported. We recorded an asset impairment charge of $11.7 million for the year ended December 31, 2003 with no comparable amount in 2002.

Our management uses judgment when setting expected asset useful lives for long-lived assets. The asset useful lives used are based on historical experience and future expectations. However, business conditions or underlying technology may change in the future which could cause a change in asset lives. Any change in lives would cause a significant change in depreciation and amortization. There were no changes to useful lives for long-lived assets in 2003, 2002 or 2001.

We record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. If market conditions were to decline, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Furthermore, if anticipated volume levels turn out to be different, this would impact reductions to revenue and accrued customer rebates.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

In the years ended December 31, 2003 and 2002, we have maintained the valuation allowance to reflect the likelihood of utilization of certain deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

22

Table of Contents

Liquidity and Capital Resources

Our ongoing primary cash needs are for operations and equipment purchases. We spent $130.7 million on capital expenditures during the year ended December 31, 2003 compared to $78.9 million in capital expenditures during the year ended December 31, 2002. In addition during 2003, we invested $3.5 million to purchase Cirrus Logic Inc.’s back-end wafer probe and test assets. We anticipate spending $100.0 million in capital expenditures in 2004, however, we continually re-evaluate market conditions and the expectations for capital expenditures could and probably will change as the conditions merit.

Borrowings

We have a borrowing capacity of $50.0 million for working capital and general corporate purposes under the revolving credit line portion of our senior credit facilities. The revolving credit line under the senior credit facilities matures on July 31, 2005. During the year ended December 31, 2003, we borrowed and repaid $26.5 million against the revolving line of credit for general corporate purposes at an interest rate of 6.75% per annum. During the three month period ended December 31, 2003, we did not utilize any borrowings against this revolving line of credit and as of December 31, 2003, there was no outstanding balance on the revolving line of credit and the entire $50.0 million was available to us. Our pending merger with STATS will require us to obtain the approval of our lenders if we wish to maintain this line of credit.

We have also established two separate lines of credit with Korean Exchange Bank and Cho Hung Bank, with credit limits of $4.0 million and $8.0 million, respectively. During the three month period and year ended December 31, 2003, no borrowings were made against either of these lines of credit. Both agreements are subject to an annual review by Korean Exchange Bank and Cho Hung Bank for the continued use of the credit line facility. We also have a line of credit with a limit of $0.5 million per borrowing available with Southern Bank Bhd. for general corporate purposes at the interest rate of 6.9% per annum. During the year ended December 31, 2003, we utilized and repaid $0.5 million in the quarter ended March 31, 2003, $0.3 million in the quarter ended June 30, 2003 and $0.4 million during the quarter ended September 30, 2003. During the quarter ended December 31, 2003, we were not using this line of credit and there was no outstanding balance on this loan.

On May 28, 2003, we issued $125.0 million of 2.5% convertible subordinated notes due 2008 in a private placement and on June 5, 2003, the initial purchaser exercised the option to purchase an additional $25.0 million of 2.5% senior subordinated notes under the same terms. We received net proceeds of approximately $144.9 million after deducting debt issuance costs. The $150.0 million of 2.5% convertible subordinated notes are convertible into shares of the our Class A common stock at a conversion price of $8.062 per share, subject to adjustment, at any time prior to June 1, 2008, and bear an interest rate of 2.5% per annum. We used $63.9 million from the proceeds of these notes to pay down term loans of $36.2 million, a foreign loan of $16.7 million and revolving loans of $11.0 million. The remaining $81.0 million is being used for general corporate purposes. On November 24, 2003, a registration statement on Form S-3 for $143.8 million of these notes, along with the shares of common stock into which the notes are convertible, became effective with the Securities and Exchange Commission. We filed an additional registration statement for the other $6.2 million of the notes, along with the shares of common stock into which the notes are convertible, on January 22, 2004.

As of December 31, 2003, our total debt consisted of $365.0 million of borrowings, which was comprised of $165.0 million of 12.75% senior subordinated notes, $50.0 million of 8.0% convertible subordinated notes and $150.0 million of 2.5% convertible subordinated notes.

23

Table of Contents

Our total potential commitments on our loans, operating leases, contingent payments, royalty and license agreements as of December 31, 2003, were as follows: (in thousands)

Our senior credit facilities, as amended, contain covenants restricting our operations and requiring that we meet specified financial tests. The financial covenants consist solely of a minimum interest coverage ratio and a maximum senior leverage ratio based on a rolling 12-months calculation. There were no violations of the covenants under the senior credit facilities, as amended, through December 31, 2003. The consummation of our proposed merger with STATS would constitute an event of default under our senior credit facilities if we do not terminate the senior credit facilities or obtain the consent of our lenders prior to the merger. We intend to terminate the senior credit facilities immediately prior to the consummation of the merger.

The consummation of the pending STATS merger will constitute a “change of control” for the purposes of the indenture governing our $165 million aggregate principal amount of 12 ³/4% senior subordinated notes due 2009. Upon a change of control, these noteholders have the right to require our subsidiary ChipPAC International Company Limited to repurchase all or a part of the notes for a purchase price in cash of 101% of the principal amount plus any accrued and unpaid interest. While the 12 ³/4% notes do not trade on a national securities exchange, we understand that recent trading of these notes have been at prices well in excess of 101% of principal amount plus accrued and unpaid interest. Accordingly, we have no current expectation that any holder of 12 ³/4% notes will choose to exercise such repurchase or “put” right. We can give no assurance that the 12 ³/4% notes will continue to trade at prices well in excess of 101% of principal amount plus accrued and unpaid interest. If trading prices were to fall below this amount, we would expect that some or all of the holders of the 12 ³/4% notes would chose to exercise such repurchase or “put” right. In such case, the board and management of the combined STATS-ChipPAC entity would need to determine what additional financing or other arrangements would need to be made to finance such repurchase or “put”.

If our proposed merger with STATS is terminated under certain circumstances, we will be required to pay STATS a termination fee of $40 million.

During the quarter ended June 30, 2002, an assessment of approximately 16.0 billion Korean Won (approximately $13.4 million U.S. Dollars at December 31, 2003) was made by the Korean National Tax Service, or NTS, relating to withholding tax not collected on the loan between our subsidiaries in Korea and Hungary. The prevailing tax treaty does not require withholding on the transactions in question. We have appealed the assessment through the NTS’s Mutual Agreement Procedure, or MAP, and believe that the assessment should be overturned. On July 18, 2002, the Icheon tax office of the NTS approved a suspension of the proposed assessment until resolution of the disputed assessment. The NTS required a corporate guarantee amounting to the tax assessment in exchange for the suspension. We complied with the guarantee request on July 10, 2002. A further assessment of 2.7 billion Won (approximately $2.3 million U.S. Dollars at December 31, 2003) was made

24

Table of Contents

on January 1, 2004, for the subsequent interest. We have applied for the MAP and obtained an approval for a suspension of the proposed assessment by providing a corporate guarantee amounting to the additional taxes. As of December 31, 2003, no accrual has been made.

We believe that our existing cash balances, cash flows from operations and the available borrowings under our senior credit facilities of $50.0 million will provide sufficient cash resources to meet our projected operating and other cash requirements for the next twelve months. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. We may require capital sooner than currently expected. We cannot assure you that additional financing will be available when we need it or, if available, that it will be available on satisfactory terms. In addition, the terms of our senior credit facilities and senior subordinated notes significantly reduce our ability to incur additional debt. Failure to obtain any such required additional financing could have a material adverse effect on our company.

Other than the covenants on the debt as discussed above, we have no performance guarantees or unconsolidated entities. Our off-balance sheet commitments are limited to equipment operating leases, royalty/license agreements, leases on office and manufacturing space and additional contingent incentive payments to Cirrus Logic. Our total off-balance sheet obligations are approximately $61.6 million.

In 2003, 2002, and 2001 cash provided by (used in) operations was $50.8 million, $39.5 million, and ($3.9) million, respectively. Cash from operations mainly consisted of net income (loss) plus depreciation and amortization as well as the write-down of impaired assets in 2003 and 2001 less utilization for working capital.

In 2003, 2002, and 2001 cash used in investing activities was $160.4 million, $98.4 million, and $59.0 million, respectively. Cash used in investing activities related mainly to net short-term investments of $25.0 million and $10.0 million in 2003 and 2002, respectively. Investments in property and equipment were $130.7 million in 2003, $78.9 million in 2002 and $46.4 million in 2001.

In 2003, 2002, and 2001, cash provided by financing activities was $100.1 million, $51.2 million, and $85.9 million, respectively. Cash was mainly provided by or used in debt issuance, debt repayment, stock issuance, and stock redemption.

Recent Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.” Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. In the second quarter of 2003, we reclassified a loss on extinguishment of debt that was previously classified as an extraordinary item in prior periods but did not meet the criteria in APB Opinion No. 30 for classification as an extraordinary item and has included it within income from continuing operations.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is

25

Table of Contents

effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We adopted SFAS No. 146 during the first quarter of fiscal year 2003. The effect on adoption of SFAS No. 146 changes on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. We adopted FIN 45 in the first quarter of 2003 and have met the disclosure requirements of FIN 45. The adoption of FIN 45 has no material impact on our financial statements.

In November 2002, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted EITF Issue No. 00-21. The adoption of EITF Issue No. 00-21 has no material impact on our financial statements.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We adopted SFAS No. 148 in the first quarter of 2003. The adoption of SFAS No. 148 has no material impact on our financial statements.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. We believe that the adoption of this standard will have no material impact on our financial statements.

In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting of derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (a) as part of the Derivatives Implementation Group process that require amendment to SFAS No. 133; (b) in connection with other FASB projects dealing with financial instruments; and (c) in connection with the implementation issues raised related to the application of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for designated hedging relationships after June 30, 2003. We adopted SFAS No. 149 during 2003. The adoption of SFAS No. 149 will not have a material impact on our financial position and results of operations.

26

Table of Contents

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 during 2003. The adoption of this standard will have no material impact on our financial statements.

Acquisition of Malaysian Business

Under the terms of the agreement relating to our acquisition of the Malaysian business, during the period from June 1, 2000 to June 30, 2003, Intersil is entitled to receive additional contingent incentive payments based upon the achievement of milestones relating to the transfer of business previously subcontracted by Intersil to a third party. As of December 31, 2003 Intersil achieved all the milestones, and we paid Intersil the sum of $17.9 million in the aggregate as additional purchase price. As of December 31, 2003, we have no further obligations under this arrangement. We also had recorded $2.4 million of other purchase price adjustments based on the difference between the final closing balance sheet and the estimated closing balance sheet of the Malaysian business, and we recorded deferred tax of $6.1 million on all of these adjustments, which resulted in a further increase of the effective purchase price and non-current assets.

There was no goodwill arising from the acquisition of the Malaysian business. The fair value of total assets and liabilities exceed the purchase price by $56.2 million as of July 1, 2000. This amount, reduced by the additional contingent incentive payments, other purchase price adjustments and related deferred taxes, as of December 31, 2003, has been allocated in full to non-current assets as summarized below.

Initial and Secondary Public Offerings of Common Stock

In August 2000, the Securities and Exchange Commission declared effective the Registration Statement on Form S-1 (Registration No. 333-39428) relating to the initial public offering of our Class A common stock. In connection with the closing of the initial public offering, we issued a total of 13,693,000 shares of Class A Common Stock for gross proceeds of $163.0 million. The total proceeds from the offering and the concurrent private placement, net of issuance costs, were $151.8 million.

On January 30, 2002, we sold 10,000,000 shares of Class A common stock in an underwritten public offering for $6.00 per share. On February 14, 2002, we sold an additional 1,425,600 shares of Class A common stock in conjunction with the underwriters’ exercise of their over-allotment option for $6.00 per share. In connection with these sales, we received net proceeds of approximately $63.8 million, after deducting underwriting discounts, commissions and estimated offering expenses. Net proceeds of $62.4 million from this offering were used to pay down term loans and revolving loans. The remaining $1.3 million was used for general corporate purposes.

27

Table of Contents

On May 30, 2002, we sold 12,000,000 shares of Class A common stock in an underwritten public offering for $8.75 per share. In connection with these sales, we received net proceeds of approximately $99.2 million, after deducting underwriting discounts, commissions and estimated offering expenses. Net proceeds of $50.0 million from this offering were used to pay down term loans and revolving loans. The remaining $49.2 million was used for general corporate purposes.

Sources and Use of Funds From Issuances of Common Stock in 2002

In June 2002, we utilized $50.0 million of the public offering proceeds to extinguish term loan A and the capital expenditure loan and substantially pay down term loan B under the senior credit facilities. As a result, capitalized debt issuance costs of $3.0 million were written off in the year ended December 31, 2002.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We have no derivative financial instruments. Historically, our long-term debt carried both fixed and variable interest rates. At December 31, 2003, all of our long-term debt carried only fixed interest rates and are not exposed to interest rate fluctuations. The exposure to foreign currency gains and losses has been significantly mitigated by the fact that we negotiated with the large majority of our material and equipment suppliers to denominate purchase transactions in U.S. Dollars.

For the years ended December 31, 2003, 2002 and 2001, we generated approximately 14.2%, 11.3%, and 8.1% of total revenue, respectively, from companies headquartered in international markets. Our facilities currently used to provide packaging services are located in China, Malaysia and South Korea. Moreover, many of our customers’ operations are located in countries outside of the United States of America. We cannot determine if our future operations and earnings will be affected by new laws, new regulations, a volatile political climate, armed conflicts, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the United States of America particularly in China, Malaysia and South Korea. If future operations are negatively affected by these changes, sales or profits may suffer.

Investment and Interest Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and short-term debt obligations. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer.

We mitigate default risk by investing in safe, high credit quality securities and by monitoring the credit rating of investment issuers. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have no material cash flow exposure due to rate changes for cash equivalents and short-term investments.

28

Table of Contents

Our results are only affected by the interest rate changes to variable rate short-term borrowings. Due to the short-term nature of these borrowings, an immediate change to interest rates is not expected to have a material effect on our results. Our long-term bonds bear a fixed interest rate and the interest does not fluctuate with changes in short-term or long-term rates.

Foreign Currency Risk

Based on the our overall currency rate exposure at December 31, 2003, a near term 10% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance, however, that there will not be a material impact further in the future.

A portion of our costs are denominated in foreign currencies, specifically, the Chinese Renminbi, the Malaysian Ringgit and the South Korean Won. As a result, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect the cost of goods sold and operating margins and could result in exchange losses. We cannot fully predict the impact of future exchange rate fluctuations on our profitability. From time to time, we may have engaged in, and may continue to engage in, exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure that any hedging technique we implement will be effective. If it is not effective, we may experience reduced operating margins.

29

Table of Contents

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Schedule II Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2003

30

Table of Contents

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of ChipPAC, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows, present fairly, in all material respects, the financial position of ChipPAC, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, in 2003 the Company changed the manner in which it classifies gains and losses on the extinguishment of debt.

/s/    PRICEWATERHOUSECOOPERS LLP

San Jose, California

February 19, 2004

31

Table of Contents

ChipPAC, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amount)